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Boards have always had one primary function: managing risk. This year’s pandemic brought this obligation to the forefront. In a world of rapid change boards are required to be able and learn. They need to understand how external developments can impact the risk landscape and long-term trends.

To achieve this, they should be able to evaluate the risks associated with projects that are both new and established in a non-biased manner. While an easy green, red and amber assessment can be useful in identifying potential issues however it can be difficult to attain a thorough understanding of risks using this method. Boards can benefit from using quantitative methods to help facilitate communication between board members and managers and assist the board to better understand the management’s risk-taking habits.

More sophisticated tools, such as those derived from option pricing (the mathematical method employed to calculate the theoretical cost of an equity option), can be very useful for helping to evaluate risks and prioritise issues that are emerging. They can, for instance, help to highlight the extent to which a project is at risk from oil price risk or credit risks and provide insight into risks management strategies.

The board should also use its knowledge of the risk profile of a business to inform strategic planning as it reviews and monitors internal controls. It must also ensure that other board committees, like audit, compliance and strategic, have the same understanding of the risk profile.