Managing Risks in Highly Regulated Industries

The breadth, depth, and frequency of risks have increased tremendously. Serving on risk committees is particularly challenging at present, making it important to take a fresh look at the risk, risk mitigation, regulatory scrutiny, and stakeholder complexities the risk committee must balance.

In this podcast, Dr Sabine Dembkowski, Founder and Managing Partner, is joined by Terri Duhon. Terri is an award-winning educator and TEDx speaker. She went from earning a master’s degree at MIT to becoming a derivatives trader on Wall Street, and then an entrepreneur and author. Terri serves as a board member at Morgan Stanley, Wise, and Rathbone Brothers. She is also a guest lecturer at the LSE and Oxford University, where she’s an Associate Fellow for the Saïd Business School.

“I split the world between financial risks and non-financial risks.”

Terri sees the risk committee as working for the Board, even as the Board ultimately retains ownership of strategy and risk management. Within that work, she distinguishes between financial and non-financial risks.

Financial risks are a comfortable space for her, thanks to her background in trading and the cutting-edge approach to viewing risk she learned at JPMorgan. Yet non-financial risks – operational, cyber, regulatory, change, and so on – are an increasing part of the work in regulated fields. The non-financial risks are harder to quantify and require significant thought and engagement across different business lines to work through.

“As a chair, I say, ‘What are the big things I have to focus on today?”

Every company will have a big, long list of risks. For Terri, the real value of the risk committee is to narrow the focus to the big three or five things. Talking with the CRO or having pre-meet sessions with them to get to the 50 or 100 critical pages of material and the top handful of priorities delivers far more value and results than trying to tackle everything.

As Terri notes, on the risk committee, you don’t have infinite time or infinite resources. In four to five hours a quarter, what are the most critical topics and challenges? Pushing for thoughtful consideration and risk weighing is a big part of how the risk committee supports and works for the Board.

“We can either skim 1000 pages, or we can really think about 50 pages.”

Terri knows Boards face mountains of information. Quality discussions come down to ruthlessness around focus. Boards skimming tons of material are less valuable than Boards focused on the company’s most significant challenges. She also likes to ask NEDs, “What’s the most important thing that came out of these risk papers for you?” as this surfaces new and interesting perspectives.

“We challenge the robustness of the process, as opposed to challenging the decision itself or challenging the output.”

To Terri, quality in a risk committee means probing the processes and robustness of the discussions and decisions. Offering this challenge helps drive deeper discussion and prepares CROs for good conversations with regulators about how they are challenged by their risk partners. Plus, having Boards explain the rationale for decisions provides more space for high-quality deliberation on action plans, risk ratings, and accountability, so that all key stakeholders fully support final choices.

 

The top three takeaways from our conversation for effective boards are:

• The job of Board members is to challenge and oversee, asking for thoughtfulness on papers and accountability on actions.
• It is essential to manage the energy in risk meetings to ensure the most critical items are covered first.
• While the risk committee takes work, it can also be quite fun.

 

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