This article originally appeared on NACD BoardTalk Blog on September 24, 2018
Most risk information presented to the board is “just not getting to the point.” This was one of the clear messages from research conducted four years ago by Marsh & McLennan Companies, the Association for Financial Professionals (AFP) and the National Association of Corporate Directors (NACD). Yet discussions among commissioners for this year’s forthcoming NACD Blue Ribbon Commission report, which will be released at the organization’s Global Board Leaders’ Summit in October, highlight directors’ continued frustration with corporate risk management—especially with respect to the threats posed by disruptive risks.
With the prospect of generating significant discontinuities and disturbances—and stemming from political, technological or other forces—these risks may profoundly compromise key strands of a firm’s commercial activity and possibly even curtail the viability of the entire enterprise.
If the prospect of a single disruption is problematic enough for business leaders, the continued turbulence that characterizes the business environment of today can sap decision-making. It’s hard to sift substance from froth in terms of key warning signals, and according to a 2018 report by Marsh & McLennan Companies’ Global Risk Center, it may be even more difficult to know how and when to respond at a time of high uncertainty or constant change.
Exhibit 1: Sources of Disruptive Risks
Information deficits and analytical challenges complicate the task of bringing together external data points with planning assumptions and operational exigencies. But cultural and institutional factors within firms can also inhibit receptivity and responsiveness to new threats by executives and directors alike.
Against this backdrop, boards must help set a tone from the top by making engagement with potential disruptions a clear governance responsibility. Three imperatives stand out.
First, ensure that the firm’s approach to anticipating potential disruption is an energetic, explorative endeavour. This means investigating hot topics in the world or fundamental trends that may shock or gradually undermine a firm’s growth, profitability and business model. Doing this effectively requires triangulating an array of different perspectives and asking “what-if” questions to keep the focus on possible consequences rather than likelihood. Characterizing the dynamics of disruptive forces and delineating touchpoints to the business helps determine where impacts might be felt and how material they might be, while well-crafted scenarios act as a tangible frame for detailed analyses and stress-testing.
Second, actively participate in this exercise and promote its use. Directors need to ask hard questions about key concerns, share the wisdom they have gleaned from different places and appreciate divergences of opinion in searching discussions. They should be mindful of blind spots and vested interests and be sensitive to an over-reliance on sources of information that reflect the prevailing corporate view. While exercising an appropriate challenge function, they should acknowledge that analyses may necessarily draw on patchy data and conflicting evidence. Historic disruptions may be weak reference points for preparing for future disruptions in terms of both the scale and nature of the impact.
Finally, be prepared to make bold decisions in a timely manner. Investigations into priority concerns need to inform strategy reviews and broader governance decisions. If the work is side-lined because the results are inconvenient, then the process has been a waste of time. Given high levels of uncertainty associated with emerging disruptions, it’s likely that business cases for action won’t be as watertight as might be desired. Sometimes, the most appropriate response is radical (business model change, large investment in innovation, market withdrawal); more often, it will be ensuring broad-based resilience to a range of potential negative incidents. As many forces of disruption can neither be forestalled nor bought off, enhancing strategic agility, boosting crisis preparedness and improving the speed of operational response are often the most viable solutions.
To fulfill their responsibilities properly, directors must look carefully both at themselves and at senior management. Boards not only need good intelligence on disruptive risks and the right forum for discussing early warning signals and strategic implications; they also need a modicum of creative friction that prevents groupthink. Likewise, they need to see a chief executive who is not adhering to last year’s strategic assumptions or risk assessments and a chief risk officer with sufficient business acumen and communication skills who can champion this agenda and exercise a suitable challenge function with executive colleagues. This provides a strong cultural starting point for the board while it is overseeing how management navigates business opportunities in a fast-changing world.