Mitigating risks has always been a challenging task for boards of directors, and with the increasing reliance on digitalization and remote governance, the task has become even more difficult. According to a study by McKinsey, only 16% of boards feel fully equipped to handle extraordinary risks. However, it is crucial for boards to effectively manage risks to protect the company’s assets and reputation. In this article, we will discuss the responsibilities of board directors for risk management and provide some risk management strategies to help boards effectively manage risk.
What is the board’s role in risk management?
Boards define strategies, and strategies always involve risk. Risk management board practices may vary from one organization to another, but the end goal is the same. Risk has to be:
Today we look at the risk management board responsibilities as it applies to cybersecurity and present ways of dealing the risks.
Escalated cybersecurity risks
Organizations worldwide continue to shift towards digital communication and data storage. On the one hand, going remote saves time and money, optimizes the decision-making process, and sets the company on a faster track to forward-looking operations.
However, at the same time, the risk of sensitive information leaks and data breaches is higher than ever.
When it comes to virtual governance, the best board of directors risk management practices include:
- Using trustworthy board software for governance. The productive work process inside a virtual boardroom builds off two fundamental principles: confidentiality and engagement. Experienced board governance software providers keep these factors in mind when developing their products.
- Restricting access to vital information. Before opening the digital boardroom to directors, it is imperative to make sure information access rights are distributed according to role and need-to-know basis.
- Choosing reliable software and hardware. While boardroom software is the central tool, it will work with other instruments, such as operating systems and digital devices. Therefore, part of the risk management board responsibility is evaluating the tools they will use to access and use in the boardroom.
A board’s risk management responsibilities
The most straightforward way to estimate and allocate the responsibilities of the board of directors for risk management is to deal with each threat factor in five stages:
The board has to identify the risks in each area of the company’s operation: financial, legal, fiduciary, and so on. While not all board members will have a sufficient amount of expertise in each matter, everyone must clearly understand the possible consequences of taking on risk.
In the case of cybersecurity risks, IT departments have too much on their plate. The board has to make sure that IT receives the right support and resources for its operation.
Next, the board delegates risk management to respective departments. In risk management, board of directors remains responsible, regardless of who is handling the case.
When board members serve on department committees, their role is more than observational. In such cases, the board has more insight into the execution of established procedures.
Whether or not board members serve on committees, it is the board’s job to oversee the process of risk handling and to implement strategy adjustments, if necessary.
The board of directors sets an example for how everyone in the organization acts. This means a significant component of supervising managers and executives is guaranteeing board compliance and transparency.
Clear and active communication at each step of the way is also one of the board of directors’ risk management responsibilities. Additionally, all risk-management-related decisions and activities have to be documented and transmitted to individuals in charge.
At least once a year, the board needs to look back at risk-handling practices in place, consider input from the directors and departmental delegates, and modify the strategy.
The risk management board analysis serves as both the guideline for further actions and as an evaluation of the board’s effectiveness.
In conclusion, board directors have a critical role to play in risk management for their companies or organizations. By understanding the types of risks that their businesses face, establishing risk management policies and procedures, and regularly reviewing and monitoring risk management activities, board directors can help ensure that their companies are well-positioned to navigate potential challenges and capitalize on opportunities. Effective risk management also helps to promote a culture of transparency and accountability, which can enhance trust and confidence among stakeholders. By taking a proactive approach to risk management and fulfilling their responsibilities in this area, board directors can help create a foundation for long-term success.
What is the role of the board of directors in risk management?
The board of directors is responsible for overseeing and guiding the risk management activities of the company or organization, including setting risk management policies and procedures and regularly monitoring risk management activities.
What types of risks should board directors be aware of?
Board directors should be aware of a range of risks, including strategic, financial, operational, and reputational risks.
How can board directors ensure that risk management is effective?
Board directors can ensure that risk management is effective by regularly reviewing and monitoring risk management activities, ensuring that risk management policies and procedures are up-to-date and relevant, and promoting a culture of transparency and accountability throughout the organization.