The discussion is based on a research report, issued by Board Agenda (magazine), Mazars (a global firm on risk advisory) in association with INSEAD Corporate Governance Centre. The report is titled as “Leadership in Risk Management.” The research report is based on an extensive survey carried out between January and March 2020 amongst 300 senior business leaders, including chief executive officers, chief finance officers, board chairs, executive and non-executive directors, company secretaries and risk managers. The report has two parts – the first, orients the readers about the preparedness of the boards in dealing with a crisis such as COVID-19 and the second discusses various aspects of risk management, its prevalence in the organizations and manner of its management by the board.

The key excerpts and learning from the research report is as under:

Section A: Response to Pandemic Risk

• Risks and COVID-19 – The pandemic of COVID-19 has been seen by many as a black swan event as it is a unique, one-off and unexpected happening. The responses of company boards to this crisis have been varied. While (47%) of them have a crisis management committee, others make the board or executive committee or the business continuity team responsible to manage the crisis. Moreover, almost, 50% of the board believed they are equipped to manage the crisis. On the other hand, 1/3rd believe that they were not prepared. Further, 43 % were of the view that COVID-19 represents a fundamental threat to the survival of their organization, with a slightly larger proportion (45%) believing it does not.


• Controls – According to the research report, as large as 96% of the respondents stated that their procedure and control have performed well to manage the effect of COVID-19 in all the stakeholders. Again 86% of the Boards are satisfied with their timely response to the pandemic.
  
  Also, 75% of the respondents agree that their Boards have effective mechanism to oversight the emerging legislative, administrative and regulatory development in the light of the crisis. And, 88% agreed that adequate assessment of liquidity, credit and capital needs is there.


• Strategy – Furthermore, research report also revealed that there is a scope for improvement in developing risk management systems in the organization. The reason can well be understood with the fact that about 1/3rd (30%) are clueless about whether their boards have developed a forward looking post pandemic strategy. And, a further 13% said that they are not developing such a strategy. However, 57% of the respondents have shown a positive approach about developing the strategy.
  
  Some of the board members have revealed about how boards are managing the crisis – they stated that board relies on management to provide updates and offer solution based on the management inputs. They also revealed their boards’ dependency on local government and regulators to assist them in their normal resumption of business. It has also been expressed that large firms are able to withstand the crisis to an extent but they are also struggling with falling revenues.

Section B: Response to Risk management system

• Risk Focus – Apart from concerns over COVID-19, boards view regulation and compliance as the number one risk. Next in line are financial, reputational and cyber risks. However, climate change has been considered as a comparatively low risk.


• Risk Landscape – A vast majority of respondents believe that their organizations are facing more risks than what they were confronting five years ago. This disclosure emerging from the report is not surprising considering that risk management is now very important for an organization because of the current business disruptions noticed in many organizations, recent changes witnessed in global politics and increasing focus on regulation, compliance, and reputation. Further, besides various kinds of risks, volume of risk has also increased because of the increasing use of data analytics and other monitoring techniques. In this respect, it can be said that organizations, which are adapting to this changing environment are most likely to succeed.


• Skills – The research report also revealed that about 70% of the respondents are confident that their board members are sufficiently skilled to face the risk in the market sector. This figure suggests high degree of confidence placed on the boards to tackle risk. Furthermore, 3/4th of them also stated that their board devotes sufficient time to discuss the risk they are facing.
  
  The survey also confirms (as expressed by 8 out of 10 respondents) that now board have clear governance structure (28% strongly agree), or even have a sub-committee to handle risky activities.


• Information – The availability of information as shown by the survey depicts a slightly grim picture as only 50% boards agree that they receive all the information needed to consider the risks faced by the organization. And, 25% of them do not agree and another 25% are unsure. The survey also revealed that this situation is mostly faced by the non-executive directors.


• Knowledge – The report further shows that large number of respondents stated to have knowledge of financial risks (91%), Regulation/Compliance Risk (88%), Reputation Risk (81%) etc. However, they portrayed very less knowledge of cyber risk (38%) and climate change risk (34%). This disclosure shows that boards are mostly exposed to those risks, which they considered to be less risky. But, one learning we can have from COVID-19 crises is that the risk can come from the least expected areas.


• Controls – About 67% of the people surveyed agree that their board is satisfied with the level of control across the organization while responding to risks. However, a worrying sign is that about 19% are not sure about this.
  
  Further, almost 2/3rd of the respondents reveal that their board have plan in place to tackle all the major risks that the organization may face. However, about 1/3rd of them either did not have a plan or were unaware of such a plan. This is not a good sign as it shows that in spite of having a plan in place it is not properly communicated.


• Appetite – Another interesting aspect revealed by the report is that about 50% of the respondents believe that their boards’ risk appetite has not reduced and it has not become more risk averse in the last 12 months. While, 27% don’t agree with that, 23% are undecided about this. This again shows a certain level of failure of communication as a significant portion is undecided or can’t tell the actual position.
  
  Moreover, 79% (8 out of 10) of the respondents agree that their board and management are aligned on the key risks facing their organizations. However, the scenario changes when only 6 out of 10 respondents agree that their board, management and shareholders are aligned on the key risks facing their organization. Again, it shows a certain level of miscommunication between the organization and the shareholders for this non-alignment.


• Culture – In an interesting observation, when asked whether their board understood, evaluated and monitored the organization’s awareness and attitude towards risk, most of them (61%) believe that their culture is measured. But again, more than a quarter believe this is not the case.
  
  Also, when asked whether their board has made changes to remuneration incentives within the organization solely or partly due to risk management issues, nearly half disagrees, while 20% were undecided. So, it can be said that almost 50% of the board don’t link risk and executive pay. Furthermore, it is widely accepted that risk invites opportunities. This is evident from the fact that a large majority (72%) agree that the board actively considers the opportunities that arise from accepting certain risks.


• Diversity – In this section, about 49% of the respondents agree that their board has made changes to its board composition in terms of diversity, to strengthen the challenges the board management faces around risk management. In this case also, 37% disagree and 14% were not aware.
  
  Moreover, the main task of the Board is to challenge its management and seek answers to those challenges. In this backdrop, progress is required to be demonstrated by the companies by providing representation of the unrepresented groups on the Board. The basis could be skills or the professionals who could help the organization in navigating through crisis.

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