Why are so many corporate boards so passive? Why have they failed to evaluate risks and govern in a way that actually adds value to the business? As Michael Schrage notes, a passive board that adheres to the letter of the law while failing to provide meaningful oversight “is mere overhead”. Failures of governance have continued unabated even though we have seen several waves of major regulatory reform over the past two decades. Those reforms may even have made things worse by creating distractions and interfering with effective governance. Schrage believes that “governance reform itself requires reform”, and he has some intriguing and promising ideas for doing just that.

The board of director’s role in overseeing risk is ripe for change. This article focuses on three practices that could both improve the board’s risk competence and increasing the involvement of key stakeholders in risk oversight: A risk manifesto; talent-driven risk scenarios; and tapping the “wisdom of investors”.

The first of these is an explicit risk manifesto set out by the board (in collaboration with management), articulating principles describing and governing how directors will assess and oversee enterprise risk management. Risk manifestos explicitly address differences in risk tolerance and establish expectations that should reassure investors. Schrage gives some examples of commitments that a manifesto might establish. For instance, outside risk advisors might be retained when too many independent directors disagree with a managerial risk assessment.

The second practice of talent-driven risk scenarios tackles the problem of overdependence on top management’s representations of risk. The idea here is for lead directors and other non-executives to request that senior management put together several teams consisting of the firm’s high-potential talent. These teams would “present risk scenarios of possible futures they believe their board needs to take seriously”. These major exercises would benefit the non-executive directors and provide professional development opportunities. In this process, board members should “put their noses in but keep their hands off”.

The third practice applies the “wisdom of crowds” to governance by having boards seek out risk concerns and insights from their shareholder communities. Digital media has enormously expanded the potential for structured information exchange among shareholders and the board. Boards in conjunction with management could, for example, encourage shareholders to participate in surveys or questionnaires about the risks that most concern them. This could both help management understand the priorities of all investors (not just the most prominent) and provide investors with better insight into the company. This and other ways of employing the wisdom of crowds could turn shareholders into valuable risk assessment partners.

Each of these three practices is well worth adopting, but the most value would come from the mutual reinforcement of adopting all three. They would not banish all losses and mistakes, but should reduce those problems through greater transparency, broader input and discussion, and engaged management. As Schrage points out, these practices “don’t require extensive investment, burdensome compliance measures, or disproportionate expenditures of time.” This article doesn’t provide all details of implementing the three practices, but its plan may well be more valuable than all of the last decade’s regulatory governance reform.