Looking at Risk

The great unanswered question about the downfall of the big banks is where was the board?  We talked the other day with the CEO of a financial-services related company.  His answer was that the boards of these institutions were present and probably watching, but were focused on constant expansion of top-line growth, rather than on the risks that could create disaster.  In other words, the focus was on growing revenues, rather than on understanding risk and determining what their companies’ risk appetite could be.

It’s easy to understand why, pre-2007, so many financial firms focused on increasing revenue.  The tenor of the times, the potential for unfavorable comparisons to peers, and the lure of huge cash bonuses for sales made all contributed to the go-go atmosphere.

However, boards of directors must not only push managements to do better, but they must become aware of the embedded risks that could literally pull down the house.  Boards must not only hold  management’s collective feet to the proverbial fire to make ever increasing growth targets, but must simultaneously rein management in when the cost of  greater growth involves too much risk..

This obligation is not a one-way street.  Independent directors who have limited contact within the company cannot be expected to know intuitively what kinds of complicated underlying risks exist.  A board’s best safeguard lies in hiring a CEO who will educate the board both about the good and the ugly.  In turn, a relationship characterized by mutual respect and trust must be cultivated and sustained between board and CEO.

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!