Topics: Risk Management,Strategy
Topics: Risk Management,Strategy
January 4, 2022
January 4, 2022
With a litany of reputation crises at leading organizations around the world, many in the governance community have been asking, “Where was the board?” And things are only expected to get worse.
According to a PwC survey done before the pandemic, some 95 percent of companies expected to experience a reputation risk within the next two years. Meanwhile, a Deloitte survey found that 78 percent of risks are strategic in nature, not coming from external sources—and 87 percent of those surveyed said that reputation risk was more important than various other strategic risks.
What is most shocking, though, is that internal audit and enterprise risk management assessments are not adept at assessing strategic risks. Most corporate crises result from unhealthy values and culture or management malfeasance, in which the policies, systems, practices, and incentives have led to bad behaviors. It is likely these bad behaviors were present long before the crises, but organizational structures were not adept at identifying these risks and bringing them to light.
The information available to the board when approving the strategy and the company’s risk appetite is typically insufficient as boards get their information from different functions or silos. Each of these functions approaches strategy and risk from a specific vantage point, one that often does not align with the vantage points of other organizational functions.
To improve oversight of strategy, reputational risk, and thus stakeholder value, boards should first ask: How often are we presented with a complete understanding of how the company is creating value for different stakeholders, including the associated risks? Who provides information on environmental, social, and governance (ESG) issues or decides whether to take a stand on controversial issues?
Companies and their boards need to better understand how each stakeholder will assess the organization against its own set of values and needs and to determine which stakeholders will view certain decisions in a positive light and which will not. No organization can or should please everyone, but businesses need to comprehensively assess decisions.
Looking to the future, boards can better oversee strategy and stakeholder value by taking the following steps:
First, consider creating a cross-functional committee to address strategy and stakeholder value. The silos within organizations impede the collaboration and information-sharing needed for multi-stakeholder decisions. Consider the number of functions within every organization that interact with stakeholders, including public relations, marketing, investor affairs, regulatory affairs, and human resources, to name a few. These functions rarely collaborate or share information, and they are trained to think in terms of their discipline’s own definition of value creation. In most companies, they vie for budget and influence with the CEO and board.
Consider instead how efficient and effective it would be to have a cross-functional, integrated strategy and stakeholder value committee that involves executives from all of the stakeholder-facing functions—along with internal audit and enterprise risk management—that would assess value creation and risk from a multidisciplinary, multi-stakeholder perspective. The board would be better assured that it is getting the best information and advice possible. This could be turned into a competitive advantage as the company would be creating a culture better able to see and understand both the inside and outside issues before strategic decisions are made.
Second, because values and culture are the sources of both reputation and risk, ensure that the board takes a stronger role in values, as well as value creation and preservation. Values and culture are not usually on the board agenda—but they should be; they are integral to value creation and preservation. If the entire board cannot take on this oversight, board involvement in the strategy and stakeholder value committee can help. It would assume risk responsibilities from the audit and risk committees, evaluating opportunity and risk together.
Many boards feel that they already have too many committees, with some boards having formed or considering committees for ESG, diversity, and cybersecurity. As important as these issues are, creating new committees for singular issues is akin to turning a telescope around: instead of seeing the totality of the universe, one sees single stars or planets and misses their connectivity.
The focus must be maintained on stakeholder value and how stakeholders are connected to one another and the company via the Internet and social media. Stakeholders’ expectations of value will continue to change, and boards must be able to assess decisions made in light of these changing expectations against the risks.
The world has changed and continues to change drastically. Few directors have ever dealt with such a politicized, polarized world. Social media is becoming the primary source of information for many but is providing them with an echo chamber, not competing views. Thus, social media is where the embers of reputation risks go to become full-fledged fires that can engulf a company.
Boards need better information to make better decisions on value creation and preservation. Instead of focusing solely on compliance issues or becoming defensive in the face of mounting pressure, boards must prepare their organizations for the future and how to best address the countervailing forces from inside and outside of the company by focusing on stewardship.
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Elliot Schreiber is a former corporate executive, international consultant, academic, and author who is focused on integrating the various parts of an organization to create and preserve differentiated value for stakeholders. His most recent book is The Yin and Yang of Reputation Management: Eight Principles for Strategic Stakeholder Value Creation and Risk Management, which includes a foreword by NACD CEO Peter R. Gleason. Schreiber continues to advise boards and management teams, and he holds a doctorate from Pennsylvania State University.
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Elliot Schreiber's contends that a divide and conquer approach to board oversight — i.e., single-issue committees — undermines board effectiveness and. by extension, the impact of the organization as a whole, increasing reputation risk, which includes the corporate brand.
Over nearly forty years consulting to major corporations on how their fundamental identities influence value creation, I can attest to the wisdom of Mr. Schreiber's assertion. If the board believes that the whole is, or should be, greater than the sum of its parts, then it needs to organize itself (via the committee structure) to ensure the viability of the whole.
Another way to increase board impact is to realize that a company doesn't have a group of stakeholders; it has a system of stakeholders, governed by the economic interdependence among employees, customers and investors. (There are sub-segments within these three constituencies.) Optimizing relationships within this system, is the key to value creation. Here's an article that illustrates the point: https://www.larryackerman.com/wp-content/uploads/2017/09/Brand_Quarterly_BQ26-4.pdf
Mr. Schreiber concludes by mentioning the need for stewardship. If long-term value creation is the goal, then every board must make stewardship its reason for being and organize accordingly.