24 May 2004

The Essence of Good Corporate Governance: Strategic Risk Management

The Essence of Good Corporate Governance: Strategic Risk Management:

From Risk International Services, Inc.
By Mark Siwik & Randall Davis

Risk management – taking deliberate action to increase the odds of good outcomes and reduce the odds of bad outcomes – is an important tool in the governance of our business and personal affairs. As Peter Bernstein wrote in his business best seller:
The ability to define what may happen in the future and to choose among alternatives lies at the heart of contemporary society. Risk management guides us over a vast range of decisionmaking, from allocating wealth to safeguarding public health, from waging war to planning a family, from paying insurance premiums to wearing a seatbelt, from planting corn to marketing cornflakes. Against the Gods: The Remarkable Story of Risk at 2 (1998).

We are still learning how to use this tool effectively as evidenced by the high mortality rate of companies. The average corporate life expectancy is less than 20 years and those companies that survive infancy generally only live another 20 to 30 years. 1

This article contains a three-part message. First, we explain why the current level of risk management thinking in many companies is less than optimal. Second, we give you a birds-eye view of what a company should strive for with regard to risk management. Third, we provide some suggestions about how to help your company improve its risk management function.

Why Corporate Boards and Senior Managers Struggle with Risk Management.

Traditionally, risk management has been an afterthought of most corporate boards and senior managers. The new wave of financial disclosure laws, most notably Sarbanes-Oxley, coming in the aftermath of the corporate scandals and the September 11 terrorist attack is causing change. Risk management is now a board priority but many boards and senior managers are unsure what to do. What exactly does risk management mean? What is the best way to go about identifying, managing and reporting material risks?

Most companies, large and small, associate risk management with insurance.

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