By Allen He
Oversight boards and their investment teams often speak different languages when it comes to risk. The often repeated pattern is one of in depth discussions without clarifying long-term implications – not seeing the forest through the trees. Then, inevitably, board members are surprised by portfolio movements in the face of market stress events. Boards can take on a very short-term focus during such periods of uncertainty, often to the extent of losing confidence in the management team or their strategy and wanting to pull back on risk.
While no two organizations’ needs are the same, boards will want to be hands on with certain aspects of investment risk. Likewise, there are other aspects where the board would do best to take a step back and trust their risk team to lead. The guidelines below outline the different roles both parties play in maintaining the long-term strategy of the business.
There is no single set of default risk measurement tools and procedures. Strategy playbooks could be as varied as the organizations using them. Regardless of the size of the firm or which types of risk are being prioritized, it is the duty of the board to enforce the following standards:
Management and risk teams look to the board to lead, especially in times of crisis. Boards that have a strong grasp of the scope of their organizations’ risk will be prepared to position the firm well in the near and long term. Accordingly, boards should assume responsibility in these areas:
While it is important for boards to understand the default assumptions behind the math and models, it can be easy to take risk metrics for granted without looking into the deeper nuances. Risk professionals are equipped to take the lead on changing existing defaults as long as boards remain open-minded and focused on the ultimate outcomes. Using a flight metaphor, boards should feel confident in empowering their risk team to set the organization’s “flight plan,” including:
Consistent practice is required to stay up to date on risks, to know what questions to ask of the risk team, and to understand when and where things can go wrong. These guidelines are meant to complement – not replace – existing risk practices. Use this tool when onboarding new board members, establishing new risk functions, or adapting a current set of standards to be better suited to a long-term strategy.
Strategy | Report
21 December 2018 - Boards and executives of long-term funds, such as pension plans, sovereign wealth funds, and endowments, have a challenging problem. They need to manage those portfolios to meet their long-term purpose, which may be decades or more into the future. Yet no fund has the luxury of looking only to that long-term time horizon. Each must also meet expectations in the near term in order to continue in its role and with its investment strategy.
Strategy | Toolkit
21 December 2018 - To facilitate discussions about managing portfolios to both meet long-term objectives and weather short-term risks, FCLTGlobal, with input from its members, has developed this Risk Conversation Guide for boards and staff. We have provided illustrative answers to these questions, but these are not intended to be exhaustive or comprehensive.
In the News
15 February 2019 - A new paper by Focusing Capital on the Long Term (FCLT) acknowledges that investors typically have competing time frames while most of the tools for risk and performance management are for only one investment period. The...