Boards have always had a fundamental task: managing risk. However, this year’s pandemic put this responsibility in the spotlight. In the midst of rapid change boards have to be able to change and learn. They must understand the impact of external developments on the risk landscape, as well as long-term trends.
In order to do this, they need to be able to evaluate the risk of both projects that are both new and established in a way that is objective. It is possible to spot potential issues using a straightforward red-amber-green assessment, but it can be difficult for boards to get a precise understanding of the risks. Boards can benefit from using quantitative techniques to encourage clearer communication between board members and managers and also assist the board to better understand the risk appetite of management.
The use of more sophisticated tools, like ones derived from an option pricing method (the mathematical technique used to calculate the theoretical price for an equity option), will help to identify risk and prioritize new issues. They can, for example help in identifying the extent to which a project is impacted by the oil price risk or credit risks and reveal the risk management practices.
The board should also take advantage of the knowledge it has about the risk profile of a business to inform its strategic planning process and review and monitor internal controls. It should also ensure that the other board committees, like audit, compliance, and strategic have the same understanding of the risk profile.
