Wednesday, October 14, 2015

A Risk Intelligent Board

A harmonic, forward-looking approach to practice governance discipline has to be put at the heart of corporate board in the digital age.

The corporate board is one of the most important governance bodies. Governance, per se, as a concept goes back 2500 years, deriving from Greek naval terminology, kubernesis or kuberneo, and referred to the act of piloting a ship - both providing direction to accomplish the ship’s purpose and its protection (risk avoidance) in that process. To navigate the corporate ship at today’s business dynamic, risk avoidance is not sufficient, the corporate board needs to be risk aware and risk intelligent. Many say that companies don’t fail, boards do.

One of the obvious issues raised by many significant business failures is the failure of governance. Often the current governance models can't enable NEDs to get enough information to hear the whole story. The problem of information asymmetry is endemic to the entire governance process. It is one which will not go away. But information asymmetry cannot be used by the board to escape taking responsibility for something significant. In fact, this is more of a case of responsibility being attributed to the board because ultimately, the buck must stop there. There are several questions about governance implications when a business has a serious incident or failure. For instance, who was responsible for feeding unreliable information up the organizational food chain? What checks were there to test the reliability of such information? How robust was the organization's risk assurance system, all the way up to the management board? How could that system miss something that has had a widespread impact? Was senior management and, ultimately, the management board, too easily assured? Who was complicit in this and how far up the organizational food chain did the cover-up go?

The clear and consistent ethical message has to start from the top with actions and not just lip service. How can top management know everything that is going on? they can't. Introducing more controls and procedures for everyone to comply with could be counter-productive - stifling innovation, common sense and personal responsibility. In an environment where there is pressure to deliver, it seems quite possible that no one thought about the ethics aspect of solving the challenge - until it was much too late. The answer is to create an environment where the staff does think about the ethical aspects of their work. Make self-assessment by asking “Is there anything going on which could cause embarrassment if it became known?' The problem is that people in high-performing organizations are often too busy to think about ethics. Boards and management should help them find the time and resources.

The NED in boards should request information from all directions of the operations. Because it is evidence that information is crucial for any board to function well and act accordingly. However, many Boards and independent NEDs are unfortunately focused on the data and information fed to them, and not on how and where do they get the information. The issue is probably a reflection of the culture of the senior management of the organization. Board members would begin to seek to know more about the day-to-day running of the business, especially decisions that have the potential to harm the organization. Also, they should learn not to lay too much emphasis on numbers, but on the goodwill of the organization. In any case, management responsibility is to ensure proper control framework and assessment.

Governance is a sophisticated process that if well executed, will lead to better decisions and high performance. It will allow not only to protect the existing value but also to create new value for its shareholders. Today, boards that are still using traditional risk management frameworks and management showing graphs and curves to their board are only moving forward by driving through a rear mirror view. Because the biggest risk for business is beyond those traditional graphs and curves. Boards need to master risk intelligence - to identify both business risks and opportunities. A harmonic, forward-looking approach to practice governance discipline has to be put at the heart of corporate board in the digital age.


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