August 8, 2022
August 8, 2022
A global survey of about 1,500 corporate directors found that directors “are not pleased with their performance on risk management.” Only 7 percent of the respondents believe that over the past year their boards were “most effective”—the highest rating—at overseeing risk management, and only 40 percent report that their organizations are prepared for the next major crisis.
As we ponder these concerns, it is difficult to ignore the continuum of disruptive events that the business world continues to absorb. The pandemic’s effects, fallout from Russia’s unprovoked war in Ukraine, and inflationary and rate pressures are creating uncertainty. China recently locked down yet another hard-to-stem COVID-19 surge, dealing supply chains another blow. Leaders continue to struggle with finding the right way to get employees to work in the office again. And, of course, volatility in financial markets has become the norm. Simply stated, the pace of disruptive events and uncertainty are stressing traditional risk management tools and processes.
For directors, this moment is about taking a fresh look at how the board oversees risk management and advises the CEO and management team as they grapple with the realities of the times. To that end, boards should focus on the following six priorities.
Make it a strategic imperative to understand and focus on the pillars of disruption. Boards have learned valuable lessons from the pandemic that will help them plan for the future, but what about the next disruptive event? Trends in customer experiences, employee loyalty, organizational culture, and supply chains—and the digital interfaces that drive them—are important considerations in shaping strategic conversations in the boardroom.
These trends are powerful sources of disruption and should be acknowledged and weighed when making decisions and formulating strategies to enhance organizational agility and resilience. With technology today, timely data is the new currency. Boards should insist on frequent reports and briefings on disruptive market forces to inform strategic discussions appropriately. In an environment of rapid change, the motto is “Disrupt or be disrupted.”
Manage strategic risk through actionable dashboard reporting. Regular briefings on “here are our risks and here is how we are managing them” have become too static in volatile times. Directors should understand the critical assumptions underlying the strategy and the plausible but extreme scenarios that may make one or more of those assumptions invalid. This analysis provides the foundation for gathering actionable intelligence on key indicators that give early alerts about whether one or more such scenarios are emerging. Actionable data and trending statistics provide early warning to the C-suite and boardroom and engender greater confidence.
Think long term when evaluating risk. Protiviti’s global study of the impact of risk on the viability of an organization’s strategy illustrates the difference in perspectives when looking out 10 years versus 12 months. The World Economic Forum, meanwhile, looks at long-term, global-scale threats to the planet and world order. The latest report highlights societal issues such as erosion in social cohesion due to income disparities, livelihood crises (due to unemployment, underemployment, lower wages, and the erosion of workers’ rights), and mental health deterioration as top risks. This report also covers such risk themes as climate action failure, countries driving regional convergence at the expense of global integration, and digital dependencies and cyber vulnerabilities.
Directors should think through how these risks could impact the organization over time to give them a more forward-looking perspective. A new world is evolving, one that entails different geopolitical dynamics such as friend-shoring, searching for natural resources that aren’t evenly distributed globally, and increased sourcing, distribution, and use of renewable energy.
Pay attention to and manage reputational risk. Companies that have the strongest brand authority share attributes worth examining. They are data-driven in their focus on customers; understand their value proposition; develop powerful and distinctive messaging; listen well and act to improve their processes and offerings continuously; establish accountability for results with metrics, measures, and monitoring; work social media effectively; and treat their employees well so that they are inspired to live the brand promise passionately every day.
Strategic relevance and a strong commitment to quality, transparency, operational excellence, and organizational resiliency set these companies apart. The board should evaluate the fundamentals underlying the organization’s brand image and reputation to ascertain whether there are opportunities to sharpen the focus.
Support the CEO in strengthening the organization’s platform of trust and cultural alignment with a proactive lean into the moment. It’s time to sharpen the focus on human capital to manage talent and skills acquisition and retention. Hearts and minds must be won, trust must be earned, and genuine authenticity and wise compassion must be expressed. The game has changed as employees have choices, opportunities, and mobility. They want purpose. Younger generations want to make a difference, which elevates the importance of management embracing environmental, social, and governance (ESG) and sustainability priorities in formulating and executing strategy. Most important, people want a life.
These trends are undeniable, and that’s why smart boards make human capital management an integral part of strategic boardroom conversations. Now is the time for the board to refresh the expectations, action plans, and accountabilities for CEOs and human resources executives.
Broaden and freshen the board’s perspective. The diversity of experience and content expertise among directors and in boardroom discussions should reflect the changing market dynamics. Independent advisors and outside informational sources should supplement insights from management. New thinking regarding market developments, dashboards focused on strategic drivers, and capital allocation proposals considering a balanced view of both opportunities and risks enhance strategic conversations. Post-mortem reporting regarding technology synergy, capital projects, and mergers and acquisitions sustains the board’s institutional memory and engenders confidence.
Risk conversations in the boardroom are changing dramatically. Traditional risk management lays a foundation, but alone is not fit for purpose given today’s issues and risk profiles. For directors, a digital mind-set, actionable data, fresh and forward-looking perspectives, and a broader focus on agility, resiliency, accountability, and key stakeholders will help improve performance in the boardroom.
Jim DeLoach is a managing director of Protiviti. DeLoach is the author of several books and a frequent contributor to NACD BoardTalk.
NACD: Tools and resources to help guide you in unpredictable times.