Director Essentials: Strengthening Risk Oversight

As the number and magnitude of business risks increase, so do the expectations for stronger risk oversight—through both greater board awareness of risk and more disciplined board review of enterprise risk management (ERM). This report from the National Association of Corporate Directors (NACD) outlines the risk oversight challenge in the current business environment, describes leading risk oversight strategies, and offers tools that all directors can use to oversee risk more effectively.  

Navigating Risk in the Current Environment

The International Standards Organization (in ISO 31000) has defined risk as “the effect of uncertainty on objectives,” which can be a negative or positive deviation from what is expected. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) currently defines risk as “The possibility that events will occur and affect the achievement of strategy and business objectives.” Each kind of risk exposes a company to potential loss; in fact, insurance professionals have defined risk as the possibility of loss. Yet when viewed as part of an active business dynamic, risk—as daunting as its manifestations may be—is far more than the chance of loss. Rather, risk is a level of uncertainty that can create economic opportunity; risks are choices that companies make and individuals take.   

In this sense, as many have noted, without risk there is no reward. The capacity to manage risk and the willingness to take risk and make forward-looking choices are key elements that drive growth and position companies to create long-term value. Thus, effective oversight of risk is not about risk elimination: companies win because they do a better job of taking risks, not because they do a better job of avoiding them. And therefore effectively overseeing how risks are chosen and handled becomes an essential board role in stewarding long-term value creation.