RMIA Conference 2014

Presented by David Spear Gladstone Consultants

May 2014

Risk; A Directors Perspective

What is corporate governance?

“To oversee business performance and compliance performance, directors must put in place systems and processes to control and monitor — or ‘govern’ — the organisation.”

What is ‘good governance’?

In essence, good governance is about the management of risk…. Both in a mitigation sense and a appetite sense…

Good governance in Australia dictates the following;

That Directors are responsible for two broad areas

– business performance (internal role) – compliance performance (external role)

Question is; do we have the balance right between performance and compliance activities in Australia?

Risk is after all fundamentally a management role, but who shares in the responsibility?

So how is risk viewed by the Harvard Business School for Directors and Boards?

HBS asks, What is ‘board’s role in Risk?

“It is the board’s responsibility to approve the organisations strategy and

monitor the risks assumed and risk mitigation treatments.

The Board needs to ensure management makes risk pay off by identifying and

selecting opportunities which more than compensate for the risk.”

Professor Jay W Lorsch Harvard Business School

“First option of a board in Risk is to smell the smoke, then you decide if you have a fire…”

“Directors and boards are there to assess, and take risks, not be stifled by regulation…”

“They (Directors and Boards) should be more active when things are good, to make sure that the risk-management processes are in place, that the financial control processes are in place, so that they're assured that the organisation has the controls and procedures that will red-light or highlight risks when they need to be highlighted…”

Professor Lorsch also asks;

“Does your Board understand the Strategy as a whole and as individual directors?”

This is a significant risk for management

Board has to deal with 3 issues in Risk;

1. The Strategy – Do they understand it?

2. Compliance – Can they mitigate the risks effectively?

3. Management Succession – There can be too much focus on succession, not enough on Leadership in the Board room!

What does Harvard Business School identify as the biggest risks to boards in 2014?

1. Fraud – Cyber fraud is growing and is now worldwide

2. Cultural – The Board needs to continually (annually) evaluate itself in relation to its performance and its culture. Poor board performance will lead to poor decision making, poor outcomes, miss-identification of risk and loss of risk opportunity

3. Sudden CFO/CEO resignation….Smell the smoke!

Risks in not-for-profit organisations can be a bigger problem

© 2010 Australian Institute of Company Directors

What can the Board do to mitigate risk?

1. Boards need to frame their activities for the oversight of risk into two areas: oversight of enterprise risk programs (risk management) and oversight of critical risks and risk decisions (risk governance).

2. Setting the risk appetite and risk tolerances, as well as monitoring strategic risks and related trends.

3. Get good reporting from Management. As directors, learn to ask the same question in three different ways…

4. Set the culture of the organisation, review performance of the board.

In Summary

From Management to the Board;

- Need to inform directors on what is going on around us?

- Then, what needs to change?

From the Board to Management;

Define your risk appetite and have management measure and remeasure. Make management understand they are responsible of defining, mitigating and pricing risk.

Look carefully at your board;

“A Grade” players on the board does not guarantee “A grade” outcomes

We truly face dynamic environments and Boards must be on top of what is happening and make decisive decisions around risk….

Questions?