Posts Tagged ‘risk governance’

Economic and Geopolitical Disruptive Forces: History Favors the Best Prepared

March 17th, 2015 | By

Now in its third year, NACD’s Directorship 2020® takes an investigative look at the trends and disruptors that will shape boardrooms agendas of the future. This initiative is designed to raise directors’ awareness of these complex emerging issues and enable them to provide effective guidance to management teams as they navigate the associated risks and opportunities.  The inaugural 2015 session was held on March 3 at the Grand Hyatt Hotel in New York City, where subject-matter experts from Broadridge, KPMG, Marsh & McLennan Cos., and PwC and corporate leaders explored the boardroom implications of geopolitical and economic disruption.

Illustrating the boardroom perspective on the impacts of economic and geopolitical disruption on corporate strategy.

Illustrating the boardroom perspective on the impacts of economic and geopolitical disruption on corporate strategy.

In his remarks on economic disruption, Peterson Institute for International Economics Visiting Fellow and International Capital Strategies Executive Chair Douglas Rediker examined the changing face of global competitive markets. Governments around the world are increasingly involved in market activities and are more likely to champion domestic businesses or businesses based in countries with which they have trade agreements. This situation creates a business environment in which companies seeking to expand must assess a foreign country’s protected business sectors in order to fully evaluate the endemic risks and opportunities.

Taking a geopolitical perspective, UBS Executive Director and Head of U.S. Country Risk Dan A. Alamariu considered the ripple effects of government regulation, using a case example of the sanctions recently imposed by the US and EU on Russia. Though these measures did diminish the buying power of the ruble, the sanctions also hurt Western companies operating in Russia because consumers could no longer afford to purchase foreign goods. He cited other examples as well. In its efforts to recover from the financial crisis, the Chinese government has recently implemented a number of economic reforms. While these reforms may succeed in re-establishing China as an “engine of growth,” the infighting that they have triggered among political elites could ultimately dampen growth and set the country on an uncertain course. Closer to home, persistent gridlock in the US government is preventing needed progress on issues critical to the business community, such as tax policy and infrastructure.

Both speakers alluded to the fact that as countries become more divided and inwardly focused—both internally and with respect to international relations—developing collective approaches to major transnational issues such as climate change and cyberattacks will become more challenging. Companies will therefore need to devise their own strategies for addressing these challenges.

Economic and geopolitical disruptors are inextricably linked, and the three main takeaways from both sessions are as follows:

  1. Embrace risk—you may discover opportunities. Directors need to start thinking like emerging markets investors. In other words, they should get comfortable working in a business environment that is volatile and unpredictable. This breed of investor has historically been focused on domestic, regional, and international political and economic risks. Because technology has created a world that is deeply interconnected, investors must proactively cultivate an understanding of geo-economic risks. By extension, it is also important to recognize technology as a major disruptive force that will continue to impact companies across all sectors. For example, tablet devices have completely changed not only how people communicate and access multimedia content but also how companies conduct business. By embracing disruptive technology, companies can in turn create the caliber of differentiated products that will transform the marketplace.
  2. Be prepared. This ageless scouting motto is especially relevant to anyone managing or overseeing a company. Businesses the world over are more interconnected than ever before, which forces companies to compete across national borders and exposes them to international political and economic risks. Boards need to consider the ultimate “black swan” events that could affect their companies. By extension, directors need to be mathematically literate—if they are not already. Black-swan events include natural disasters, such as Hurricane Sandy, which incapacitated businesses in our nation’s financial epicenter; political events, such as the outbreak of war; economic unpredictability; and technological innovation, which we have seen from the automobile to the iPad. Having a by-the-numbers plan for how the company could behave in specific scenarios will create a comprehensive understanding of the risks the business faces. Because it’s impossible to completely protect a company, it is essential to create resiliency. The board must therefore ensure that incident response plans are in place and must routinely test those response plans to confirm that they meet the company’s evolving needs.
  3. Beware of “herd mentality.” Directors need to periodically review the current board composition; and if there are gaps in the board’s collective knowledge that may prevent it from assessing areas of risk, it may be in the board’s best interests to bring in a third-party expert to help inform boardroom discussions. This is especially true of cyber risk. Many boards are still struggling to comprehend the depth and breadth of these threats, and because it’s neither possible nor desirable for every board to have a cyber expert in their ranks, it is imperative to bring in outside sources to inform and educate directors and management.

Look for full coverage of this NACD Directorship 2020 session in the May/June 2015 issue of NACD Directorship magazine. For information on future events and recaps of past events, visit the NACD Directorship 2020 microsite.

How Boards Can Proactively Oversee Strategy and Risk

May 15th, 2014 | By

The 2013-2014 NACD Public Company Governance Survey found that strategic planning and oversight ranked as the number one issue for directors. While risk oversight came in at number 3, Paula Cholmondeley—who serves on the boards of Terex and Dentsply International Inc.—finds it curious that risk doesn’t follow strategy as the number 2 priority because these issues are part and parcel of each other.

During a May 6 panel discussion at the C-Suite to Board Seat program at the Four Seasons Hotel in Washington, D.C., Cholmondeley and fellow panelist Greg Pratt offered their perspectives on the board’s role in overseeing strategy and risk. Cholmondeley emphasized that strategic thinking is where directors add the most value to a company. Furthermore, boardroom discussions surrounding strategy should be viewed on an ongoing basis—not as a single event. Chairman of Carpenter Technology Group and director of Tredegar Corp., Pratt went on to  compare strategy to a GPS system:  A tool that tells you where you are, where you want to go, and the possible ways to reach that destination. According to Pratt, directors have a responsibility to use strategic discussions and planning to decide which route is best for the business.

THREE KEY TAKEAWAYS FOR OVERSEEING STRATEGY

1. Educate yourself—and others. This is especially important for directors serving on boards in industries in which they do not have prior experience. Reading industry publications, attending relevant conferences, and getting exposure to as many sources of industry information possible can help directors enrich board discussions. Similarly, directors should ensure that the strategic goals are well-known throughout the company. This could include requesting that the CEO meet with staff so that goals are communicated to the lower levels of the company.

2. Set reasonable benchmarks. Directors should consider the critical assumptions underpinning the strategic plan. For example, how much progress is the company expected to make in the course of a month? Evaluate whether those benchmarks are reasonable for your company by consulting regional or national industry sources as well as third-party sources.

3. Monitor the course and evolve the strategy. The board should consistently review corporate performance with respect to the strategy, and alter course when necessary. Boardroom culture should support open discussions with the c-suite—and management should feel free to report to the board areas where the strategy may or may not be working. As a company reacts to different economic environments, the board needs to be able to evaluate which initiatives worked, which initiative work over a period of time because they are key to your business.

THREE KEY TAKEAWAYS FOR MANAGING RISK

As stated in the 2009 Report on the NACD Blue Ribbon Commission on Risk Governance: Balancing Risk and Reward, “Every business model, business strategy, and business decision involves risk.” Risk may bring doubt, but it is the board’s role to work with management to find a balance between the costs and benefits of a strategic plan.

1. Get the committees involved. While ultimate responsibility for governing risk lies at the board level, the board can look to committees for support. In publically-traded companies, the audit committee has traditionally assumed the responsibility of risk oversight.  A growing trend, however, is to delegate specific risks to various standing committees. The board can also create new committees that manage the emerging facets of risk, such as keeping the board abreast of new sources of competition.

2. Work with management to assess risk. Open communication between management and the board is critical, especially because the C-suite is likely to be the first to see that a strategy is not working. Directors should learn how risk discussions take place within the various departments and business lines, and establish multiple avenues through which directors can work with management.

3. Be aware of the risks around the corner. The board should constantly review potential non-traditional sources of competition, for example, Amazon’s move to enter the dental distribution market.  Likewise, a company should work to make itself obsolete—best itself at its own game before the competition—and then create a strategy that will again put the company on the cutting edge of its industry.

NACD will continue to discuss these issues throughout 2014. Our Directorship 2020 events explore the disruptive forces that create new challenges in the boardroom and our forthcoming 2014 Blue Ribbon Commission Report will address the board’s role in recalibrating strategy. The topic will also be discussed at the next C-Suite to Board Seat in Beverly Hills, CA.

Risk Assessment: Expect the Best, Plan for the Worst

July 15th, 2011 | By

Organizations face risk on multiple levels and from an enormous range of factors. And being seen as a “high-risk” company certainly impacts valuation. Of the many concerns for risk managers today, two of the biggest are global economic uncertainty and information technology.

For boards concerned with how different economic forces will impact the corporations they oversee, today’s environment provides plenty of challenges and opportunities. Last month, the Wall Street Journal reported that as the Federal Reserve’s latest economic stimulus initiative (QE2) comes to a close, investors are keeping a close eye on their portfolios and shying away from riskier assets. According to a recent Bloomberg article, after his recent meeting with German Chancellor Angela Merkel, President Obama made it clear that U.S. economic growth is still at risk from the precarious economic situation in Europe.

Cyber attacks that lead to data theft threaten not only the valuable information a company might possess, but the trust and confidence of its investors as well. Just ask Sony, Epsilon and RSA Securities, who all recently suffered data breaches.

In a letter to Senate Commerce Committee Chairman Jay Rockefeller (D-WV), the Securities and Exchange Commission (SEC) recently stated that publicly traded companies should disclose the threats and potential impacts of cyber attacks. The SEC guidance came in response to a letter sent by Senator Rockefeller, who noted that “it is essential that corporate leaders know their responsibility for managing and disclosing security risk.”

Because of these new oversight and risk management demands and higher stakes for corporate boards, NACD is offering two separate sessions discussing risk assessment and management at this year’s NACD Board Leadership Conference in Washington, DC from October 2-4.

The Reshaping the Risk Agenda session features expert speakers who will explore possible blind spots in risk assessment and the implementation of early warning systems, as well as the importance of scenario planning. A major focus of the panel’s discussion will be the board’s role in overseeing risk versus avoiding risk in the current economic environment.”

This year’s conference also offers a Risk Board Committee Forum where professionals from the leading global management consulting firm Oliver Wyman will discuss methods for improving oversight processes and examine the links between strategy and risk. A special focus of this forum discussion will include the board’s role in overseeing IT risk.

NACD understands that the best way to mitigate risk is through education and learning from people who have already been on the front lines battling these issues—and winning. That is why we want you to be there to share your experience and hear from your peers.

To register for the NACD Board Leadership Conference, go to nacdonline.org/conference. Early-bird discounts are in effect until July 31.  Additionally, for directors and executives from NASDAQ-listed companies to save 10 percent on registration prices, please enter coupon code OMXSAVE. To register or ask questions in person, please email registration@NACDonline.org  or call 202-572-2088.