What to Look for in a Board's Risk Director
As JPMorgan Chase & Co. reportedly looks to shake up the board of directors risk committee per hints at the banks annual shareholder meetinga group of risk governance professionals has come out with some handy literature: the Qualified Risk Director Guidelines, which provide a detailed description of potential director candidates.
The guidelines were created by the Directors and Chief Risk Officers group (DCRO), a volunteer network of some 1,600 risk governance professionals from around the world. The publication covers topics including personal attributes, business acumen, and experience requirements for directors tasked with overseeing risk.
While the Dodd-Frank financial reform law made having a risk committee mandatory for large financial institutions, DCRO hopes the new guidelines will help companies across industries voluntarily create and fill risk director seats. Technology, information, and competition have accelerated in the last 10 to 15 years, says David Koenig, chief executive officer of The Governance Fund Advisors, who led the effort to draft the guidelines.
These days, he adds, The impact on public companies of a bad news eventits immediate and its large.
And in the case of JPMorgan, for example, where the three members of the banks risk committeestill feeling the heat from a large trading loss last yearearned relatively low levels of shareholder support, such guidelines could be a useful benchmark. How do you say Theyre not the right people if you dont have something to compare it to? Koenig notes.
Contributors to the publication included a member of UNICEFs audit committee, directors of financial services and insurance companies, and a board member of a water management agency in Australia.
The basic question they started with was: What qualities would you be looking for in a board colleague whos in charge of risk?
One important attribute discussed in the guidelines is experience navigating a company through different economic and revenue cycles. Another is a persons ability to think stochasticallythat is, to consider many different potential outcomes at once, both positive and negative. Having a background in accounting and statistics is also considered desirable.
Risk director candidates may have served as a chief risk officer, had leadership experience with a high growth company, or had experience as an expert in business valuations, according to the guidelines.
Its a pretty demanding list, says Koenig.
Ultimately, the person selected for the role is someone who would also make a strong candidate to serve on a boards audit, compensation, and corporate governance committees, the guidelines say.
Many of the skills and attributes required of a Qualified Risk Director can and should apply to all directors, according to the publication. It is their collective presence that differentiates a Qualified Risk Director.
Boards can start moving in this direction by asking if they already have a director who meets many of the criteria outlined in the guidelines, says Koenig. If they dont, a companys nominating or governance committees could use the document to assist in their search.
The groups working hypothesis is that installing a qualified risk director on the board will benefit the companys bottom line, too. With someone accountable for risk oversight, you have a slightly cheaper cost of raising capital, Koenig says.