The role and contribution of GRC officers in developing strategies,
risk appetite and profile, culture, and governance effectiveness
GRC officers are accountable for key GRC policies at
all levels in the organization. They have to be sufficiently empowered to
put on the brakes on the firm's risk exposure,, but their critical role
is in enabling the firm to conduct well-measured, profitable risk-taking
activities, to support the long-term sustainable success.
Since 2006 and in seven previous GRC
conferences we have preached that compliance to risk governance is of
paramount importance to the stability and profitability of the enterprise.
Without the ability to properly understand measure, manage, price, and
mitigate risk, companies will underperform and eventually fail.
Effective risk governance requires a dedicated set of risk leaders in
the boardroom and executive suite, as well as robust and appropriate risk
frameworks, systems, and processes. To enable supervisors to play a fully
effective role in the overall governance process, they need to:
- Understand the overall business, strategy, and risk appetite, and
focus on reactions to real-world events. The expanded objectives of
many supervisors encourage them better to understand the strategies,
business plans, products, and risk appetite of the companies they
supervise. Supervisors should continue to improve the use of stress
testing and horizontal reviews, but they should also learn how they
have reacted to real-world events. Supervisors should look for areas
where FIs are performing unexpectedly well and consider the sustainability
of that performance.
- Develop a sophisticated appreciation of how corporate governance
works, including governance structures and processes, board composition
and new director selection, and the internal dynamics of effective
boards. Supervisors should seek to understand how effective governance
and board challenge occurs, but supervisors should also safeguard
their independence, attending board and committee meetings only occasionally.
They can reserve the right to vet and approve new directors as may
be legally required while leaving board building to the board chairman
and nominating committee.
- Develop trust-based relationships with senior executives and directors
by regularly engaging them in an informal dialogue on industry benchmarks,
emerging systemic risks and supervisory concerns. Supervisors' increasing
interaction and dialogue with senior executives and directors on key
strategy, risk, and governance issues are a positive trend.
- Ensure boards and management govern effectively by setting realistic
expectations of boards and adjusting regulatory guidance accordingly.
Regulatory guidance should clearly articulate distinct roles and expectations
for the boards and management. As supervisors develop a deeper understanding
of the culture and values that drive behaviors, they will be better-positioned
to discuss their concerns or recommendations with the leaders.
- Avoid overstepping their supervisory role and allow the board and
management to shoulder their respective responsibilities. As supervisors
expand the scope of their oversight, they should reserve the right
to step into decisions historically left to management and boards
if they determine that those decisions present undue risk with potential
systemic consequences. However, they must do so only as a last resort.
More frequent intervention risks compromising the clear fiduciary
responsibility of management and the board.
Source: Own research and Harvard Business Review.
