One might say that “risk management” is the new “hot topic” in corporate governance. Just as the Enron and other high-profile corporate scandals were seen as resulting from a lack of ethics and oversight, the credit market meltdown and resulting financial crisis have been blamed in large part on inadequate risk management by corporations and their boards of directors.1 As a result, along with the task of implementing corporate governance procedures and guidelines, a company’s board of directors is expected to take a leading role in overseeing risk management structures and policies. What needs to be understood, though, is that there is no way to eliminate risk, nor would any enterprise be well-served by attempting to do so. However, it is important for directors to take steps to be well-informed as to the company’s risk profile, to discuss and evaluate risk scenarios and to satisfy themselves on an ongoing basis as to the adequacy of management’s efforts to address material risks. The goal should not be to eliminate risk, but to make sure that risks are understood and appropriately managed; the management team is responsible for managing the risks, while the board of directors’ role should be one of oversight.2
There are a number of important elements to risk oversight by a board of directors that can be addressed through effective communication between the board of directors and members of senior management, effective communication among board members, board committees, and board advisors and effective coordination among all of the participants.
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