Risk Management and the Board of Directors
This was posted by Martin Lipton of the influential firm, Wachtell, Lipton, Rosen & Katz,
Click Here To Read: Risk Management and the Board of Directors
Purpose of This Paper/Memorandum (via Harvard Law)
This memorandum outlines the risk oversight obligations of the board of directors and certain best practices derived from governmental, regulatory and other sources and provides recommendations for structuring and improving risk oversight at the board level. Attached as Appendix A to this memorandum is a discussion of some of the common areas of risk that companies may face.
Introduction (Via Harvard Law)
Balancing risk and reward has never been more challenging than it is today. Companies face risks that are more complex, interconnected and potentially devastating than ever before. Over the past two years, a perfect storm of economic conditions has triggered an extraordinary downward spiral from which we are only recently beginning to emerge: the subprime meltdown, liquidity crises, extreme market volatility, controversial government bailouts, consolidations of major banking institutions and widespread economic turmoil both in the U.S. and around the world. Against the background of the global financial crisis and the still uncertain global economy, companies are re-assessing their strategies for responding to the challenges and pressures of the new environment. Risk—and in particular the risk oversight function of the board of directors—has taken center stage in this re-assessment, and expectations for board engagement with risk are at all-time highs. Risk from the financial services sector has contributed to large-scale bankruptcies, bank failures, government intervention and rapid consolidation. And the repercussions have spread to the broader economy, as companies in nearly every industry have suffered from the effects of a global constriction of the credit markets, sharply reduced consumer demand and volatile commodity prices, currencies and stock prices.
The public and political perception that undue risk-taking was central to the breakdown of the financial and credit markets has fueled an extensive legislative, regulatory, and even judicial focus on risk management and risk prevention. A number of legislative and regulatory proposals that address or touch upon risk-related items are currently pending. The Securities and Exchange Commission recently proposed disclosure rules that would require discussion in proxy statements of the board’s role in overseeing and managing risk and the relationship between a company’s overall employee compensation policies and risk management. Bills introduced in Congress have called for independent risk committees responsible for the establishment and evaluation of risk management practices to be formed at large financial institutions as well as other publicly listed companies. Risk management is also likely to receive heightened focus by shareholder activists and other “good governance” proponents, and the SEC has recently liberalized its approach to shareholder proxy proposals addressing risk oversight. While we expect that the business judgment rule will survive the financial crisis intact, boards and companies should remain mindful in the current environment of the possibility that courts may apply new standards, or interpret existing standards, to increase board responsibility for risk management. Finally, the reputational damage to companies and boards of flawed risk management processes must also be considered.
Risk & Boards of Directors (Via Harvard Law)
A company’s risk management system should function to bring to the board’s attention the company’s most material risks and permit the board to understand and evaluate how those risks interrelate, how they affect the company, and how management addresses those risks. Given the challenges and complexities of the current risk environment, companies may want to refocus on industry experience and qualifications in their new director selection process, and, in addition, provide tutorials to help their directors better understand and assess the risks the company faces. Proposed revisions to proxy statement disclosure obligations would expand required information about directors and director nominees, mandating a discussion of the specific experience and skills relevant to service as a director and, where applicable, as a committee member
Click Here To Read: Risk Management and the Board of Directors
