The Evolving Contours of the Board's Risk Management Function in UK Corporate Governance

Abstract

The well-documented banking company failures that occurred in the UK over 2007 and 2008 have enhanced the perceived importance and scope of the risk management function performed by boards. It is consequently a universal expectation of non-executive directors (NEDs) today that they provide a high-level challenge to a company's executive on core business risks. This article examines the recent corporate governance reforms introduced by Sir David Walker in 2009 and the Financial Reporting Council (FRC) in 2010 as they relate to NEDs' evolving risk oversight role. It also documents the regulatory development of the board's risk management function in the UK prior to 2007, explains the impact of the UK banking collapses of 2007–08 in reframing boards' risk function, and also critically assesses the key Walker and FRC recommendations in this regard. It will be demonstrated that over recent years the board's internal control remit has shifted from one of risk management—denoting the mitigation of the extraneous adverse effects of business activities (with limited questioning of the viability of those underlying practices themselves)—to one of risk moderation—whereby the inherent riskiness of a firm's core entrepreneurial activities is now placed at the very centre of the board's risk compass. The article then explores the relationship between NEDs' extended risk management function today and the independent board paradigm that has been increasingly dominant within UK corporate governance over recent decades, and concludes with a prediction as to the future development of British board structures in light of the recent reforms.