New Deloitte survey shows tougher regulation and greater risk awareness driving greater demand for risk experts on financial institutions' boards
Increased regulation and heightened risk perception are forcing changes to the structure and duties of boards of financial services companies and prompting reviews of compensation and recruiting policies, according to Deloitte Touche Tohmatsu Limited (DTTL).
From reviewing risk management in incentive compensation policies to creating risk management committees to recruiting risk experts as directors, most boards are having to adapt to a 'new normal’ since the financial crisis of 2008, the results of a global DTTL survey show. DTTL released the results of its eighth biennial survey on risk management practices earlier this week.
Of the chief risk officers -- or their equivalent -- at 86 financial institutions surveyed, 94 percent said their boards are spending more time on the oversight of risk than they were five years ago, while 67 percent are spending `considerably’ more time. None of the respondents said their boards were spending less time on risk management now than five years ago.
Regulators are focusing increased attention on large banks and other financial institutions considered to have the potential to threaten the stability of the financial system as a whole if they should fail. The Dodd-Frank Act imposes additional reporting requirements on institutions deemed systemically important and also requires that they create recovery and resolution plans.
‘The new normal for boards in banking is to be much more involved in risk oversight,’ says Edward Hida, DTTL’s global lead for risk and capital management services. ‘Given regulatory expectations and other factors, we expect the trend to increased risk oversight to continue. Regulators are establishing rules that will force board oversight of risk management. Through the action of regulators, there’s a cascading effect’ that spurs even more board involvement in risk management.
The survey also showed that 98 percent of boards or their risk committees now review regular risk management reports, up from 85 percent in 2010. In addition, the number of boards that review their corporation’s overall risk management policy increased to 81 percent from 78 percent.
Some changes, such as greater focus on incentive compensation policies, are occurring more slowly or have been adopted by only a minority of institutions, DTTL found. About 55 percent of the institutions polled use risk management principles to review performance goals and compensation for senior management, essentially unchanged from 2010.
Clawback provisions are now written into executive compensation at 41 percent of the institutions, versus 26 percent in 2010. And 49 percent of boards now review compensation plans to better align risks with rewards, compared with the 35 percent of boards that did so in 2010.
Rising demand for board members considered ‘experts’ in risk management appears to be intensifying, forcing boards to recruit members from a small group of increasingly valued, qualified people. That means boards potentially are competing for the same candidates with other boards, says Hida.
‘As many organizations might be looking at a similar pool of individuals, I could see some challenges in locating suitable directors,’ he says.
Regulatory action is also prompting more boards to create risk management committees, particularly in the US, where the Federal Reserve requires boards of publicly traded bank holding companies with more than $10 billion in assets to create one, Hida says.
About 62 percent of the institutions surveyed assign risk management duties to a committee, or possibly several, while only 24 percent say risk management oversight is the responsibility of the full board. The most common method, used by 43 percent of the boards, is to create a single committee with responsibility for risk oversight. Roughly 8 percent of boards assigned responsibility to a single board member and 7 percent assigned it to the audit committee.
