Newsletter | Volume 1

GRC officers that are accountable for key GRC policies at various levels in the organization have to be sufficiently empowered to put the brakes on the firm's risk taking, but they also play a critical role in enabling the firm to conduct well-measured, profitable risk-taking activities that support the firm's long-term sustainable success.

We have for several years preached that risk governance is of paramount importance to the stability and profitability of the enterprise. Without an ability to properly understand measure, manage, price, and mitigate risk, companies will either underperform or 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 to better 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 is 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: Harvard Business Review.