Nearly three quarters (72 percent) of independent directors believe risk levels have risen over the last two years, according to a new survey by Ernst & Young, and compliance with standards and regulations has become a top priority for corporate boards. However, there is an opportunity to better leverage the skills and competencies of these directors to address forward-looking growth issues.

The survey, ‘Board members on risk: leveraging frameworks for the future’, is the third in a series of reports on risk produced by Ernst & Young, and follows similar reports on the views of investors and of executive management. It sought the views of around 150 independent non-executive board members, from companies ranging in size from half a billion dollars turnover.

The increased levels of risk, coupled with new codes of practice and investor pressures, have changed the role of the independent board members. All board members are focused on reducing down-side risk but individual board members are focusing on different aspects of risk management, depending on their role on the board.

According to the independent board members interviewed in the survey, compliance with standards and regulations topped the list of what constituted the board’s main risk priority.

The survey suggests boards can add most value through better collaboration and skills transfer, both between audit committee members and non-members, and between independent directors and executives. One in four (27 percent) of directors sees a framework for risk management as critical to success, but the challenge is to create a framework that goes beyond simply compliance.

However, when boards focus on risk mitigation this raises potential tensions between board members and company senior management, whose growth and performance objectives mandate active risk-taking.

A third of board members (32 percent) have pushed for executive changes on the basis of poor performance on risk management, with audit committee members significantly more likely to have pushed for change than non members (35 percent v 24 percent).

One in three independent board members believe some types of risk are not well managed by their companies, primarily business environment risks (17 percent) and to a lesser extent operational (12 percent), technology risk (11 percent) and competitive risks (10 percent).

Nevertheless, board members generally believe risk is well managed (7.6 out of 10 score). Certainly more so than the senior managers who deal with it on a day to day basis (7.0 in a corresponding survey).

Other key findings include:
* Clear ownership of risk across the business is considered the single most important factor in successful risk management, but while the board see themselves as most likely to ‘own’ risk (40 percent) with the CEO some distance behind (21 percent), in an earlier survey of executive management the CEO’s were seen to own risk (30 percent) well ahead of the board (on just 20 percent). This implies a difference in understanding of what is meant by ownership, with the board focused on authority and management on accountability.

* Boards now have greater accountability, a larger role and spend more time on risk with increased awareness of risk accentuating accountability. While board members generally agreed about their role in setting the strategy for risk (36 percent), non-audit committee members see their role as providing guidelines for implementation (41 percent), leaving execution to the executive management, whereas audit committee members (28 percent) are, understandably, more involved in detail and take an active role.

* Risk priorities for the future include dealing with regulatory risk (15 percent), identifying emerging risks (14 percent), and improving systems for risk management (14 percent).

Read the full report here

•Date: 6th July 2006• Region: World •Type: Article •Topic: Operational risk
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