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 risks. The board of today must possess competence in assessing and managing risks associated with new technologies and social change from a new generation of consumers.

In the technology age, a revolution has occurred in conventional ways of working for many industries which have also seen lowered barriers to entry for new startups. This change can be attributed to four primary factors:

• Changing intergenerational behaviours
• 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 material investments into 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 material losses suffered by shareholders resulting from catastrophic risks and the demise of legacy companies that played significant roles in their respective industries (such as Wirecard, TSB Bank, Thomas Cook, Toys R Us, Monarch Airlines) indicates that many boards are not seeing or appropriately addressing the onslaught of new risks.

With the new era of risk upon us, the rules for risk management are being rewritten across a broad range of risk topics, including strategic risk, social risk and technology risk. To keep apace of technology and social revolutions, companies are adapting the role of risk management to ensure it protects their continued viability and connects 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 and the board to address risks that can lead to significant harm.

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. Alongside this effort, they are scrutinizing how boards effectively address the management of risks against the pursuit of profits, including 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 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 destined to losses to shareholders, employees and consumers.

Boards must constantly push into the unknown (before, during and after the business strategy and plan are set). 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 and understand what could go wrong?”

Looking at risk management as something that is done inadvertently when making strategic decisions without asking that question is equivalent to taking a gamble on the business strategy. Shareholders expect boards to implement practical risk management systems that protect the safety of their investments and ultimate returns and provide consumer confidence.

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.