Risk Management and Corporate Governance

We take up the question of potential conflicts between the objectives of risk management policies and those connected with maximization of the firm’s value. This question is a timely one, since many firms have a special committee devoted to risk management—banks and insurance companies in particular. In the wake of the Enron affair, various proposals have been formulated regarding the composition of the different committees set up by boards of directors. In the financial literature, it is now a widely accepted fact that risk management issues can give rise to conflicts of interest between heads of firms and shareholders, notably when executives are remunerated in stock options. In our opinion, the board’s risk management committee must be composed of competent and independent directors who hold no options to purchase the firm’s shares.