It could be argued that getting the board involved in risk started with a push from treasury. Now it’s a recognized trend.
Even before the recession, corporate treasury knew that getting the company’s board involved in supporting projects was always key to that project’s success. Working capital management initiatives were an early benefactor of board and senior management involvement. More recently, amid the financial crisis, risk management has attracted board attention. Managing risks has become so important post-crisis that it was even a subject at the recent World Economic Forum in Davos.
According to a report from Wharton business school professor Michael Useem, a Davos session entitled “Redesigning the Board” attracted quite a few participants. Chairing the panel leading the session was former Clinton economic advisor, and now professor, Laura Tyson. Joining her were experts and CEOs of global companies. The session’s major thrust was that the governing board is “potentially one of the most pivotal places for the introduction of risk management practices.”
This has already been a realization within NeuGroup peer group membership, where treasurers have been asking in some cases whether the board should now include a finance committee. This would be a separate board entity—much like an audit committee—to provide guidance on strategic financial and capital-structure decisions. One consideration that arose among members in 2009 was how formal the discussions with the full board should be. It was determined that what is needed for open, two-way dialogue is finance expertise on the board so that hard-core finance discussion can be more productive. As some boards are set up currently, a high level of formality will prevent an open discussion of ideas, according to treasurers (see related story here).
This was echoed at Davos, where it was determined that boards should move away from their traditional focus of compliance, control and compensation and move toward more engagement in company strategy, talent development and risk management. “It is a matter of not only ‘feeding the beast,’” Mr. Useem reported, “but also building the business – advising executives on strategic direction and appropriate risk.”
Therefore, directors should not only bring oversight capabilities to the boardroom but also a challenge to management practices, independent judgment and the ability to resist executive actions that pose excessive risk. But it is also a dialogue, the panel determined, and management should feel free to speak up.
And speak up they are, according to results from The NeuGroup’s peer group pre-meeting surveys. One survey suggests that treasury is mostly succeeding in sustaining the level of interaction with their boards that started mid-crisis. It is hoped that the continued interaction is a greater realization at the board level to seek treasurers’ input on corporate strategy matters, including mounting pressure for movement on risk-based governance initiatives.