Integrating risk into performance when reporting to the board of directors
As the board of directors is ultimately responsible for a company’s success or failure, board members should be adequately informed not only about the company’s (financial) performance but about the risks that may impact the company’s strategy and results as well.
Performance and risk are actually two sides of the same coin. Although they have traditionally been reported and managed by different organisational functions, there is a growing tendency to link them – for example, by integrating risk indicators into the company’s performance scorecard.
Because today’s global economic climate indicates that the business world is more uncertain, risky and volatile than it has been in the past, Vlerick has launched a research project to study corporate practices with respect to reporting performance and risk to the board of directors.
Objectives of the research
The main objectives of this research project are to:
- Analyse the content and flow of performance and risk information to the board on the basis of practices employed in several European companies.
- Document how performance and risk are integrated in management reporting to the board of directors.
- Identify leading practices in enhancing performance management with risk to enable board members to optimise their strategy monitoring role.
Risk management contributing to a company’s strategy process
The key conclusions of this first phase of the research project are:
- Board members are increasingly aware of the importance of explicitly considering risks in their decisions. Although this has in fact been the case for some time (it’s not a new trend in response to the economic crisis), the new development seems to be that risk reporting is now more formal and professionalised than it has been in the past.
- There is a tendency for boards of directors to view risks not solely from a negative perspective (as threats to be mitigated or avoided), but also from a positive perspective: for example, how might we make value-creating opportunities out of these potential risks?
- More and more companies are integrating risk and performance in their reporting and board-level strategic reviews. They are also increasingly adopting risk-adjusted performance measures (instead of financial performance metrics alone). And perhaps most recently, risk management is being more explicitly embedded in a company’s strategic and financial planning.
What are the implications for the finance professional who must include risk information when reporting to the board? First of all, the management reporting must be aligned with the board’s expectations. This does not necessarily mean that large amounts of extra information need to be produced, but it definitely means increasing the scope and quality of board-level information.
Source: This research has been sponsored by the CIMA (Chartered Institute of Management Accountants) General Charitable Trust. While the full research project is in progress, this first phase has been documented in the summary report: “Integrating Risk into Performance: Reporting to the board of directors”, by Prof Regine Slagmulder, Vlerick Business School.