August 21, 2018
August 21, 2018
Given today’s world, where simultaneous business, geopolitical, and even environmental disruption seems to be the norm, it’s not surprising that boards are searching for new ways to oversee risk. NACD’s 2018 Blue Ribbon Commission (BRC) initiative on board oversight of disruptive risks will move us all from familiar territory to the next frontier of risk oversight, delivering vital new perspectives and tools that are needed now more than ever.
Ever since NACD’s founding more than 40 years ago, independent directors have been overseeing risk in their dual role as both monitors and advisors, described in this FAQ. Accordingly, our past BRC reports on risk oversight and risk governance have helped directors spot and minimize a wide range of potential risks, both internal and external. Risk oversight was also a major focus of the 2017–2018 NACD Public Company Governance Survey. And these are only a few of the many resources NACD features in our Resource Center on Risk Oversight that, when taken together, show that director knowledge is progressive and cumulative. The 2018 BRC initiative is the latest chapter in our journey.
I won’t speak for the Commission, which has yet to release its report, but based on my experience as a director, I believe that truly disruptive risk is an attack on the very premise of a company. Paradoxically, this kind of risk is often atypical for the organization, appearing to be outside the borders of normal risks. At the same time, however, disruptive risk is by definition highly relevant to the organization’s strategy and operating model.
Examples include the impact of a US-China trade war on a company that does not do any business with China, but that buys materials from a third country that gets impacted by the battle. Also, remember Amazon.com’s offer to acquire Whole Foods Market in 2017, which caught many by surprise. While hardly unthinkable, it was certainly atypical—less common than food contamination, demographic shifts, lease pricing, and the many other risks the boards and managements of retail chains and their suppliers have been monitoring for years. It was disruptive to the industry as well.
An April 2018 NACD flash poll revealed that more than 6 in 10 directors (61.6%) believe atypical risks are much more important than they were five years ago (with 30.8% reporting that they are “slightly” more important). And just 19 percent of directors expressed confidence in management’s ability to address atypical risks, compared to 82 percent who were “extremely” or “highly” confident in management’s ability to address risks that are well known.
As a result, many directors are taking a proactive approach to oversight. A strong two-thirds (66%) of respondents have increased the time they spend with non-management resources, such as consulting firms or advisory boards, to help them understand what boards can do to oversee atypical risks. And evidently, they believe that this has worked: 42 percent of respondents believe they are extremely or very knowledgeable about disruptive forces the organization faces. A further 53 percent believe they are moderately knowledgeable.
Clearly, boards need to spend sufficient time to discuss disruptive risks, and they need to gather adequate information about these risks. Yet because the risks are inherently difficult to identify, directors face a challenge: which risks have both a probability and a magnitude worthy of attention? Traditional methods of risk measurement are likely insufficient to meet the new challenges these risks pose. Existing enterprise risk management models and crisis-response planning methods still serve an important role, but they may not be enough to help boards anticipate and respond to risks outside the expected.
This year’s BRC initiative will offer current guidance and tools for overseeing these atypical, unconventional risks. It will be released at the NACD Global Board Leaders’ Summit on Transforming Governance this fall.
So, what can directors do? I believe that directors need to think like futurists focus on the skills of resiliency and recovery.
We need to encourage our minds to see new patterns in our complex, adaptive environment. Once upon a time, boards used to talk about separating the wheat from the chaff in management reports, or about cutting through the clutter. Today, in the era of big data, directors must see patterns in everything—even in what seems like chaff or clutter. Remember the “butterfly effect” discovered by scientists studying complex adaptive systems.
Frankly, this is the thrill of attending Summit. We are surrounded everywhere by strong indicators of the future. I defy any director to attend the Summit without walking away with a clearer sense of the world of risks in which his or her company operates—while holding new tools to anticipate and respond to these risks should they become realities.
NACD surveys reveal possible gaps in director knowledge; NACD BRCs provide guidance on how to close those gaps. There is honor in performing these services, but we are also well aware of the limits on director time and attention. The world and NACD can’t just keep piling responsibilities on directors and expect them to shoulder it all. When we identify a new area of responsibility, we need to help boards fulfill those responsibilities.
This year’s Blue Ribbon Commission initiative on disruptive risk and our upcoming Summit will lighten the load and light the way.