Report From Davos Includes Fascinating Discussion of Governance and Risk Issues

This report contains some excellent information on a variety of risk and governance issues. What caught my eye was the section halfway down, under the heading: “Redesigning the Board.”

Here are a few quotes, but you should read the whole section (and probably more):

  • “The governing board is potentially one of the most pivotal places for the introduction of risk management practices.”
  • “…the boardroom could serve as a barricade against the next crisis -- if properly redesigned. The board's traditional focus has been on "compliance, control and compensation," fulfilling the oversight function mandated by both government regulators and listing requirements. But that is no longer sufficient, suggested several panel members. Directors should also be engaged in "company strategy, talent development and risk management." It is a matter of not only "feeding the beast" -- providing investors with expected quarterly returns -- but also "building the business" -- advising executives on strategic direction and appropriate risk.” 
  • “…directors should bring not just oversight capabilities to the boardroom. They should also be ready to challenge management practices, exercise independent judgment and resist when executive actions pose excessive risk.”

This next quote was interesting: “smaller boards make better forums. ‘Seven to eight people can debate strategy, the way a board of 15 cannot.’"

The report continues with this:

  • “If well redesigned, company boards can thus help their companies in "a race to the top" -- building long-term value and avoiding excessive short-term risks -- rather than permitting a "race to the bottom" that had driven some companies into the cauldron of the crisis.”

I really liked these next two:

  • Working in extremely high stakes environments requires taking calculated risks, the antithesis of recklessness that had driven the sub-prime mortgage lending that sparked the financial crisis. And when critical decision points are reached -- going for a dangerous summit, landing a stricken aircraft -- a total focus on the task at hand and the ability to draw on a lifetime of experience are vital for surmounting the perils of the moment.”
  • “Complacency will kill you, good governance is essential, and learn from others' mistakes to avoid your own.”
I would appreciate hearing your views on this, and other nuggets of interest in the report.

Posted on Feb 15, 2011 by Norman Marks

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  1. Perhaps keystone is 'fulfilling requirements' which, if thought adequate to address issues, is difficult to adequately audit.  This appears to be one more attempt to corral the problem when little is working.  Seems as thought governance boards are expected to fulfill the top-down driven ethical behavior behind rhetoric but is the problem more one of getting individuals to accept ethical leadership practices?  Would be good to see research on changing leadership mindsets as a follow-through.

  1.  Actually, I do not have any substantive comments to make on the above but I do have a couple of comments on the report. Michael Useem is a noted professor from Wharton who has filed a great report on Davos' recent WEF. The Global Risks Initiative he refers to in the report should be excellent reading material for all internal auditors especially as regards what is  going on around  the globe external to their companies. But I like the references to the risk response network and leading practices exchange- two initiatives for risk practitioners that will start up in the near term together with  the community of risk officers.

    My main concern with the GRI report focuses on the composition of the team that assembled the report. I do not see representation from many of the heavy industries including manufacturing, oil and gas, retail. I do however see representation from financial services and insurance and does this not lend a bias to the report? I mean Martin Useem discusses  Tunisia and Egypt in his aftermath memo but nowhere in the GRI report do we see Key developments to watch (Key risk indicators). So whereas all black swans cannot be identified, perhaps this was not a black swan at all but a normal swan and one would therefore think the risks that we now see should have been more prominently displayed in that report which he references in his memo.

    Furthermore, this is what you would term a slow evolving risk. This is one of the key COSO ERM sins that Grant Purdy alludes to in Norman Marks blog of February 21. COSO ERM is completely silent on the slow types of risk. The Middle East/Africa is only one such risk. Others include such things as the subtle shift from America being the center of the universe to China (West to East).

    Nevertheless, the report by Martin Useem and the GRI report are important documents to read and we are thankful that Norman has shared them.

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