With tomorrow marking the second anniversary of RBS reporting the biggest British corporate loss in history, the report from executive search, leadership and talent management firm, Korn/Ferry International, reveals that large global businesses are changing their attitude to risk.
This is as a result of the increasing complexity of risk, heightened public interest in corporate behaviour and the ability of contentious issues to go viral on the internet, as well as the threat of new regulation.
Today risk is "constantly and persistently on the minds and in the conversations of the board", according to Peter Brabeck-Letmanthe, chairman of Nestlé.
The report, Calculated Risk?, highlights the fact that risking capital or assets in search of financial reward is the definition of business. It asks whether, in the wake of the financial crisis, businesses’ appetite for risk appetite has become too conservative.
Paul Turner, chairman of the industrial team for EMEA at Korn/Ferry International, said: "By talking to the leadership teams at some of the world’s largest and most successful companies we have gained valuable insight into best practice into boards’ management of risk. It is clear that the past few years have led to a seismic shift in boards’ oversight of risk and, that looking forward, risk will be top of the agenda in all boardrooms."
With several high-profile examples of excessive risk-taking in the corporate world in the past two years, politicians, regulators and commentators have called for more stringent risk regulation.
Korn/Ferry interviewed chairmen, CEOs and board directors of companies including Kingfisher, Legal & General, Balfour Beatty, National Grid, Deutsche Bank, UBS, Nestlé and US Steel.
The report finds that best practice includes:
• The appropriate level of oversight: a board’s risk outlook needs to suit its company’s scale, strategy and regulatory situation.
• Risk requires the full board’s attention: some businesses with complex risk profiles (for example, financial services) need to work on risk at the committee level for efficiency's sake, but ultimately the whole board must be engaged.
• Check the organisational risk culture: boards need to consider ways to measure, and possibly influence, attitudes towards risk to keep behaviour in line with the board's risk appetite.
• The chairman must challenge the status quo: risk oversight is hampered by stifled opinions, so an open, trusting environment is mandatory. The conversations taking place at board level about risk should be some of the most challenging.
• Renewing the board is critical: new directors should be recruited with risk in mind, so that the board, on balance, has industry experience, strong risk instincts, strategic minds and overarching diversity. Non-executive directors have a critical role to play here. Having experience in a broad range of fields is essential.
• Risk reports need reassessment: board members are seeking more granular information, and more leading indicators, as well as opportunities for far-ranging discussions with relevant executives.
