Risk management by directors

One of the important lessons of 2008 is that we can't predict everything and that there will always be surprises (even if in hindsight the cause of the surprise appears to be obvious).

The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us. (page 197, Against the Gods, Peter L Bernstein, 1996)

Whilst the law does not expect directors to be able to predict the future, it does expect them to be diligent in their risk oversight function. There will be increasing regulatory pressure for boards to be more involved in risk management decisions.

Specific hotspots in 2009 will be:

• managing solvency, the level of debt, liquidity, capital management and dvidends;
• board and management evaluation and succession;
• executive remuneration;
• corporate social responsibility and high ethical standards;
• stakeholder communication;
• developing strategies to deal with opportunist investors;
• maintaining compliance resources;
• aligning business performance with your values.

Whilst the board need not be involved in day-to-day activities, it does need to show leadership in the areas of strategy, culture and values.