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Insights

Cultural Risk November 2013

Cultural Risk November 2013

Introduction

Boards are responsible for the long term health, sustainability and performance of the business. The nature of business is to take on and manage risk at a level that is appropriate for each business.

Boards and management apply various processes to manage a variety of risks that impact businesses. Reporting fair and accurate financial account to the market – audit firms ensure this and also detect fraud. Every major M&A transaction has a myriad of advisors doing due diligence on the deal.

  • During the GFC, CFO’s had a critical role in managing liquidity risk – this was the most important focus of many boards
  • General Counsel are employed to make sure legal risk is managed across the business
  • CRO’s are employed by many major companies today to help manage a variety of risks in conjunction with CFO’s and GC’s
  • Terrorist risk
  • Hacking into computer systems
  • Political risk
  • Business continuity risks
  • Sovereign risk – paying bribes in third world countries

But what about cultural risk?

Cultural Risk

  • Lots of companies have failed because of a breakdown in the behaviours of board members and senior executives
  • Lying about the true state of the business’s financial affairs
  • Taking on a level of risk that the business could not absorb – and failing to spot that and or deal with it
  • Most of the banks that failed were guilty of this – and they took on excessive risk partly because of the way bonus schemes were structured
  • Lots of companies have suffered significant reputational damage because senior executives have not lived the code of conduct values that have been espoused by the company
  • Boards have not been aware of these behaviours, or
  • Boards have been aware of these behaviours and have chosen to ignore them
  • In this example, the board has not done its job, and serious questions need to be asked about the ongoing composition of such a board
  • Indeed many corporate failures can be laid squarely at the feet of boards that simply didn’t do their job
  • The question is - how can boards be fully informed about the behaviours of senior executives of the business that are outside the company’s code of ethics and are potential threats to brand of the business
  • What is certain is the following – senior executives in every company on the planet are watched constantly by people in the business – and when they do something wrong, the whole business will know about it almost instantaneously
  • How do boards tap into this knowledge

Summary

  • Board members are observing senior executives in a variety of forums and have the opportunity to test the integrity of leaders in a variety of ways
  • Active board members are out in the business talking to people throughout the business – and they have the opportunity to “smell” issues – even when most people are reluctant to blow the whistle on their senior leaders
  • Some companies set up independent processes where people can communicate breaches in a protected way
  • Some companies use outside consultants to do 360 degree assessments on all key executives on a regular basis
  • The HR function also needs to play a key role here – and should have a direct line into the chairman on matters of ethics that could have serious reputational impacts for the business

Author(s)

John Colvin

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