According to acclaimed researcher and author Brené Brown, being vulnerable can be a strategic asset to any organization. Although this may sound counterintuitive to some, Brown made the case for how vulnerability cultivates innovation to a rapt audience of directors and corporate-governance professionals gathered at the 2017 NACD Global Board Leaders’ Summit.
Brown became an Internet sensation after she discussed her academic research on these themes at a TEDxHouston event in 2010. Although her presentation was enthusiastically received by her in-person audience, she was frustrated by negative online comments left on the video. But soon after, she discovered a quote by President Theodore Roosevelt that not only has reframed how she viewed her experience, but also has guided her subsequent work:
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
Brown then identified the following four qualities that, when operationalized within an organization, will create a culture of courageous leadership:
Vulnerability. Based on Brown’s research, there is no job where a person is not vulnerable. She noted that vulnerability is not the same as cowardice. Rather, it’s the willingness to expose your new ideas to public scrutiny. Without trying to do something new, and risking the possibility of failing horribly, progress can never happen.
Courage. It takes courage to compete in business. Luckily, Brown’s research into the behaviors of 80 senior leaders and more than 300 MBA students demonstrates that courage is a skill that can be taught and measured. She recommends four practices to instill a culture of bravery in an organization: (1) encouraging vulnerability, (2) defining the organization’s values and operationalizing those values, (3) inculcating trust between individuals and teams, and (4) empowering people with “rising skills,” or the skills to pick one’s self up and brush one’s self off after failing. Regarding rising skills, Brown pointed out that if your employees cannot recover from and learn from their failures, they will begin to feel that they need to be on the defensive—a mind-set that can hinder creativity and innovation.
Ethics. One of the most difficult situations a person can encounter in a business setting is standing up to someone who is making unethical choices. According to Brown, ethics should be the grounding framework that drives behavior. When someone acts outside the set of ethics that the organization adopts or outside the law, leaders must be brave enough to call out that person’s missteps. Her point holds particular relevance to directors and executives who are responsible for overseeing business ethics and promoting a culture of ethical performance.
Trust. Brown asked the audience, “If you can’t see a person’s vulnerability, will you ever be able to trust them?” Vulnerability is a key to building trust, and top-performing teams rate trust in their coworkers as the deciding factor for success.
Brown noted that people who lack trust in one another are likely to avoid confronting their fears and anxieties. Trust makes workers brave enough to develop and share their ideas, and allows them to discuss failures in a respectful manner.
“Can innovation come without exposure?” Brown asked. “Can you have innovation without vulnerability? No. It doesn’t exist.”
“The last several decades have proven that, more than ever, we are all interconnected and interdependent,” said NACD Chair Karen Horn. “We will rise—or fall—together, based on that trust.”
NACD Board Chair Karen Horn
Horn’s opening speech at the recent 2016 NACD Global Board Leaders’ Summit revealed a compelling case for strong, conscientious corporate governance in light of recent political, economic, and social turbulence.
Horn’s governance experience is extensive and includes serving as a director at Simon Property Group, vice chair of the U.S. Russia Foundation, and vice chair of the National Bureau of Economic Research. She also previously served as chair of the audit committee at Norfolk Southern Corp., lead director and chair of the compensation committee at Eli Lilly & Co., and a director of T. Rowe Price Mutual Funds.
Horn began by thanking outgoing NACD chair Reatha Clark King for “her leadership and her positive influence on our organization’s growth,” and praised the audience for their own strength of leadership in the boardroom. She then turned to the guiding concept behind this Summit’s programming—convergence.
“Convergence is an important theme at a time when our world appears to be tearing itself apart,” Horn said. She pointed out that hostility seems to be the prevailing sentiment of our time and that frustrations with the current domestic and geopolitical environments are the impetuses for growing division. “I feel we must focus on a wider, longer view—a more broadly encompassing perspective that leads us back toward convergence,” she said.
Horn—who previously served as president of the Federal Reserve Bank of Cleveland and as an economist for the board of governors of the Federal Reserve—made several recommendations meant to address the evolving relationship between society and capitalism, using conscientious governance. (For more information on the roles of capitalism and corporations, view the NACD blog post “Re-Thinking Capitalism: Best-Selling Author Espouses Higher Calling for Boards.”)
Addressing Income Inequality
Directors can take a role in addressing social issues like income inequality, Karen said, adding that income inequality is an example of a challenge that “affects not only our immediate stakeholders, but everyone downstream who will be affected in the long term as well as the short term.”
Horn agrees that free trade is an excellent driver of economic value across the board, but that the path to growth can unintentionally leave some individuals behind. She suggested public, private, and government entities alike should develop programs that lift up those who are taken advantage of or otherwise harmed on the path to greater economic progress. “Looking at an issue like this from the perspective of those who will not benefit, or may even be hurt by it, is the first step toward finding compromises and solutions that will minimize negative fallout,” Horn said about the corporation’s role in growth as a greater good.
One such program that directors could collaborate with policy makers, social leaders, and other stakeholders on is how to address the controversial debate over minimum wage increases. “Everyone has an opinion, and it is clearly a divisive issue,” Horn conceded to the audience. “If we are to find a solution that works, again, we must become familiar with the divergent perspectives.”
The Imperative to Lead
Capitalism is being impacted by “globalism, social and demographic shifts, new technology, increased transparency and resource scarcity,” According to Horn. In the face of these paradigm shifts, directors have the opportunity to converge with stakeholders to build a better path forward for all, and have a unique opportunity to rebuild the public’s trust in the role of corporations.
“People are searching for leaders they can trust, leaders who are smart, confident and strong—who are understanding and compassionate,” Horn said. “This is a role sometimes filled by government, but trust in government is at an all-time low, so the leadership gap needs to be filled. I believe we are some of the leaders who can and should fill that gap.”
Horn’s address closed with a charge to directors that will resound through her term as chair of NACD and beyond.
“Corporate America has an immense amount of talent, and we need to step up before we are stepped over,” she entreated. “There is no question that we have the ability to take this leadership challenge, but only if we act responsibly, transparently, honestly and with careful regard for different perspectives. If we can do that, we can move our culture back toward civil discourse—toward convergence.”
Recently, the world’s largest ongoing study of the internal audit profession—the Global Internal Audit Common Body of Knowledge (CBOK)—was completed by the Institute of Internal Auditors (IIA) and Protiviti to ascertain expectations from key stakeholders regarding internal audit performance at organizations of varying operational models and sizes. The study sought input from members of audit committees all over the world about their expectations of the internal auditor’s role in the organization. We think all directors will find the results of the study applicable to their work in the coming year and beyond.
Below are six imperatives for internal auditors from the CBOK study based on feedback from audit committee members.
1. Focus more on strategic risks. According to the CBOK study, two out of three board members believe internal audit should have a more active role in evaluating the organization’s strategic risks. Study respondents indicated that internal audit should focus on strategic risks (as well as operational, financial and compliance risks) during audit projects (86 percent) and periodically evaluate and communicate key risks to the board and executive management (76 percent). Accordingly, chief audit executives (CAE) must focus their function sufficiently on the bigger picture to think more strategically when evaluating risks, proposing risk-based audit plans, and formulating audit findings. By understanding the organization’s business objectives and strategy, and identifying risks that create barriers to the organization achieving its objectives and executing its strategy successfully, the CAE increases internal audit’s value proposition.
2. Think beyond the scope. The call for internal auditors to think strategically leads to another challenge: thinking beyond the scope of the audit plan. Thinking beyond scope means, for example, that the auditor should:
“Connect the dots” when considering enterprisewide implications of the findings of multiple audits, particularly findings with significant business model underpinnings;
Broaden the focus on operations, compliance, and nonfinancial reporting issues; and
Watch for patterns or signs indicating a deteriorating risk culture.
By focusing more broadly on the implications of audit findings, and thinking beyond the expressed or implied boundaries set by the audit plan, internal audit is better positioned to deliver stronger, more practical, and harder-hitting recommendations aligned with what directors are seeking.
3. Add more value through consulting. In today’s era of slower economic growth, a high premium is placed on operational effectiveness and efficiency. The CBOK study respondents picked up on this point, as 73 percent of respondents recommended that internal audit advise on business process improvements. For example, consulting activities by internal audit can result in: strengthening of the lines of defense that make risk management work; more effective collaboration with other independent functions focused on managing risk and compliance; improvements in the control structure, including greater use of automated controls; and suggestions for improving and streamlining compliance. These study findings underscore the benefit of investing in consulting services that will strengthen business processes.
4. Facilitate effective, high-quality communication. Board members generally rate internal audit’s communication at a high level of confidence. For example, a large majority of directors give high scores for the quality (83 percent) and frequency (81 percent) of internal audit’s communication. That’s good news and a great foundation on which to build the board’s satisfaction with the internal auditor’s role.
5. Elevate stature and perspective. Intentionally positioning the CAE and internal audit within the organization is vitally important to their ability to meet elevated expectations. Access and perspective have always been keys to positioning. Access has typically been attained through direct reporting to the audit committee, as well as to the C-suite. But beyond these reporting lines, the study reports that two out of three board members rank the CAE’s participation in board settings beyond the traditional audit committee meetings as an effective strategy for broadening the CAE’s perspective. The board settings that are relevant in this context must be defined by directors to fit the organization’s specific needs. However the goal is defined, increased access to and more frequent interaction with the board broadens the CAE’s perspective of the organization and elevates the stature and visibility of the internal audit function within it. It also enables the CAE to establish relationships with directors, understand their views on addressing competing audit priorities, and earn the right to be viewed as a valued source of insight for the board.
6. Align with stakeholder expectations. In most organizations, not all stakeholders see eye to eye or want the same value from internal audit. This reality creates a significant challenge for CAEs tasked with building consensus among stakeholders. While directors may not expect their company’s CAE to address all of the above imperatives, they should initially and periodically assess whether internal audit is doing what matters based on previously-established imperatives. The CAE bears the brunt of the responsibility for addressing this challenge by articulating the value that a top-down, risk-based audit plan contributes to each facet of the organization, and by providing an assurance and advisory perspective that the board, executive management, and other stakeholders can understand.
Following are some suggested questions that directors may consider based on the risks inherent in the entity’s operations.
Does the board periodically evaluate the scope of internal audit’s activities and discuss whether modifications are needed in view of changes in company operations and the business environment? Is the board getting the insights it needs?
Does internal audit provide adequate attention to strategic risk issues, including barriers to the organization’s execution of the strategy?
Does internal audit have an appropriate mix of consulting and assurance activities?
Does internal audit have the stature and access necessary to maximize its effectiveness?
Jim DeLoach is managing director with Protiviti, a global consulting firm.