NACD BoardVision - Risk Appetite Statements
This week's edition of NACD BoardVision focuses on risk appetite statements. Join Peter Gleason, managing director of NACD Directorship, and Bruce P. Nolop, director of Marsh & McLennan Companies, as they discuss the processes surrounding creation of risk appetite statements.
Announcer: Welcome to NACD Board Vision, where leading board room advisors, governance professionals and seasoned directors discuss critical issues related to your responsibilities in the board room.
Peter Gleason: Welcome to NACD Board Vision. I'm Peter Gleason, Managing Director of NACD. I am joined today by Bruce Nolop. Bruce is a director at Marsh & McLennan Companies, and is the former CFO of eTrade. Welcome Bruce, it's good to have you with us.
Bruce Nolop: It's my pleasure.
Peter Gleason: On this episode of Board Vision we're going to be talking about risk governance and specifically risk appetite statement. When we went through our blue ribbon commission report on risk govern we indicated that companies ought to create a formal risk appetite statement to help them -- help the boards oversee the risk management of the company. And while we made that recommendation a number of years ago, actually our survey tells us only 25% of companies have actually done so. What Bruce, what exactly is a risk appetite statement and how did Marsh & McLennan go about defining theirs?
Bruce Nolop: Well, that was one of the learnings, was exactly what should be in a risk app title statement. And I think that the statements will vary by companies and by industries, but in our case, we divided up the statement into five sections. So it was financial performance, financial stability, client business, people, and operational performance. And then for each of those categories we talked about what are the risks that we want to encourage the companies to take, what are the risks that are unacceptable. For example, legal compliance or employee safety were just unacceptable risks. And then there were a third category which is the type of risk that we want to mitigate, and in that case we would do a cost benefit analysis as to whether or not the mitigation is worth it. And then finally the risk appetite statement helps provide the criteria by which the management and board can judge whether or not the benefits of a particular risk are worth taking.
Peter Gleason: Can you give us a little bit more insight into the process the board went through in order to start the whole exercise?
Bruce Nolop: I think the most important thing we did was just start the process. And I say that because the first draft is going to be a long ways from the finished product. So the risk management staff of the company did a first draft. Again, it was in the context of declarative sentences and trying to be overall summary of how the company views risk. And then that version was edited and reviewed and discussed by the management team. And they made various additions and changes. Then it went to the risk committee of the board, and we likewise spent a lot of time just discussing the points, trying to see what -- where we had consensus and where we had differences. And then we iterated those processes several times. So it was not staff delegated project, it was much more of a discussion vehicle. And then eventually we got to the full board and each there, there was some more editing, some more review, and that went back through additional processes. And then once we got it done our CEO, Dan glazier [Phonetic] out a letter to all employees explaining what the risk appetite statement was and now it's out to the entire world of Marsh & McLennan employees. In fact, it was translated into 15 languages, which really makes it one of our core documents for managing the company.
Peter Gleason: In terms of the dialogue you had at the board level, and again that's what this is really all about, was there anything that were key learning point for you in this process?
Bruce Nolop: Yeah. I think there were actually several learning points. Instead of being what you should not do, it often in the risk appetite statement was what do we want to do, what are the risks we really want to take on, what do we want to encourage. For example, introducing new products, and new processes can be risky and has a risk of failure. But on the other hand, it can prevent more systemic risk like technological disruptions or challenges to your business model. The other learning I think I would emphasize is the qualitative areas were extremely important. So for example we have a section in the appetite statement on corporate culture and management programs with the idea that the quality of the people and the transparency of the culture are one of the greatest areas to have the type of risk -- risk attitude that we want throughout the company.
Peter Gleason: Great. Now for those of the boards, the 75% that haven't done this yet, what are a couple of things that you can kind of give them as recommendations as they're contemplating going through this process, is there anything you might want to share with them?
Bruce Nolop: Yeah. I'd say that the two things that I think we really did well and right were first is we didn't try to come up with a perfect product to start with, that again we went through several drafts and self iterations. It's also important to -- to use it as a way to -- to distinguish what should be discussed at the board level and what is probably not something that needs to be at the board level. I think it's important also to write the risk appetite statement in a way that you would be comfortable sharing it with employees, customers, regulators, investors, rating agencies, and even your third party service providers.
Peter Gleason: So plain English is the point.
Bruce Nolop: Plain English, and not including a lot of proprietary information, and really focus more on the type of management practices that you're proud to share with the world.
Peter Gleason: Great. Well Bruce, I can't thank you enough for sharing how Marsh & McLennan and board went through this process and some of the key take-aways that you had with it. On behalf of NACD, on behalf of Bruce and Marsh & McLennan companies, thanks for watching Board Vision.
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