The concept of systemic organizational risk is critically important in corporate governance. A systemic risk is one in which the system itself — through its incentives, structure, and culture — encourages or fails to detect behavior contrary to what is intended by those who developed or manage the system.
To illustrate the potential for systemic organizational risk to arise, we consider the curious case of the residential solar industry, in which complex financing, generous tax credits, generous sales commissions, and uncertain costs — coupled with widespread public interest in the adoption of solar — have combined to create an incredibly complex industry with multiple points of potential breakdown.
We ask:
- What information might the director of a residential solar company seek to understand whether the company is appropriately managing its exposure to risk?
- What steps can the board take to ensure that leadership and control functions are properly monitoring risk?
- How should the board structure incentives (compensation and otherwise) to decrease risk?
- What expertise — in terms of finance, accounting, tax, and legal — is required at the board level to adequately oversee company practices?
