Risk e-Views Vol 45 September 2014 – Risk Leadership: Board Director Appetite for Risk

I thought this article by the UNSW Business School put forward a well-balanced argument for and against the Australian Institute of Company Directors’ push for changes to corporations law to afford directors broader protection (see AICD article here).

In essence the argument goes that if directors feel too much at risk of personal liability they either won’t act as a director or they will be risk averse in their decision making.  Being too risk averse is bad for the economy and bad for shareholders. Providing too much protection for directors may lead to poor risk taking and may harm stakeholders.

I am not a legal expert so I cannot provide any clarity on the likely realities of the current protection vs the AICD proposed protection. What I can offer, however, is some practical advice to directors on risk taking.

Without doubt there is good and there is bad risk taking. Think Apple and the iPhone 6.  All those people who lined up to buy an iPhone 6 as soon as the store opened would have been hoping that the new version had some really cool new features. This does not come without risk taking. Of course if Apple took too much risk and the phone was a disaster, customers would be most dissatisfied.  And so on and so on when you look at other key stakeholders of a business.

Bad vs Good Risk Training

The tip for directors is that having management articulate the organisation’s appetite for risk allows for a much needed discussion to occur to ensure directors and executives are on the same page when it comes to risk taking. Don’t forget, depending on the remuneration structures you have in place, executives may be much more highly incentivised to take risk when compared to a director.

In a recent webinar I ran on Risk Appetite, I also pointed out that an articulated risk appetite statement is only the beginning. You need managers to operationalise it so that staff can live it.