A spotlight on boards’ response to the new risk environment: How boards are changing the way they think about risk in strategic decision making
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.
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Author's Biography
Celia Huber is a Senior Partner in McKinsey’s Silicon Valley office and leads its board services in North America.
Michael May has been a professor of computer sciences and facility management at the University of Applied Sciences (HTW) Berlin since 1994. Before assuming his current position he was head of the FM research department at the IIEF Institute in Berlin and worked for the German Ministry of Research and Technology. He earned his PhD in mathematics in 1981 and his postdoctoral Habilitation in information technology in 1990 at the Berlin Academy of Sciences. His current research is related to FM knowledge management, gamebased learning, facility layout automation, IT integration, CAFM/IWMS, BIM, augmented reality and sustainability. He is the editor and author of several books including The Facility Manager’s Guide to Information Technology. He is a board member of the German Facility Management Association (GEFMA) and head of GEFMA’s IT (CAFM) work group. He represents GEFMA at the international level, eg at EuroFM and IFMA.
Olivia White is a Partner in McKinsey’s San Francisco office. She advises financial institutions on issues across strategy, organisation, risk management and operations. Olivia has helped multiple institutions transform their enterprise-wide approach to risk management, drawing on deep expertise in risk appetite, identification, effectiveness and efficiency; organisation and talent; culture and other areas. Olivia has also worked extensively on financial inclusion and broader economic development, with a primary focus in emerging markets. She holds a PhD in physics from Harvard, an MSc in mathematics from Oxford University where she was a Rhodes Scholar, and a BA in physics and mathematics from Stanford University.
Citation
Huber, Celia, May, Michael and White, Olivia (2021, March 1). A spotlight on boards’ response to the new risk environment: How boards are changing the way they think about risk in strategic decision making. In the Journal of Risk Management in Financial Institutions, Volume 14, Issue 2. https://doi.org/10.69554/EKLV3372.
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