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Thinking beyond Turnbull
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One of the strongest themes to emerge from the review was the need for boards to take responsibility for assessing the major risks facing the company, agreeing the company’s risk profile and tolerance of risk, and overseeing the risk management systems. There was a view that not all boards had carried out this role adequately and in discussion with the chairmen of listed companies many agreed that the financial crisis had led their boards to devote more time to consideration of the major risks
facing the company. There were differing views about the extent to which risk management systems below board level might need to be reviewed in non-financial companies.
FRC Review of the Combined Code: Final Report, December 2009
The . . . proposed new principle makes explicit the board’s responsibility for overseeing risk management and setting the company’s risk appetite and tolerance reform.
Financial Reporting Council Consultation paper, December 2009
Having stepped back from detailed language on the responsibility of boards to determine a firm’s risk appetite and tolerance, the FRC has a problem: how do they revise the Turnbull guidance (as they have said they will) in a way that doesn’t result in a minimal amount of ‘explain’ and not much ‘comply’?
In terms of what it says, the Turnbull guidance was unimaginative but fine; it is what it does not say that is the problem. And there was only limited attention given to the environment in which its laudable (if naïve) statements of proposed practice would be implemented. In essence, the disciplinary and professional backgrounds of the Turnbull committee members ensured they would have blindspots. The result has been a somewhat futile exercise in compliance; the relevance of much corporate risk management practice has suffered as a result.
We believe the time has come to reclaim the relevance of corporate risk management. We are collaborating on a guidance document on risk management that aims to fill in the holes in the Turnbull approach and recognise the importance of the board working to understand its risk tolerance and preferences. Due out in November 2010, the guidance seems likely to presage the FRC’s review of Turnbull.
Our aim to provide users of corporate reporting – analysts, institutional and private shareholders – a better basis for judging corporate risk management performance, and to give boards and executives much-needed guidance on how to achieve this.
FRC COMBINED CODE
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