‘Directors need to know the risks’

There are plenty of lessons to be learned from the recent banking crisis.

This from David Brimacombe from the Institute of Directors in London, who was in Bermuda recently to talk about the director’s role in effective risk management. 

He said: “Risk management is a fundamental tool of any business or organization and its purpose is to allow the organization to be wise before the event.”

Mr Brimacombe said the recent financial crisis has made risk management high priority among all organizations.

“If banks, who lavish the greatest amount of money on risk management, and if they got it wrong, with calamitous consequences, how are other organizations to measure up?”

He added a number of independent studies concluded there were “dramatic failures of risk management at the heart of the financial crisis”.

Mr Brimacombe said all organizations face risk management questions whether they be regulatory risk, reputational risk, or market risk.

“They should examine how they approach these issues and the lessons from the financial crisis as a means of upgrading what they do.”

He said the directors of a company have a responsibility for both the strategy and activities of an organization and the second is the risks involved with those strategy and activities.

Mr Brimacombe said many boards are putting themselves at risk because they are solely focusing on the strategy and quarterly results and “pay insufficient regard to the risk involved in achieving the strategy. They basically only had one eye open.”

He said several in the banking industry went over the financial incentives tied in to receiving quarterly results without paying attention to the risks involved.

“If they had an incentive of reaching a return on equity of 20 per cent, they didn’t stop to think this could only be achieved by taking high-risk activities. High-risk activities, naturally, have dire consequences if the economic environment changes or any of the assumptions underlying that business change.”