Board members weigh in on effective risk management
Directors told us that they place a premium on the talent of the individuals tasked with managing the companies they oversee. They see a direct connection between the quality of the strategies and the execution against objectives, and the skills and experience of the management team.
Directors depend on management to effectively navigate the labyrinth of risks faced by their organization, and to support the board as it articulates alternative futures. And, at a more micro level, directors expect management to leverage the range of talent at its disposal as it assesses matters of risk, including functions such as internal audit, general counsel, corporate compliance and environmental health and safety.
Directors are also looking with a keen interest at the talent sitting next to them in the boardroom when significant issues are deliberated. It’s no surprise that board members across the country spoke of the need for diverse talent in terms of professional experience, gender and cultural backgrounds. What we also heard is that directors with deep industry and international experience are valued, as are those with the inclination to ask the “uncomfortable” questions, go against the grain, and speak firmly about what’s on their minds when it comes to the strategy and the risks that matter most.
A changing business environment translates into changing business needs in the C-suite as well as at the board level. One of the directors proposed an interesting exercise for boards: “Evaluate your CEO against the required competencies, skills and experience, and then ask yourself if you would hire the current CEO if the position were vacant.” This highlights the importance of directors always having a clear understanding of the organization’s succession strategy and plans in light of the changing environment, and hiring and developing suitable executives accordingly.
One key factor that’s inextricably linked to hiring and maintaining quality talent, of course, is compensation. An organization’s compensation practices should be tied to performance, and competitive enough to support desired retention targets. Although goals should obviously link to the organization’s growth plan, related incentives such as bonuses should not encourage the C-suite to take unacceptable risks that could endanger the business in the future.
CEOs and other executives should be compensated based on their ability to manage, monitor and find opportunity in risk, and in many cases this may mean that compensation plans will have to vary from person to person. Strong governance is important to encourage behaviours that are consistent with the organization’s core values and culture.