13 Questions on Risk Management
   Do supervisory board members understand ...


13 Questions on Risk Management

Do supervisory board members understand the financial instruments the company uses or owns, particularly derivatives?

Most boards comprise people who do not have a detailed understanding of financial instruments, especially derivatives. This is understandable given that derivative usage has yet to reach critical mass, as it will in the future. Nevertheless, directors should take it upon themselves to nominate two people to bear special responsibility for derivative activity. Ideally, these two candidates should already have the appropriate background and knowledge, causing them to be singled out in the first place. If necessary, the company should look at bringing in new blood if existing directors do not have the necessary knowledge and show no inclination to learn about derivatives. If existing members of the board show some interest, then the board could nominate two candidates to undergo appropriate education. The aim of such training is not to enable them to price a swap or an option, or to construct a nifty hedging solution; but rather to teach them when and how to use derivatives as well as the unique risks of derivatives and the problems of management and control.

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