Friday, 17 February 2012
Risk glass ceiling and not fit for purpose boards biggest reputational threat
Recent corporate crises, and the resulting damage to reputation and brand, have largely been the result of boards not being fit for purpose and the inability of risk managers to report on risks to the board due to a risk ‘glass ceiling’. This is according to Alan Punter, Visiting Professor in Risk Management at Cass Business School, and based upon the findings of a study that was carried out by Cass on behalf of Airmic entitled Roads to Ruin.
Alan Punter, Visiting Professor in Risk Management at Cass Business School
Professor Punter outlined the study’s findings during a session devoted to reputational risk at this week's Commercial Risk Europe Frontiers―Risk seminar. The study investigated 18 high profile corporate crises from 1999 to 2009, and discovered a number of key lessons to be learned.
The first lesson related to board skills and dysfunctional boards. Professor Punter said that in these case studies boards did not appear to be in control of the business, did not understand the fatal flaw in the business model or did not stand up to dominant CEOs. “The leaders were lacking the skills necessary to exercise oversight of the business,” he said.
Another key lesson concerns board risk blindness. He said that boards did not focus on the important risks, including threats to reputation. And boards did not set and control risk appetite, he added. Finally, there was a failure to appreciate the risks presented by complexity, and its ability to cause and exacerbate events.
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He added that there was also a failure of board leadership on ethos and culture. “A lot of the problem lies in the UK/US model of corporate governance. It seems that boards are not fit for purpose,” he said.
Of particular interest to risk managers was the finding that, in many of the cases, there was a defective flow of important risk information across or up and down the organisation.
Professor Punter said there was often a risk ‘glass ceiling’, which he described as “an inability or unwillingness of risk management or internal audit to report on risks up to C-suite executives and non-executive directors, especially where risks were not the normal insurance or operational risks, but risks that stemmed from strategy, behaviour or culture.”
What needs to be done to prevent such crises happening again? Professor Punter said that risk professionals need to be able, and feel confident, to report on risks that may not be, or are perceived not to be, within their area of responsibility, especially in relation to the activities and behaviour of their leaders. And companies should think about outcomes rather than just perils.
Phil Ellis, CEO of Global Solutions Consulting Group at Willis, told the seminar that Willis’ own research of 600 publicly held companies revealed that, on average, a company faces an event that damages its reputation every seven years.
The research showed that these 600 companies had faced 1853 crisis events, of which 50% were due to a failure of the company’s strategy or business model. And the result of such a crisis event was almost universally an executive job loss and more importantly, a liquidity issue and a potential stock price slide.
Is there a role for insurance in all of this? The answer, according to Mr Ellis, is that there should be a role for insurers, but at the moment the risk is not transferable, though he stressed that the insurance industry is working on solutions.
What clients want and need from a reputation protection product, said Mr Ellis, is immediate payment, no (or few) exclusions, very high limits and a price significantly below the cost of capital. He said it was possible to meet these specifications, but it was hard. It would require a change of mindset. It would also probably involve the capital markets, he continued.
“There are discussions with capital markets, and they are interested,” he said. “Capital markets are comfortable with parametrics, and with providing capital quickly, but they are uncomfortable in providing capital when there is a crisis.” However, he concluded on an optimistic note: “Help may be on its way.”
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