Will new regulations be effective in preventing any repeat of the global financial crisis?
I suppose we can all agree that to some degree regulations are important. But, as a new report points out, new rules alone will not be sufficient. In addition to regulatory oversight, companies need to completely revise their own attitudes towards risk, as well.
The report, released by Korn/Ferry International, is based on interviews with chairmen, CEOs and board directors of leading companies including Kingfisher, Legal & General, Balfour Beatty and National Grid in the UK, Deutsche Bank, UBS, Nestl and Lagardre Group in mainland Europe and CB&I, US Steel and Owens Corning in the US.
These interviews reveal that large global businesses see their own attitude to risk as more important than regulation, and they suggest these attitudes are dramatically changing not only because of as the threat of new regulation, but also because of
the increasing complexity of risk,
heightened public interest in corporate behavior and
the ability of contentious issues to go viral on the Internet.
According to Korn/Ferry, companies can enhance strategic decision-making by paying more attention to six specific aspects of risk management, including:
The appropriate level of oversight. A board's risk purview needs to suit their company's scale, strategy and regulatory situation. Boards need to decide if they will simply review and ratify management decisions, engage at a more ambitious level as challengers and counselors on risk issues or settle on a level of oversight that is somewhere between those two extremes.
The appropriate level of attention. Ultimately, the whole board must be engaged.
The organizational risk culture. Boards need to consider ways to measure, and possibly influence, attitudes towards risk to keep behavior in line with the board's risk appetite.
Challenging the status quo. Risk oversight is hampered by stifled opinions, so an open, trusting environment is mandatory. The conversations taking place at board level about risk should be some of the most challenging.
Board renewal. New directors should be recruited with risk in mind, so that the board, on balance, has industry experience, strong risk instincts, strategic minds, and overarching diversity. Non-executive directors have a critical role to play here. Having experience in a broad range of fields is essential. The report recommends an ongoing and systematic program of board renewal to bring new thinking that will keep pace with the changing face of risk.
Reassessment of risk reports. Board members are seeking more granular information and more leading indicators, as well as opportunities for far-ranging discussions with relevant executives.
Of course, attitudes towards risk are dynamic and must continually evolve as global situations change. As the report concludes, "The risk-smart board will always be a work-in-progress."
The full report, Calculated Risk? The view from the boardroom, is available here.