“Boards will have to cope with uncertainty, leaving executives to focus on operational risks” says corporate governance and board development consultant Bob Garratt
The heart attack of the 2008 financial crisis led to emergency surgery through quantitative easing and a very fragile recovery. Now public demands for a stronger recovery fly in the face of the risk-averse stance taken by many boards and executives.
Two powerful trends will force boards and top teams to take more risk, and do it more transparently. The first is the call for observable competency among leaders. The shock of finding that those at the top are no more than ordinary has led to great anger – the public will be paying, at east for a decade, for mistakes taken by boards and senior executives.
Matters have not been helped by the lack of contrition shown by bankers and a reluctance to change. Insurers have been more open and ready to improve. It is hoped the City Values Forum’s City Obligation – a return to “my word is my bond” – will have a long-term benefit.
Public demand panics legislators and regulators, who rush out codes and laws that do little to solve problems but enable them to say they have done something. Codes should be treated with scepticism as they usually give mechanical solutions to human problems.
In an era when the business mindset is to be risk-averse, can one create wealth without taking risk? No. Life is risky. Commerce is risky and necessary. Wealth creation requires creativity around opportunities to deliver business effectiveness and productivity to deliver efficiency. How many risk management systems deliver both or even either?
The second issue is the under-performance of boards in the financial crisis. This signals the beginning of the end of the executive-led capitalism that has lasted since the 1920s. The notion that owners do not count and the financial system should be designed to give a free hand to executives is ending. Public anger is forcing us towards a stakeholder-led capitalism.
Such a prospect, barely conceivable 20 years ago, is forcing boards to differentiate their roles from executives. In the UK, this has been accepted since the Companies Act 2006 but poorly enforced. Yet with the arrival of triple-bottom-line reporting, the board will have to take a more policy-formulating stance to cope with new uncertainties.
Using uncertainty and tolerating ambiguity is becoming the new norm for directors. Boards will have to cope with uncertainty in their main task – tracking changes in the political, physical, social, economic, technological and world trade environments – to fulfil their legal obligation to ensure business success. This leaves executives to focus on the operational risks from their business model.
Uncertainty and risk must be brought together in a system of continuous business learning, so that the rate of learning is equal to, or greater than, the rate of change in the external environment. That is our challenge.
Bob Garratt, corporate governance and board development consultant visiting professor, Cass Business School
No comments yet