The key roles of a board of directors include monitoring regulatory compliance and risk management systems in their company.

Although the economic events of the last 2 years were well beyond the control of any individual board of directors, some companies did a better job than others in anticipating, identifying and managing the consequences of the GFC.

The author of The Black Swan, Nassim Nicholas Taleb, argues that as it is impossible to know the unknown risks, we should base our decisions around how unknown risks might affect us and prepare for the consequences.

How does the law deal with this? If the risk is unpredictable then directors are not in breach of their duties to exercise care and diligence under Section 180 Corporations Act. But, as Taleb points out, one of the characteristics of improbable events is that experts predict them after the event.

A board does not have a duty to forecast unpredictable events, but it is required to determine that the company has implemented appropriate monitoring systems, and it must take appropriate action when it becomes aware of a problem and believes that management is not properly dealing with it.

In reviewing risk management, a board should ensure management has identified the most likely sources of material future risks and understand how the company is addressing any significant potential vulnerability.

This article is available in full from Australian Regulatory Compliance Review.