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INTERACTION WITH SHAREHOLDERSremedial action that is being taken, should be disclosed to shareholders.Directors should also be happy that adequate processes are in place to ensurethe risk return disciplines mentioned above are in place. So does the companyknow it is beating its cost of capital? Can it articulate, and is it exploiting, itsstrategic advantages to the full? Is itaware and is it managing its socialand environmental risks?Shareholders are likelyto be happy to take onsome element of risk,but they will want toknow that the risk ismanaged down to theappropriate levelType B – risk appetiteA rather more complex area is therisk that the company itself choosesto take on. We might divide theseinto two: financial and strategic. In both cases, shareholders are likely to behappy to take on some element of risk, but they will always want to know that therisk is managed down to the minimum appropriate level.As regards, financial risk, directors should be particularly careful inunderstanding the shareholders’ perspective, and that the company does notreplicate the job of the financial markets. For example, an individual whoseentire assets are tied up in one company may wish to see it diversify into differentbusiness areas. This makes no sense for a diversified shareholder such as apension fund beneficiary, who has hired an investment manager to do preciselythat. A similar observation would apply to holding of cash on the balance sheet.As regards strategic risk, public companies should be clear about the risks theyare taking. These can be very high, for example in the case of a drug developmentcompany, or very low as in the case of a water utility firm. Shareholders arewilling to accept both, provided that they are well managed. They will expectdirectors to be able to communicate this to them in an organised fashion.Directors should be clear what the ‘known unknowns’ are. Shareholders will haveless patience with ‘unknown unknowns’, or worse still ‘unknown knowns’.SAFEGUARDING COMPANY INTERESTSCommunicating such risks does not mean that companies need to offer a runningcommentary on prospects. Indeed they will find themselves in trouble if they do.69