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Sommario:

1. Risk Governance: A Primer - 2. What is Keeping Chief Risk Officers Awake at Night - 3. Risk Governance in 2020s - 4. Conclusions - NOTE

After the Global Financial Crisis of 2007-2008, which brought severe economic consequences worldwide, regulators around decided to increase internal controls within firms. As a result, the risk management function became a cornerstone of corporate go­vernance leading to the current situation where it is not possible to separate best-prac­tices in risk management from best-practices in corporate governance, a phaenomenon commonly referred to as risk governance [1]. The building block of risk governance is described in G20/OECD Principles of Corporate Governance VI.D.1 recommending that “the board should fulfil certain key functions including reviewing and guiding corporate strategy, major plans of action, risk policy” and VI.D.7 specifying that amongst the functions of the Board there is “Ensuring the integrity of the corporation’s accounting and reporting systems … and that appropriate systems of control are in place, in particular systems of risk management, financial and operational control” [2]. Therefore, it is responsibility of the Board to set out the so called “risk-appetite”, which should result in a concise document highlighting the risks that the corporation is willing to undertake. Furthermore, the Board should also establish strong ethical standards and hold accountable the management [3]. In order to focus on economic performance rather than accounting performance, [continua ..]

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The World Economic Forum has been circulating for fifteen years a Global Risk Report in which they survey businesses, governments, civil society, and thoughts leaders to understand the top five risks both in terms of likelihood and impact [8]. Likelihood-wise, back in 2007, the top five global risks were perceived to be “infrastructure breakdown”, “chronic diseases”, “oil price shock”, “China hard landing”, and “blow up in asset prices”. Nonetheless, the focus has changed overtime, giving increasing importance to geopolitics, emerging risks (including climate change) and cybersecurity. This evolution of the World Economic Forum reports is consistent with a survey conducted on Chief Risk Officers of leading financial institutions during Risk Minds events [9]. Fast forward to 2020, the landscape is completely different from 2007: all the top five global risks are environmental risks, namely “extreme weather”, “climate action failure”, “natural disasters”, “biodiversity loss”, and “human-made environmental disasters”. The World Economic Forum Global Risks Report 2020 also describes the level of interconnectedness amongst such various risks. Looking at this metric, “climate action failure” seems to be one of the most interconnected risks. In fact, failure to mitigate it, may impact amongst the others, “water crisis”, [continua ..]

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To stress the importance of ESG governance, in his 2018 letter to shareholders Larry Fink, CEO of Blackrock, wrote “A company’s ability to manage environmental, social and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process. Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that will help them achieve their goals?” [10]. In this respect, sustainability reporting has become a central part of the annual returns of both public and private companies. Recently, also other ESG variables (especially related to corporate governance) are starting to be reported. According to the “Guidance for Applying Enterprise Risk Management to Environmental, Social and Governance-related Risks” prepared by COSO and the World Business Council for Sustainable Development (WBCSD), this was partly due to the increase regulatory and disclosure requirements, totalling 1,502 [continua ..]

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Overtime risk governance has evolved from the silo-approach to the enterprise risk management approach to tackle systemic risks. However, the risks landscape (and consequently the risk management one) is evolving further, and emerging threats such as cybersecurity and ESG-related risks seem to be more and more interconnected with external factors. Hence, the only way to mitigate a firm’s exposure would be imposing best-practices among an ecosystem and dealing only with virtuous (or at least risk-aware) firms embracing similar or coincident high-standards.

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[1] OECD, Risk Management and Corporate Governance, Corporate Governance, OECD Publishing. http://dx.doi.org/10.1787/9789264208636-en. [2] OECD, OECD Principles of Corporate Governance, 2004, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264236882-en. [3] Crouhy-Galai-Mark, The Essential of Risk Management, 2nd Edition, New York, NY: Mc­Graw-Hill, 2014. [4] Stulz, Risk Management, Governance, Culture, and Risk Taking in Banks, in FRBNY Economic Policy Review, 2016, pp. 43-59. [5] OECD, Corporate Governance and the Financial Crisis – Conclusions and Emerging Good Practices to Enhance Implementation of the Principles, 2010 OECD, Paris, www.oecd.org/daf/ca/corporategovernanceprinciples/44679170.pdf. [6] Lam, Enterprise Risk Management: From Incentives to Controls, 2nd Edition, Hoboken, NJ: John Wiley & Sons, 2014. [7] Comitato di Corporate Governance: Codice di Corporate Governance, 2020, Borsa Italiana, avallabile at: https://www.borsaitaliana.it/comitato-corporate-governance/codice/2020.pdf. [8] World Economic Forum, The Global Risk Report 2020, 2020 available at http://www3.weforum.org/docs/WEF_Global_Risk_Report_2020.pdf. [9] Nguyen, Top risks keeping CROs up at night, available at https://bit.ly/3ceGwC5. [10] Fink, Larry Fink’s Annual Letter to CEOs: A [continua ..]

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