Boards have always had one primary role: Managing risk. But this year’s pandemic has put this responsibility in sharp focus. In the midst of rapid changes, boards must be able to adapt and grow. They need to be aware of how external developments affect the risk landscape and long-term trends.
To accomplish this, they must be able to assess the risk of existing and new projects objectively. It is possible to identify potential issues using a straightforward red-amber green assessment, but it isn’t always easy for the board to obtain a precise understanding of risks. Boards can benefit from using quantitative techniques to encourage clearer communication between the board and management and assist the board to understand the management’s risk-taking habits.
More sophisticated tools, like those derived from option pricing (the mathematical technique employed to calculate the theoretical price of an equity option) are helpful in helping to assess risk and prioritise emerging issues. For example, they can help in identifying the extent to which a project is a risk for oil price risks or credit risk, and show how risk-taking reducing internal risks with the nonprofit boards has been controlled.
The board should also use the knowledge it has about the risk profile of the company in order to inform its strategic planning process and review and monitor internal controls. It should also make sure that all committees of the board including audit strategy, compliance and audit have the same common understanding of the risk profile of the company.