By Christopher Thackray
Are boards of directors gambling on the future of their companies?
Successful boards are now being judged based on how proficient they are with balancing business strategy with risk management. The culture of risk management is shifting, and this shift is placing a greater emphasis on top-down risk management that understands the complexity and interconnectedness of risk. The board of today must possess confidence in assessing and managing risks associated with new technologies and social changes that come with a new generation of consumers.
A New Age for Governance
In the technology age, a change has occurred in conventional ways of working for many industries at the same time as barriers have been lowered for new startups. This change can be attributed to four primary factors:
- Changing intergenerational behaviors
- Widespread innovation
- Greater technological capabilities
- Investor willingness to place bets behind disruptors
Technology has altered the competitive fundamentals of legacy industries which, when combined with escalating external risks, such as economic power sharing between the West and East, has resulted in large programmes of digitization and business model transformation.
Consequently, conventional corporate wisdom is being challenged, which has left boards with a decision to make: develop new skills to properly assess internal and external risks in the business environment or bring in new board members with this expertise. The demise of legacy companies that played significant roles in their respective industries (such as Wirecard, Thomas Cook, Nortel and Lehman Brothers) indicates that many boards and executive leaders are not seeing or appropriately addressing new risks.
With this new era of risk upon us, the rules for risk management are being rewritten across a broad range of risk topics, including social risk, technology risk, and strategic risk. To keep apace of technology and social revolutions, companies are adapting the role of the board and that of risk management to ensure the company’s continued viability is protected and connect their strategy to the delivery of long-term, sustainable shareholder returns. This has led to the institution of an essential executive leadership position – the chief risk officer – which is a partner in setting and delivering strategy as well as working with management peers to address risks that can lead to significant harm.
The Evolving Role of the Board
As executive leadership evolves, so too does the role of the board. With each corporate failure, governments and regulatory bodies are intensifying their efforts to understand how the failures occurred. With this effort, they are placing greater attention on how boards effectively addressed the management of risks against the pursuit of profits. Included in their scrutiny is the question: Is the composition of the board equipped with sufficient subject matter knowledge to properly challenge executive leadership’s actions in order to mitigate risks to the delivery of the business strategy.
The ability of the board to oversee and challenge executive leadership in the treatment of current and emerging risks is essential to protecting shareholder interests and the overall strategy of the business. Not fully understanding new forms of risks and effectively challenging executive leadership on their treatment of these risks is akin to gambling with shareholder investments.
It is critical for boards to demonstrate how they themselves possess the expertise to fully identify the implications of internal and external risks. They must align this with their ability to represent the interests of shareholders, especially as they are called upon at any moment to advise executive leadership, such as in times of crisis.
As complexity and interconnectedness of internal and external systems of risk grow, risk management as a critical board and executive leadership discipline also grows. Without sound practices of risk management, a company may struggle to thrive, thus creating an environment that is intolerable to shareholders.
Pushing into the Unknown
Boards must constantly push into the unknown (before, during and after the decision is made). It is impossible to know what you don’t know until you ask the right person, “What more must I know to make the right decision?”
Looking at risk management as something that is done primarily when making strategic decisions without asking that question is a style of risk management that indicates the strategy is a gamble and not a logical decision based on an accounting of risks and the creation of solutions to ensure the safety of shareholder returns, consumer confidence and greater market viability.
The escalating and tangible impacts caused by an inadequate understanding of risk by boards leads to a simple question, one that great leaders already know to ask themselves: Is your approach to risk management a gamble on your company’s future?
Place your bets.