Cor­po­rate gov­er­nance

Each month, Jan Bladen takes us through one of the top 10 rea­sons good boards fail and how to im­prove your chances of sur­vival

Gulf Business - - CONTENTS -

Why good boards fail: part 5

Boards are the ul­ti­mate own­ers of the risks their or­gan­i­sa­tions take to gen­er­ate a re­turn on in­vest­ment for their share­hold­ers


Ger­many’s au­to­mo­bile sec­tor ac­counted for 14 per cent of the coun­try’s GDP in 2015 and Volk­swa­gen, the largest ve­hi­cle man­u­fac­turer in the world, ac­counted for one in four cars sold in Europe. The com­pany had de­lib­er­ately been mak­ing its cars ap­pear less pol­lut­ing than they ac­tu­ally were (40 times more pol­lut­ing than per­mit­ted) and in Septem­ber 2015, US au­thor­i­ties went pub­lic with the rev­e­la­tion that Volk­swa­gen had been de­lib­er­ately cheat­ing in car emis­sion tests. With 11 mil­lion ve­hi­cles af­fected, fines and po­ten­tial law suits, share­hold­ers have seen some $30bn wiped off the com­pany’s value.

Ac­cord­ing to a BBC ar­ti­cle, dated Septem­ber 29, 2015, Volk­swa­gen board mem­ber Olaf Lies said: “We only found out about the prob­lems in the last board meet­ing, shortly be­fore the me­dia did.”

Un­for­tu­nately, just like ig­no­rance of the rule of law ex­cuses none from com­pli­ance, ig­no­rance of cor­po­rate risks does not ex­cuse boards. Boards are the ul­ti­mate own­ers of the risks their or­gan­i­sa­tions take to gen­er­ate a re­turn on in­vest­ment for their share­hold­ers.

I spent 10 years work­ing for PwC in their global risk man­age­ment prac­tice, work­ing with both global and Mid­dle Eastern boards. Risk man­age­ment was a rel­a­tively new con­cept that boards typ­i­cally knew lit­tle about. Chief risk of­fi­cers were and of­ten con­tinue to be ‘sub­ject mat­ter ex­perts’ (SMEs) who find it dif­fi­cult to syn­the­sise com­plex risk man­age­ment data into a form that is com­pre­hen­si­ble by the board. Few board mem­bers, other than bank­ing board mem­bers, un­der­stand loss given de­faults, prob­a­bil­ity of de­faults, value at risk or risk mod­els.

The board should re­quest a reg­u­larly up­dated risk in­ven­tory, ranked by pri­or­ity ( im­pact and prob­a­bil­ity com­bi­na­tion), and fo­cused on the top 20 risks fac­ing the or­gan­i­sa­tion, along with rec­om­mended risk con­trols ei­ther in place or cur­rently be­ing im­ple­mented. One board I worked with in­sisted on an in­de­pen­dent au­dit of the cor­po­rate risk iden­ti­fi­ca­tion process so as to ob­tain com­fort that the risks be­ing shared by the ex­ec­u­tives with the board were all the risks the or­gan­i­sa­tion was fac­ing.

As my work with this board evolved along with the board’s risk man­age­ment know-how and un­der­stand­ing, we cul­mi­nated the ex­er­cise by defin­ing the board’s an­nual evolv­ing risk ap­petite in a vis­ual chart. This al­lowed the ex­ec­u­tive to mea­sure ma­jor cor­po­rate risks against the board’s risk ap­petite and take the ap­pro­pri­ate cor­rec­tive/pre­ven­ta­tive ac­tion. As a board mem­ber, there is no ex­cuse for not know­ing that your or­gan­i­sa­tion is tak­ing a par­tic­u­lar risk.

Jan Bladen is manag­ing part­ner of Gov­er­nance Creed, and qual­i­fied as the first ac­cred­ited board di­rec­tor of the Mud ar a In­sti­tute of Direc­tors( Iod) in Dubai. An in­de­pen­dent board mem­ber on sev­eral boards, B laden was formerly the lead and se­nior ex­ec­u­tive ad­vi­sor to the board at A bu D ha bi Global Mar­ket( ADGM ), and the found­ing chief op­er­at­ing of­fi­cer of the Dubai Fi­nan­cial Ser­vices Author­ity (DFSA ). Gov­er­nance Creed is a niche ad­vi­sory firm spe­cial sing in gov­er­nance frame­work de­sign, board per­for­mance, strat­egy de­vel­op­ment pro­cesses and cor­po­rate risk op timi sat ion.

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