Boards have always had a fundamental role: Managing risk. But this year’s pandemic has brought this task into the spotlight. In a world of rapid change boards are required to be able and learn. They must be aware of how external events can affect the risk landscape and long-term trends.
To achieve this, they must be able assess the risks of both new and existing projects objectively. It is possible to identify potential issues using a straightforward red-amber-green assessment, but it can be difficult for the board to gain an accurate knowledge of risks. Boards can benefit from using quantitative methods to help facilitate communication between the board and management, and help the board to comprehend the management’s risk tolerance.
More sophisticated tools, such as those derived from option price (the mathematical method employed to calculate the theoretical value of an equity option) can be extremely beneficial in helping assess risks and prioritise issues that are emerging. For instance, they may assist in identifying the extent to which a particular project is at risk from oil price risk or credit risk, and reveal how risk-taking has been taken care of.
The board should also take advantage of its knowledge of a company’s risk profile to inform its strategic planning process and review and monitor internal controls. It should also ensure that the other board committees, like audit, compliance and strategic, have the same understanding of the risk profile.