Martin Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz, recently contributed a blog post on the Harvard Law School Forum on Corporate Governance and Financial Regulation entitled Risk Management and the Board of Directors – An Update for 2014. The post discusses the role of corporate directors in monitoring a company’s risk. Rather than managing risk, Mr. Lipton states that directors oversee risk to determine whether
the risk management policies and procedures designed and implemented by the company’s senior executives and risk managers are consistent with the company’s strategy and risk appetite, that these policies and procedures are functioning as directed, and that necessary steps are taken to foster a culture of risk-aware and risk-adjusted decision-making throughout the organization.
Mr. Lipton emphasizes the importance of a risk-aware culture, where risk management is an integral component of strategy, culture, and business operations. The submission points out that risk is not inherently bad, noting that there is as much danger in excessively avoiding risk as there is in excessive risk taking.
In addition to recommendations for board oversight, the submission also discusses different ways that boards can organize to effectively fulfill their risk oversight roles. Mr. Lipton states that boards can choose a variety of different structures provided that the efforts of board members are “coordinated so the board is satisfied as to the adequacy of the risk oversight function and the company’s overall risk exposures are understood.” He recommends an annual review of a company’s risk management systems, including board policies and procedures, potentially with the assistance of outside consultants. In addition to the annual review, Mr. Lipton stresses the importance of continually assessing changing risks facing the company.