The Role and Responsibility of the Board in Risk Management
Risk management is identifying, quantifying, and controlling risks in a project or the entire organization. Projects that do not incorporate risk management are often at a higher risk of unsuccessful. Many businesses monitor and drive their projects with the management of the risk process. This process usually follows a defined structure that ensures all risks within a project are identified, assessed, and controlled to prevent them from negatively affecting outcomes.
Risk oversight
The role of the Board in the management of risk is defined by the Board's mandate, which is generally to oversee the management of risk function and not to manage risks itself. In assuming its risk oversight role, the Board's focus must be on monitoring the organization's control environment and evaluating whether controls are appropriately designed and adequately implemented. It should also be concerned with periodically testing systems to ensure they operate as intended. Finally, it should scrutinize significant events, actions, or inactions which have caused or could cause a severe adverse effect.
Setting the management of risk framework and strategy
The Board must set a risk management framework and strategy. This gives the members of the Audit Committee a good starting point to examine the company's risk profile and its management for specific risks. While boards play a direct role in approving the management of risk strategy and significant risk exposures, the board of directors can also play an important role in risk identification.
Ensure awareness and understanding of the risks within their organization
The role of the board of directors ensures full awareness and comprehensive understanding of the risks within their organization. The necessary measures – such as policies, procedures, processes, and control mechanisms to address these risks – are in place. This is a crucial responsibility of the Board, and it is an area where many boards fall.
Development of an organization's risk management program
The Board has a primary role in developing an organization's risk management program and must be familiar with its operation and evolution. The Board should approve the risk management policy and strategy and set general oversight for the management of the risk program to ensure that it is providing adequate information to support prudent business decisions, including risk identification and assessments, handling of significant risks, insurance management, and control activities, and other risk oversight activities.
Risk management is critical to your company's overall health and well-being. It is the art of protecting an organization against the potential damage that different types of risks could cause. Ideally, it allows your business to take the appropriate measures to avoid loss or damage before it even happens.
