Why Your Board Needs a Risk Committee

With technology growing at rapid rates, organizations in all industries are open to an array of pathways yet to be traveled.

Now, this is quite positive. Businesses benefit from previously inconceivable opportunities to increase profits.

Unfortunately, it’s not all good news. The world is an increasingly complicated place—and as tech grows at a lightning pace, so do risks. And it’s extremely tough to keep up with the mounting perils faced by many businesses.

It’s one (of many) reasons for the financial crisis in 2008. Financial institutions failed to assess risk under the parameters of modern technologies.

Ever since the collapse, organizations worldwide have changed the way they perceive and strategize against risks.

In fact, the Dodd-Frank Act responded directly to the role that poor risk management played in the 2008 crisis. The act mandated that publicly traded financial institutions (other than banks) must establish risk committees.

But, why should non-financial organizations and boards of directors implement a risk committee? Read below and find out:

Weighing Risk Isn’t a Part-Time Job

Risk management is a discipline all on its own. As such, it’s essential to have members of a board whose sole purpose is to assess risk. Efficient risk-management is a pipedream when only a few hours a month are dedicated to the matter.

Also, a committee could provide support for executives with broader risk responsibilities. These board members can focus on the most successful resource allocation strategies for risk management. And they won’t get overwhelmed and distracted by the specifics.

Risk Committees Establish a Risk-Aware Culture

It’s one thing to tell everybody on a board or throughout the organization to just “be aware of risk factors.”

Sure, board members and other employees might take note, but the message won’t hit home the way it should. Instead, issues with risk will seem like some looming, indecipherable entity that everybody ignores, and hopes don’t come back to bite them.

With a risk-first focus coming from the top, everything – from operations manuals to marketing strategies – will be executed with risk management in mind.

Risk Committees Keep Boards On Their Toes

Risk committees allow boards to be proactive and prepared when dealing with potential loss events/disasters.

In fact, in the face of an unavoidable catastrophe with finances or technology, for instance, a risk committee can help ensure there’s a second line of defense. This way, the company will be more than equipped to handle these adverse scenarios.

Furthermore, legal disclosure requirements and risk management are beginning to overlap in their respective policies and specifications. This fact has been made clear in last year’s guidance on cybersecurity from the Securities and Exchange Commission.

So, with the above tidbits in mind, risk committees will become more prominent in defending boards from legal liabilities.

Do All Boards Need a Risk Committee?

Most experts state that the only organizations that should utilize a risk committee are one’s involved in finance and technology. These landscapes are where risks are at their most imminent.

However, in 2019, every company is involved in technology in one way or another. Therefore, before brushing aside the idea, it’s worth contemplating the gravity of your company’s overall risk factors.