Boards have responsibility for approving the strategy and risk appetite of the company. This requires directors to have sufficient information to assure themselves that they can make the best decisions possible at the time the decision is needed.
Those who follow business literature know that there has been an increase in focus on culture, and how to create a “healthy” environment in which employees feel respected and are engaged in creating value for all stakeholders. This is not a search for “feel good” environments. Healthy cultures create greater financial success over the long term. Conversely, an unhealthy culture, one that is authoritarian, puts the organization at risk. However, boards have not focused on organizational culture, seeing it as an operational, management responsibility. But before focusing on culture, boards need to work with the CEO to ensure that the right values are embedded in the organization.
What do we do, though, if the CEO is the problem, fostering values and culture that are unhealthy and create unnecessary risks? This has been the case in more than 70% of the corporate crises in recent years. Wells Fargo, Volkswagen, and Boeing, to name but a few have all had crises caused by a CEO that created an environment in which employees were afraid to disappoint and incentivized to do the wrong things. The damage to each of these companies has been considered in terms of market value loss, increased cost of capital, loss of key talent, and greater regulatory scrutiny.
We should question why the boards of these companies did not see the problem in advance. Some, like Margaret Heffernan believe it has to do with “willful blindness” and that in every crisis there is someone who knows but chooses not to believe it or share it. And if the crisis is caused by the CEO, there would likely be little information provided to the board. Yet, how could Wells Fargo open 3.5 million bogus accounts for customers without the board knowing?
While boards do not want to step into operational issues, they need to be able to understand opportunities versus risks, even those caused by the CEO. However, consider how boards get information on critical issues. They need to make choices, to call on the heads of environmental affairs, R&D, Compliance, Human Resources, Corporate Strategy, Public Relations, Legal, Investor Affairs, Information Technology, Government Affairs, Internal Audit, and Enterprise Risk Management. Would the information be discussed by the entire board or a committee? And if a committee, which one? In either case, directors would likely sit there hearing a debate from the different perspectives of each executive on what to do. And if the board wanted to know if the culture was conducive to averting a potential crisis, where would they go to find out? Sounds like a joke and maybe a bit of hyperbole, but each of these people would have a different perspective on the issue that should be heard. Not only is this cumbersome for the board, but it also highlights the inefficiencies and risks of Read more:https://bit.ly/3qVZnef