Director's Cut | Summer 2020
Risk and the Board
It’s not a game; how corporate boards analyze and respond to risk is critical in a crisis.
Kristie P. Paskvan, CPA, MBA
Board Director and Leadership Fellow
Board committee work these days is anything but boring. While many boards typically meet
four times a year, in a crisis, boards and their respective committees must meet and
communicate far more frequently. And while financial matters in prior meetings may have
focused mainly on company income statements, crisis management demands a deep focus
on the balance sheet. Is there enough cash flow to meet short-term obligations? Are there
debt obligations that can be renegotiated or refinanced?
Finances aside, corporate leaders should be looking for ways to act, not just react, and
boards should encourage executive management to actively seek out opportunities. During
turbulent market periods and economic recessions, there are always opportunities for new
talent, new partnerships, and new consolidations. While we are all trying to imagine a new
normal, we also are given a rare chance to reimagine operations and technology solutions
through creative problem-solving.
During a crisis, getting a multitude of perspectives on strategic decisions is more important
than ever. Often, critical decisions occurring in boardrooms are vetted initially in a committee
structure. Risk committee agenda items permeate throughout the entire organization, and
frequent disclosures of regulatory and other material risks are required and discussed in
management discussion and analysis (MD&A) reporting. The overlap that exists between
the risk and the audit committees has increased as risk disclosures continue to expand,
meaning risk matters often end up on multiple agendas. The regular discussion of risk in
each committee and among the broader board of directors is critical to the understanding
of a business’ growth strategy, scenario analysis, and mitigation plan. As businesses retool,
recover, and rebuild in a crisis, they need a playbook of potential paths forward. This is
easier with the comprehensive and collaborative ownership of risk matters throughout the
organization all the way up to board oversight.
The AICPA and N.C. State University’s Poole College of Management collaborate each year
in publishing an annual look at the state of enterprise risk management. In the 2020 findings published in April, they observed:
- Over 80 percent of large organizations and public companies have management-level
- Most respondents (59 percent) believe the volume and complexity of risks is increasing
extensively over time.
- But only 24 percent of the organizations’ board of directors
substantively discuss top risk exposures in a formal manner when
they discuss the organization’s strategic plan.
Of the 563 survey respondents, which included public, private, and
not-for-profit entities, only about 54 percent had assigned risk
oversight to a separate committee. Lacking a separate risk
committee, risk matters are generally assigned to the audit
committee for review, with the HR and compensation committee
dealing with talent risk and second-tier succession matters.
By necessity, crisis management board work often focuses on
short-term emergency decision-making. It should also highlight risk
measures and contingency planning initiatives that have been
successful, as well as evaluate and strengthen those that need
improvement. As each board committee meets on critical matters,
here are some of the most prominent risk areas to be discussed:
The pandemic has highlighted the real risk of not having a
distributed supply chain with multiple third-party relationships.
Companies and their boards should be evaluating overseas
suppliers of raw materials, manufacturing plants, distribution
arrangements, and everything in between.
Has management been communicating the dangers of cyber
threats? Hacking and phishing are rising risks as cyber criminals try
to take advantage of increasingly distributed workforces and many
newly remote workers—potentially sharing devices with family
members—which may leave personal and business data vulnerable.
You’ve no doubt read about the retail bankruptcies filed for J. Crew,
J.C. Penney, and Neiman Marcus. There will be many more illiquid
organizations forced to consolidate locations or stop doing
business altogether despite government response programs to
stem the impact of COVID-19. Bankruptcy doesn’t work in all cases,
and it can leave employees without pensions unless you carefully
construct the filing. Scenario planning is critical in these uncertain
times. Boards should expect, or request if necessary, frequent
updates on plans to evaluate and strengthen access to capital and
refinance debt given current low interest rates. Boards should also
evaluate any share buyback programs in place and, if necessary,
Many industry-wide company valuations have declined and it’s
unclear how long they may be depressed. Evaluating revenue
stream scenarios is necessary, along with frequent reviewing of
client/customer touchpoints. Companies will be reporting balance
sheet impairments or new reserve requirements. Many companies
should also renegotiate and rethink leases as they reconstruct
office layouts that are conducive to social distancing and account
for more remote workers. Boards should be made aware that
regulatory agencies are calling for specific disclosures about the
effects coronavirus is having on companies.
The Department of Labor reported the U.S. unemployment rate hit
19.5 percent in April when adjusted for errors. Besides being the
highest rate since the Great Depression, more than 20.5 million
jobs vanished in the worst monthly loss on record. Whether these
job losses are temporary or permanent is still to be seen. Still,
companies must devise plans to reskill and upskill employees.
While this has been on the radar for some time, the move to virtual
work environments highlights the need for workstreams dedicated
to enhanced training and retooling.
HR and compensation committees should be evaluating incentive
compensation structures, including considering executive pay cuts
and retention packages for key succession personnel. At the same
time, the marketplace may be offering an opportunity to go after
previously unavailable talent.
Bain & Company’s 2020 Global Private Equity Report lists 2019
cash-ready reserves at $2.5 trillion. The challenge in getting this
money off the sidelines and invested in new deals is that due
diligence will be tougher than normal if all activity is done virtually
and digitally. After all, meeting company leaders and evaluating
culture and values has generally been done through in-person
conversations. In addition, deal structures may change depending
on the target industry and any reliance on overseas supply chains.
I suspect only companies with liquidity reserves and already
targeted M&A opportunities may be in the marketplace in the near-term.
However, with company valuations depressed, boards may
want to explore previously unavailable acquisition targets.
Major economic events require teams to come together. A board
that is engaged and informed can strengthen its committee
structure and its ability to do the planning and evaluative work
necessary to mitigate risks. Ensuring your board and its committees
are evaluating and responding to risks as quickly and with as much
information as possible puts your organization in the best position
to be responsive and transformative.