At the end of each year, we list what we think will be the key issues for directors in the new year. Some issues continue to be relevant from year to year; others are new or come to the forefront due to current events. This year the economic crisis affects all the issues. The following is an updated list:

1. The risk oversight function of the board of directors has never been more critical and challenging than it is today. In the context of the current global economic crisis, companies now face risks that are more complex, interconnected and potentially devastating than ever before. The public and political perception that undue risk-taking has been central to the breakdown of the financial and credit markets is leading to an increased legislative and regulatory focus on risk management and risk prevention. In this environment, directors must be mindful of the possibility that courts will apply new standards, or interpret existing standards, to increase board responsibility for risk management.

2. Monitoring balance sheet issues, including leverage, liquidity, debt maturities, share buybacks and dividend policy, in light of the economic crisis, and dealing with the problem of underwater pension and other employee benefit plans.

3. Assuring shareholders and other constituents (including regulators) that the CEO and senior management are being properly evaluated and that there is a frequently reviewed management succession plan.

4. Dealing with executive compensation, not only in light of normal sensitivities, but also to address the current perception that poorly structured executive compensation programs encouraged excessive risk-taking and contributed to the economic crisis. Directors will need to develop specially tailored executive compensation programs to comply with new regulations and to minimize criticism, but at the same time enable the company to attract and retain the best available executives and reward outstanding performance.

5. Regularly reviewing that the CEO and senior management are setting “tone at the top” that stresses professionalism, integrity, transparency, risk management, legal compliance and high ethical standards.

6. Striking the right balance in responding to shareholder corporate governance initiatives, accepting those that do not interfere with management of the business and rejecting those that impede the achievement of long-term success and shareholder value.

7. Anticipating attacks by activist hedge funds seeking management, structural or strategy changes to boost short-term stock prices at the expense of long-term value, and developing business, financial and legal strategies to avoid or counter them.

8. Maintaining collegiality and the culture of a common enterprise with the CEO and senior management, while continuing to enhance monitoring of performance, risk management and compliance in response to sharply increased pressure from Congress, shareholders, regulators and employees brought about by the economic crisis.

9. As the current economic crisis grows more severe, navigating the dangerous shoals when a company has solvency issues that create a conflict between the interests of shareholders and creditors.

The risk oversight function of the board of directors has never been more critical and challenging than it is today. In the context of the current global financial crisis and the swooning global economy, companies now face risks that are more complex, interconnected and potentially devastating than ever before. Risk from the financial services sector has contributed to large-scale bankruptcies, bank failures, government intervention and rapid consolidation. And the repercussions have spread to the broader economy, as companies in nearly every industry have suffered from the effects of a global paralysis in the credit markets, sharply reduced consumer demand and extremely volatile commodity, currency and stock markets. In addition, the public and political perception that undue risk-taking has been central to the breakdown of the financial and credit markets is leading to an increased legislative and regulatory focus on risk management and risk prevention. In this environment, boards and companies must be mindful of the possibility that courts will apply new standards, or interpret existing standards, to increase board responsibility for risk management.

But what exactly is the proper role of the board in corporate risk management? The board cannot and should not be involved in actual day-to-day risk management. Directors should instead, through their risk oversight role, satisfy themselves that the risk management processes designed and implemented by executives and risk managers are adapted to the board’s corporate strategy and are functioning as directed, and that necessary steps are taken to foster a culture of risk-adjusted decision-making throughout the organization. Through its oversight role, the board can send a message to the company’s management and employees that corporate risk management is not an impediment to the conduct of business nor a mere supplement to a firm’s overall compliance program but is instead an integral component of the firm’s corporate strategy, culture and value generation process.

Given the increased significance of the risk oversight role in the current risk environment, a company’s risk management system should function to bring to the board’s attention the company’s most material risks and permit the board to understand and evaluate how these risks interrelate, how they affect the company, and how management addresses these risks. It is important for directors to have the experience, training and knowledge of the business necessary for making a meaningful assessment of the risks that the company faces, however complicated they may be. The board should also consider the best organizational structure to give risk oversight sufficient attention at the board level. In some companies, this may include creating a separate risk management committee or subcommittee. In others, it may be sufficient to have the review of risk management as a dedicated, periodic agenda item for an existing committee such as the audit committee, in addition to periodic review at the full board level. While no “one size fits all,” it is important that risk management be a priority and that a system for risk oversight appropriate to the company be put in place.

My colleagues Daniel A. Neff, Andrew R. Brownstein, Steven A. Rosenblum, Adam O. Emmerich, Sabastian V. Niles, Shaun J. Mathew, Brian M. Walker, and Philipp von Bismarck and I have prepared a memorandum entitled “Risk Management and the Board of Directors” that considers these and related considerations. The memorandum (1) outlines the risk oversight obligations of the board of directors and certain best practices derived from governmental and regulatory sources, (2) discusses some of the common areas of risk that companies may face, and (3) provides recommendations for structuring and improving risk oversight at the board level.

The memorandum is available here.