Dear Board Doc: Do We Need a Risk Committee?

The MFDF’s Board Doc is an occasional feature of the Daily News Feed that features questions from our readers. The answers and commentary provided in our responses do not constitute legal advice and should not be treated as such. Please consult with your independent counsel on questions of compliance with the securities laws and director fiduciary duties. If you would like the Board Doc to consider your questions, please e-mail

Q: Our mid-sized board has operated with committees for our oversight of audit, compliance, and governance issues. In light of recent global events and our limited resources as a board, we have been rethinking our structure and considering adding a risk committee. Do you think it is necessary for a fund board to have a risk committee to address and anticipate seismic risks as the ones we are currently experiencing?

A: The global health pandemic has been a good test of boards’ oversight of risk in general and how boards organize their risk oversight responsibilities. Mutual fund boards have experienced and dealt with past crises that magnified financial, operational, cyber, third party oversight, and other risks. Lessons learned from previous crises can inform how boards successfully navigate the present, including how well their committee structure can contribute to the effectiveness of their oversight.

A place to begin to consider your question is to address why your board wants to add a risk committee and why now. You mentioned your board’s limited resources, and that is an important consideration. In a recent Spencer Stuart survey on corporate boards’ response to the crisis, consultants found that even with the myriad issues the COVID-19 outbreak has raised for companies, boards in general were not considering any changes to their current committee structures, with 94 percent responding that no changes in board structure was planned. So, it appears that some boards, at least at the beginning of the pandemic, were operating well with their current structure. Still, it is wise to consider the future. A Financial Times report focusing on corporate boards’ response to the current crisis quoted experts who suggested that boards need to ensure that they have the right strategy to handle future waves of the pandemic, or comparable global threats.  

Board committees can help to distribute the workload of fund oversight and allow a deeper focus on particular areas, such as audit or fund investments, for instance. In assessing the effectiveness of your committee structure in the recent crisis, you may ask questions such as: Was our board prepared to face a large-scale crisis with an appropriate plan and process already in place? Have we been paying proper attention and giving enough time at board meetings to compliance, internal controls, business continuity, cyber risks, and other hot-button issues? Have we had the appropriate level of communication with management and among one other? How quickly and effectively did we respond to requests or alerts from management? 

Use your CCO and counsel (who will know what your charter permits) to help you evaluate potential areas for improvement and to determine whether your committee structure played a role in your response to the  crisis and whether a risk committee would strengthen your oversight. Moreover, you may wish to examine whether your communications with management, the CCO, and among fellow directors are at appropriate and optimal levels. A risk committee’s work can involve oversight of how the adviser manages and prioritizes risk as well as communicating with management about its processes around risk management. With your current board size and workload, you have a few options, including forming a risk committee. Your independent counsel will also be able to present other options, including shifting the risk oversight function into an existing committee or committees. For instance, an investment committee could appropriately focus on investment risks as part of its responsibilities. It also may make sense to retain your current structure and maintain the flexibility to form ad hoc committees when certain crises arise. Further, your board may task one director as a point person with management who will report back to the entire board on specific issues, such as cybersecurity or business continuity. It can be useful to have all members fully involved in risk oversight as it is such a central oversight area. It also might make sense to consider adding a risk committee at a later time when the crisis has abated even further and you can truly reflect on the totality of your board’s response and performance.

Additional Resources: Role of the Mutual Fund Director in the Oversight of the Risk Management Function: