Walking on Shifting Sand ERM in the Age of Uncertainty

By: Geary Sikich

Governments and companies worldwide are emerging from the current financial crisis and subsequent recession. While governments are crafting new regulations, businesses around the world are walking in shifting sand as risk exposures are high and new regulations will create compliance challenges. According to a recent survey by Korn/Ferry International, corporate leaders are focusing more attention on risk management after what is considered by many to be excessive risk-taking during the boom times that factored into the global financial crisis.

One question that both corporate executives and board members will have to wrestle with is, while there will be more regulations, can they be crafted better than the regulations of the past? Will it be just more reactive and ill-conceived regulations? The Financial Stability Act of 2010 commonly referred to as the Dodd-Frank Act alone comprises over 2,300 pages of regulatory directives. More regulations are in the offing, ensuring that compliance will be a top consideration. But, who writes the regulations? Are they industry experts? No. In most cases, regulations are written by politicians and legal professionals who may have a basic understanding of an industry, but who are in no way experts in that industry.

The boards of directors in all companies will be on the high-wire without much of a net between them and the unyielding and, in many cases rocky, ground. Stakeholder expectations will be high, hoping that boards of directors to do their best. How well boards document their risk oversight activities, as is required in the new regulatory scheme, in proxy disclosure documents there may be some protection as such a record may serve as evidence that good “business judgment” (a Delaware Court decision affirmed that “the business judgment rule” protects boards). The pertinent question may be, exactly how should a board oversee risk? Perhaps the answer lies in a combination of an emerging management process – Enterprise Risk Management (ERM) – and a much discussed risk of loss predictive theory – the concept of the “Black Swan” that has been chronicled by Nassim Taleb, author of the book “The Black Swan.”

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