Focus Renewed on Risk Management

Every well publicized financial scandal and crisis brings with it a new focus, applied with the benefit of hindsight. The steep losses of shareholder value and, indeed, the failure of major corporations that have been hallmarks of the recent financial crisis have caused renewed focus on risk management, and the role of boards and key committees overseeing the risks that their businesses take.

Board responsibility for the risks assumed by business is not a new concept. Balancing risk and reward has always been the fundamental dynamic of making business decisions.

State law provides substantial protection to directors against liability for losses that result from reasonable risks assumed. The prudent man rule, the time honored standard for judging the fiduciary behavior, permits risks to be taken, but requires that those risks be reasonable ones that fiduciaries would reasonably take in the management of their own affairs. The business judgment rule limits judicial review and the imposition of liability for losses resulting from reasonable assumption of risk.