When it comes to Corporate Risk Management and Governance, a company’s Board of Directors will play a vital and pivotal role for the effective governance of its bank. This isn’t always easy to understand, though. A board’s role in corporate risk management and governance can be a tangled web, leading members of the company to ask questions like, “who is the Board accountable to?” or “what exactly is the Board’s goals anyway?”
While it’s true that the Board plays an important role in this type of governance, saying that just isn’t enough to paint the clear picture of how they manage their governance, what responsibilities this should entail, and who they’re held accountable to during this process.
In this article we’ll aim to answer many of the questions you might have about the main responsibilities of a Board of Directions in corporate risk management and bank governance. Read on to get more info and to answer any questions you might have.
First, let’s talk accountability — when it comes to the Board, who are they being held to? Do they have a check and balance in their system, or are they the end-all-be-all in the governance of the bank?
To put it simply, this isn’t the case at all.
A much more complicated answer revolves around the nature of the Board of Directors. While, hierarchically, they’re the top of the food chain, so to speak, hierarchy isn’t the best way to describe the system. The Board, rather, works in a system of checks and balances, and the Board is held accountable by various groups, such as the shareholders, regulators, and stakeholders in the company.
To put it simply, the Board’s role in the governance of the bank is going to be incredibly different and distinct from a management perspective or a management role — they should be responsible for the overall direction of the bank. Rather, the Board should be responsible for the oversight of the bank, but not worry about dealing with the day-to-day functions of this governance.
We’ll lay out a few of the Board’s primary responsibilities here:
· Overseeing management
· Providing organizational leadership and setting and organizational example
· Honing the core corporate values
· Establishing an ethical framework for their corporate structure
· Facilitate the bank’s strategic direction
· Develop a framework to control risk culture and risk appetite
· Oversight of talent management and senor management, including portions of their recruiting, planning, and compensation.
As you can see the Board oversees plenty of different aspects dealing with the governance of the bank, including holding management accountable — especially when it comes to the bank’s risk appetite. Regardless of the responsibility or specific task, all of the Board’s actions should be aimed toward ensuring the bank is operating in a safe, sound way and always complying with laws, regulations, and other requirements.
Not just anyone can function on the Board of Directors, and in fact, there should be both general and specific qualifications for both individual members of the board, and the board as a whole. The ideal board is going to be crafted by a mix of diversified people, for example, those with a mix of knowledge are typically going to make up the most well-rounded, ideal board of directors. Diversity is an especially important ingredient when crafting the ideal board of directors. For example, a good board candidate will have a record of integrity, as well as the capability to disclose any relations or potential conflicts of interests that would require them to abstain from consideration for certain issues. The board needs to actively seek a diverse pool of candidates, this includes selecting people of all ethnicities, genders and diverse subject matter expertise.
Executives who are well-versed in risk management, as well as other areas of the governance of the company, should be considered when adding members to the board of directors. Diversity of experience in various areas of risk and controls, as well as the importance of seeking external advisory independent from management from time to time, is one of the best ways to ensure diversity in a board. In this way, it’s important to have a top-down approach in risk management by involving the board and communicative to always strive toward a proactive approach, rather than be stuck in a reactive or retroactive approach.
While qualifications will always vary, it’s important to have a Board that has people in different expertise fields dealing with the bank’s size, risk profile, complexity, strategy, and the ability to understand the organizational complexities and the risks that are unique to the bank itself.