What is the most important function of the board? Many board members and governance experts would contend it is overseeing the development of corporate strategy to ensure long-term growth and sustenance of the business. Indeed, no other activity exerts such a profound impact on the long-term success of the business.

If this is a gospel truth, why is it then that the average life expectancy of a Fortune 500 company is fewer than 50 years and for smaller companies it is even less?

The degree of financial loss and public outrage after the global economic crisis has caused many governance experts to attribute this failure to inadequacy of the board's understanding and management of enterprise risks.

Thus, management of business risks could well be one of the most compelling and top-of-mind business issues of the current times.

Every decision, activity, and initiative that aims to create or protect value involves some degree of risk. Unfortunately, conventional risk management has focused on avoiding the risks to a business strategy, rather than understanding and managing the risks of the strategy itself.

While the protection of existing assets is necessary, it is not sufficient for competitive advantage.

Risk governance

When boards look at risk only as the failure to adequately protect existing assets and prevent loss (unrewarded risks), the rewards of calculated risk-taking (rewarded risks) are neglected, often at a high cost to the organisation's future success.

Hence, effective risk governance calls for an approach that seeks not to discourage appropriate risk-taking, but to embed appropriate risk management procedures into all business pursuits of the organisation.

Sir Nigel Turnbull, in his famous guidance on the Combined Code, says “to improve performance, you have to understand how to better manage risk”.

Although it is the responsibility of the senior management to assess and manage risks, effective corporate governance requires that the board should possess enough collective knowledge and experience to promote a broad perspective, open dialogue, and useful insights regarding the management of critical enterprise risks.

Risk intelligent governance elevates risk management from an exercise in risk avoidance to an essential consideration in corporate strategy.

Here are some steps boards may consider to take along the path to risk intelligence:

Broaden your view of risk : Do not limit your deliberations to fraud prevention, inventory protection, IT security, and the like. These are all important items, but they are related more to ‘survive' than to ‘thrive'.

Take a hard look at the board : Evaluate the risk governance structure within the board and its committees. Determine to what extent risk oversight is occurring.

Do not underestimate the challenge : Devote adequate time and effort to understand the issues and activities that underlie risk reports. Engage in meaningful dialogue around risk exposure and organisation's resilience.

Think about your risk framework : Do not address risk in an ad hoc manner. Make sure there is an appropriate framework over which the risk governance activities occur.

Team up with management : Ensure that the management is aligned and coordinated with the board's point of view on risk and supports the board in achieving the most practical level of risk governance.

Assess risk performance : Ensure that there are periodic, independent assessments to evaluate the effectiveness of the full risk management programme.

Striking a balance

The active pursuit of risk is essential, as calculated risk-taking is a fundamental precept of any business.

Without risk-taking, the prospect of innovation diminishes, competitive advantage evaporates, and with it, shareholder value.

Risk intelligent enterprises and their board attain a balance between calculated risk-taking for shareholder value creation and management of critical risks in shareholder value protection.

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