It’s way too early for nostalgia about the financial crisis. But one of the most telling anecdotes coming out of this period was from John Thain, remarking to the Wall Street Journal on his time as CEO of Merrill Lynch. “Merrill had a risk committee,” he asserted. “It just didn’t function.”
Since then, legions of experts have devised sage guidance on what boards should do to supervise a company’s risk management—in effect, to make those risk committees function. But there’s one safeguard most such advice has neglected, and it is among the most important, at least for public companies. Directors must ask themselves whether their firm’s investors have the capacity to tell if the board is effectively overseeing risk. Because if shareowners can’t find comfort that the board is doing its job, it won’t matter how much skillful oversight the directors exercise. The company may discover its cost of capital too high and its relationship with shareowners too fraught with mistrust.
