A spotlight on boards’ response to the new risk environment: How boards are changing the way they think about risk in strategic decision making

Celia Huber, Michael May and Olivia White
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Celia Huber: Senior Partner, McKinsey, USA
Michael May: University of Applied Sciences (HTW) Berlin, Wilhelminenhofstr. 75A, USA
Olivia White: Partner, McKinsey, USA

Journal of Risk Management in Financial Institutions, 2021, vol. 14, issue 2, 115-120

Abstract: While most financial institutions have significantly enhanced their traditional risk management capabilities over the past decade, these organisations — and their boards of directors — are often less prepared when facing extreme and multi-faceted uncertainty. Preparing for uncertainty, particularly over long time horizons, is much more complex than preparing for particular risk events, as it means taking account of unknown unknowns. To help their organisations navigate extreme uncertainty, boards report that they are focusing on one topic above all: resilience. Leveraging insights from interviews with nearly 1,000 board members, this paper outlines the forms of resilience that should be bolstered and recommends three actions boards should take to build resilience. Specifically, boards should consider and promote operational resilience, organisational resilience, reputational resilience and business-model resilience, in addition to the more familiar financial resilience. To build resilience and prepare for uncertainty, this paper proposes that boards of financial institutions should take three key steps: first, they must understand the main drivers of uncertainty that will impact their operating environment. Secondly, based on these drivers of uncertainty, they should look at the specific financial and operational implications for the company and consider scenario and contingency planning. Thirdly, boards should set clear expectations for management — including setting an appropriate risk appetite, detecting risks and control weaknesses, developing responses, and setting clear metrics — and hold management accountable for strong performance and stewardship of risk.

Keywords: board of directors; risk committee; resilience; enterprise risk management; emerging risks; scenario planning; risk identification and risk appetite (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2021
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