According to the 2014 AFP Risk Survey nearly 86 percent of financial professionals expect their ability to forecast risk will remain, or become more, difficult three years from now. But with an enterprise risk management program supported by robust risk communication between management and the board of directors, a company can separate itself from the pack.
In a new whitepaper, AFP, the National Association of Corporate Directors (NACD) and Oliver Wyman examine how companies can develop effective risk communication between the C-suite and the board. Even though investors are demanding more and more that organizations have effective risk management and communications systems in place, current efforts are “just not getting to the point,” said one director in a recent roundtable discussion. A short survey of NACD and AFP members found that half of directors and more than half of senior financial professionals believe that improvements in risk communication are needed.
Craig Martin, executive director of AFP's Corporate Treasurers Council, explained how the whitepaper came to fruition. "Oliver Wyman, the NACD, and the AFP have been studying this issue about the communication gap between the C-suite and the board on risk management," he said. "So we asked finance executives at the CTC Corporate Treasurers Forum in May 2013, as well as the Executive Institute at the AFP Annual Conference in October. Their answers are included in this report, and they just go to show that there remains a lot of work to improve communication on risk."
Both boards and management point to some common frustrations for this communication gap, such as a lack of clarity around their respective roles, the structure related to risk management and overall deficiencies in information. Directors particularly struggle with a lack of clear ownership and organizational leadership for risk management and are frustrated that risk information is not linked to drivers of earnings volatility. Managers, meanwhile, pointed to boards’ lack of understanding of the goals of risk management processes, as well as poorly defined board risk-reporting requirements.
“Managing risk in the terms of long-term strategy continues to challenge management and boards in what is an increasingly interconnected world, especially when you start thinking about risk and reward,” said Alex Wittenberg, Partner, Global Risk and Trading Practice, Oliver Wyman, during a recent session on risk communication between management and the board.
Leading companies are finding that focusing on fundamentals ensures value-added risk dialogue. The whitepaper identifies four essential components of strong risk communication:
- Defined risk governance roles: Organizations should examine their risk governance structure to ensure that responsibilities are clearly allocated and defined at the board and management levels and that the structure supports the desired risk dialogue.
- A shared of view of risk: Companies need a clear understating of risk what risk is, as well as an understanding of the business, value drivers, and strategy and associated risks.
- A concise risk appetite statement: Management and the board must share a clear understanding of the company’s risk appetite and its relationship to company strategy and objectives.
- Focused risk reporting and dialogue: Directors can only offer effective oversight if they are provided adequate information. Management should carefully evaluate the format and purpose of board risk communication with consideration to risk governance responsibilities, risk appetite, and the intersection between risk and strategy.
“Boards need to have a more wholesome dialogue; they need to get better information,” said Peter Gleason, Managing Director and CFO, NACD. “It's not necessarily the quantity of information; it’s the quality of information. I think sometimes when they have to make decisions, they have too much or too little information. What they're trying to do is get information that’s useful, that’s concise, and that’s succinct enough to let them get a good grasp of the situation at hand and make a decision.”
If management and the board are not on the same page when it comes to risk, they will struggle to mitigate it. Companies should take a good, hard look at themselves and determine whether they have set the groundwork that will allow meaningful and useful dialogue between directors and the management team.
Download Risk Communication: Aligning the Board and C-Suite here.