Topics:   Audit and Risk,Corporate Governance,Risk Management

Topics:   Audit and Risk,Corporate Governance,Risk Management

October 1, 2018

BRC Commissioners to Directors: Become Adept at Adapting

October 1, 2018

When this year’s Blue Ribbon Commission (BRC) convened to define the objective of its initiative, evidence was everywhere that boards needed to do a better job of adapting to unexpected risks. Since that day, 2018 has shaped up to be a year that embodies the acronym VUCA: volatile, uncertain, complex, and ambiguous.

What follows is an adapted excerpt from “Adapting to Future Trends,” the cover story of the September/October 2018 issue of NACD Directorship magazine. Comments from BRC cochairs Sue W. Cole and Kelvin R. Westbrook add color to the initiative behind The Report of the NACD Blue Ribbon Commission on Adaptive Governance: Board Oversight of Disruptive Risk, which was released this week and discussed by attendees and commission members at the 2018 NACD Global Board Leaders’ Summit.

Situational Awareness in the Boardroom

The fact that business operations today are fundamentally different from those of even a decade ago has only complicated the board’s role in risk oversight. The current pace of change necessitates that your board’s composition, skills, and processes are chosen to maximize situational awareness in the boardroom. “There’s not a cookbook for how to deal with this stuff,” said Cole. Thus, the commission challenges boards to anticipate and get ahead of change.

“In an operating environment frequently characterized by the acronym VUCA (volatility, uncertainty, complexity, and ambiguity), boards need to help their organizations do a better job assessing disruptive risks, whether internally or externally driven, that could have a significant economic, operational, or reputational impact—and to be better prepared to respond when the unforeseen does occur,” the cochairs write in their introductory letter to the report. “We believe this task is not an optional consideration for directors—it is a critical imperative for boards of both for-profit and nonprofit organizations, both private and public companies.”

“NACD and our commission did a survey of directors that indicated that the majority of boards felt they were not spending enough time even talking about this area of [atypical] risk,” Westbrook said. Fifty-three percent of surveyed directors indicated that they felt only moderately or slightly knowledgeable about these risks, while another portion of the survey found that 72 percent of surveyed directors felt that the amount of time left in their agenda to address these types of risks served as a moderate to significant barrier.* “If you’re not taking the time to do so, what you’re doing probably isn’t adequate,” Westbrook said.

In spite of their assessment, the cochairs wanted the commission findings to inspire and empower directors who are often overloaded with work and information. “We thought that given everything that’s going on boards ought to be encouraged to improve by reevaluating their approach to risk oversight in the current environment—to step up their game,” Westbrook said. A summary of recommendations follows.

  • Define what disruptive risks look like for your organization. Assess the risks that might have the greatest impact on your organization’s ability to function and thrive. Set goals for strengthening governance based on what you would need to have in place either to respond to a negative incident or to bounce back with resilience, and task the nominating and governance committee with allocating oversight responsibilities among the full board and key committees.
  • Seek new and different resources for information critical to assessing disruptive risks. “If you’re going about the risk oversight process by gathering information in the same way that you have historically, then you’re probably leaving some very relevant data inputs on the table,” Westbrook said. These resources include hiring subject-matter-specific consultants, attending educational events, and pressing management to provide greater context about how their reported results were compiled and how their conclusions were drawn.
  • Develop awareness of cognitive biases that could be acting like blinders. “A great leader is going to be very self-aware,” Cole said. “And the same goes for the board—we have to be aware we have our own biases.” Westbrook suggested that directors “spend time with people who didn’t occupy this world 30 years ago,” stating that “they’re not concerned with what used to be; they’re focused on now and tomorrow, and the pace of change for them is very comfortable.” Westbrook also suggested developing an advisory board, while Cole mentioned bringing specialized experts into the boardroom if an advisory board doesn’t make sense for your organization.
  • Create a board culture where skepticism is encouraged. “We have to set up the environment where it’s okay to ask questions, to debate, to disagree,” Cole said. “It’s that simple. We’re put on boards to have the oversight, the insight, and the foresight, and you can’t do that without asking questions continuously.” Boards that do not embolden directors to seek greater context may miss indicators of risks that could be right under their noses—and may miss the opportunity to seize on a risk that could create greater value.
  • Stop looking backward. “Depending on where you sit, you can’t derive a lot of comfort from the way things have played out in the past, because that world looks very different from where we are today,” Westbrook said. When the stakes change, boards have to change their approach to risk oversight. “If you’ve not been here before, I don’t know how much you should rely on history to give you comfort that you’re at a good place,” he added. Directors should learn from past mistakes and triumphs, but also recognize that the current operating environment is significantly different from the one where they may have cut their teeth as executives.

Directors should approach these risks with the understanding that oftentimes, risks have upside opportunities. This year’s report and toolkit will empower your board to seize chances to strengthen long-term value creation.

Ready to read more? Members can click here to read the September/October 2018 issue of NACD Directorship. Members and nonmembers alike can click here to read the Commission’s report.

*Source: Data from NACD director poll on board oversight of atypical risks, conducted March–April 2018.