Managing Board Member Risk – Part One

Overview

Much has been written and discussed about corporate risk. There are no shortage of strategies, approaches, articles, or consultants. So why do board members continue to lose sleep over their company’s risk management approach?

What Can Go Wrong, Might Go Wrong

Many board members and executives ask, “Where are we vulnerable? Does my team have a sense of urgency to find our weaknesses? Are they implementing safeguards? Can we manage the inevitable? Can we recover?”

Where to Focus – Key Areas

Risk Management

Risk management is the fundamental responsibility of corporate boards. Board members must ensure that their company identifies, assesses, and mitigates risks effectively to safeguard shareholder value and organizational sustainability. Risk can be viewed through various lenses. There is no perfect approach.

If you are a new member of a company’s board, you will want to fully understand the Company’s risk assessment and its plan to monitor and test. Consider using the outline below to assist with your understanding of risk management. Engage in conversations with the board and management.

If you are a board member that has engaged in numerous company risk discussions over the years, consider using the following outline as a refresher and to identify areas that may need additional emphasis. Engage in conversations with the board and management.

Strategic Risks

Strategic risks arise from decisions that affect the long-term direction of the company. Boards should:

• Ensure that business strategies align with the company’s mission and risk appetite
• Evaluate market trends, competitive dynamics, and geopolitical factors that could impact operations
• Review major investments and mergers and acquisitions to assess potential risks and returns
• Consider not only the “downside” of risk but the “up-side” of risk as well

 

Reputational Risks

 

A damaged reputation can lead to the loss of business, regulatory scrutiny, and financial losses. Boards should:

 

• Monitor social media and public sentiment
• Assess crisis management and communication strategies
• Ensure ethical conduct in corporate governance and operations

Operational Risks

Operational risks stem from internal processes, systems, and human factors that may disrupt business operations. Boards should consider:

• Business continuity and disaster recovery plans
• Supply chain vulnerabilities and vendor risks
• Workforce management and succession planning
• Impact of incorporating generative AI within business operations

Financial Risks

Financial risks can undermine a company’s stability. Boards should consider:

• Liquidity and cash flow management
• Credit and market risks affecting investments and financial instruments
• Fraud and financial reporting accuracy
• Capital structure and debt management strategies

Compliance and Regulatory Risks

Regulatory changes and legal obligations require strict adherence to compliance standards. Boards should:

• Ensure compliance with local, national, and international laws
• Oversee internal audits and regulatory reporting
• Foster an ethical culture to prevent misconduct and litigation risks
• Stay updated on evolving industry regulations

Cybersecurity and Data Privacy Risks

Cyber threats, including cyber ransom threats, are a growing concern, requiring proactive oversight. Boards should:

• Assess the company’s cybersecurity framework and response plans
• Ensure employee training on data security best practices
• Evaluate third-party risk from vendors managing sensitive data
• Monitor adherence to data protection regulations

Environmental, Social, and Governance Risks (ESG)

ESG risks are ever changing as stakeholders evaluate corporate responsibility. Boards should consider:

• Governance policies related to board composition and executive compensation
• Environmental and natural disaster risks
• Social risks related to employment and retention
• Marketing programs that could have unintended consequences

Industry and Functional Risks

• Consider unique risks for your specific industry situation
• Consider all functional areas not already discussed including areas such as human resources, and sales and marketing.

Weighing other risk factors

The above risks should be viewed in tandem with the following dynamics:

• Current vs. longer term impact
• High, medium, and low probability
• Internal vs. external risks
• Investors, customers, and employees
• Upstream and downstream flow

What’s Next – Building the risk management team

Attracting, retaining, and evaluating individuals with the right personal attributes to monitor and evaluate risks is the natural next step.

Final Thoughts

Take a hard look at your current plan. Have a robust discussion with the board and management. Be willing to challenge your plan and be willing to make changes.

This article was partially generated with the assistance of AI technology.

 

**Marty Brunk is a board director and financial expert with extensive experience in audit, financial reporting, and internal controls evaluation. He brings significant value to corporate boards in the areas of financing, mergers and acquisitions, governance, risk management, compensation, and negotiations. Marty has deep experience working with private equity firms and their portfolio companies, owners and their privately held businesses. He has board experience as Board Chair, Board President, Board Vice Chair, Treasurer, and Finance Committee Chair for private, not-for-profit, government, and foundation boards. Marty’s experience also spans multiple industries and ranges from early-stage entrepreneurial companies to later stage private equity portfolio companies.