Corporate Governance Is not Safe from Black Swans

THE DIFFERENCE BETWEEN RISK MANAGEMENT AND RISK GOVERNANCE, IN A BOOK BY SERGIO BERETTA

A lack of risk culture among top management is not a major problem anymore in listed firms. Yet a gap still separates awareness and practices. “Risk management is one thing, risk governance is another”, says Sergio Beretta, Professor of Planning and Control Systems. “Risk management devises specific measures to deal with risks. At top management level, however, there must be a risk management strategy providing skills and resources to the organization. According to the most recent studies on large firms, there is still a huge gap between the awareness on risk and the work done to set up an integrated risk management system”.
 
Current corporate governance codes feature chapters on risk management that are too generic and oversimplified. Professor Beretta pinpoints two major problems. “First, there is no comprehensive definition of all contexts of risk exposure. Three different contexts must be taken into account: those in which we have a reasonable knowledge of both the chance of occurrence and the expected impact of known risks; those in which we know the existence of risks, but we do not know their impact; those in which we are not aware of the risk exposure. The so-called black swans belong to the latter category. They are unexpected and yet have catastrophic effects. The guidelines do not mention these contexts or the way to deal with them”.
 
The second problem is risk appetite, that is the quantification of the amount of risk that a firm is willing to take. In order to spread awareness on risk appetite, it has been defined in a very generic way that is of little help in implementing it at the operational level. “We must rethink risk governance”, professor Beretta concludes. “Today, it is not adequate to deal with all the risks inherent in businesses”.

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by Claudio Todesco