Boards have always had a primary task: managing risk. However, this year’s pandemic has brought this task into the spotlight. In a world where risks can change rapidly, it’s vital for boards to enter learning mode and comprehend how current events are transforming the risk landscape as well as the longer-term trends that could affect their business.
To accomplish this, they must be able assess the risks of both new and existing projects objectively. It is possible to recognize the potential issues using a simple red-amber green assessment, but it can be difficult for boards to gain a precise knowledge of risks. Boards can benefit from using quantitative strategies to facilitate clearer communication between board members and managers and aid the board to company website better understand the management’s risk tolerance.
More sophisticated tools, such as those derived from option price (the mathematical technique used to calculate the theoretical cost of an equity option) can be extremely useful for helping to evaluate risks and prioritise issues that are emerging. For example, they can help in identifying the extent to which a project is exposed to oil price risk or credit risk. They can also provide insight into how risk has been managed.
The board should also utilize its knowledge of a company’s risk profile to inform its strategic planning and review and monitor internal control. It should also ensure that all other committees on the board such as audit, compliance and strategy – are aware of the risk profile of the business.