Webinar: Sustainability and Climate in Strategy and Board Agenda

By Karen Loon, IDN Board Member and Non-Executive Director

With climate challenges increasing, the board has a responsibility to assess the impact and define strategies to handle the risk.  Are we as board members doing enough?  Do we understand how to address the topic?  What are the challenges and opportunities here?

INSEAD Directors Network (“IDN”) members had the opportunity to listen to Lise Kingo, IDP-C, NED and former executive director at UN Compact and Novo Nordisk, Stig P Christensen, IDP-C and NED, and Silvio Dulinsky, Head of Business Engagement Latin America, World Economic Forum held on 18 November 2020 in an exclusive webinar for members which was facilitated by IDN Board Member, Liselotte Engstam based in Sweden with Q&A support from Hagen Schweinitz, a fellow IDN Board Member based in Germany.

Top left – Lise Kingo, Top right – Silvio Dulinsky.  Bottom – Stig P Christensen

In their introductory remarks, the panellists covered three areas:

Responsible business is now a board and senior management agenda however climate and social inequality remains far behind

The Sustainable Development Goals were issued out five years ago.  Whilst there is much broader recognition that responsible business is now a key board and senior management agenda topic, after five years, we are still very far behind in the whole climate area and also social inequality.

Due to the huge gap and climate emergency across the globe, the whole area of climate change has developed and is now one of the most mature areas in relation to how companies can control, manage and set good risk and targets.  In particular, the financial community has put climate risk as a key priority through how they are setting targets.  Another recent initiative is that investors want to know how companies put climate risk costs into their accounts.

Climate will continue to stay on the board and management agenda.  However, companies need to develop more holistic approaches to running their businesses when it comes to ensuring a successful transition to a net-zero economy. There are a number of tools and initiatives in place to support board members in this process, which means there’s no reason for boards not to stat working on a transition strategy.

We are beyond a tipping point in relation to climate.

  1. We are beyond a tipping point – We have no time to waste. Policy-makers and business leaders have to their best to rapidly implement new ways forward, as younger generations are demanding.  Investors are increasingly more supportive of these changes.
  2. Green and digital is core business – There is currently a risk for boards to get stuck on the compliance and risk agenda and not address opportunity agenda. It is often hard for boards to have strong and precise discussions and evaluation of the opportunity side.  Boards should push this agenda beyond climate.  The way forward requires innovation of the regulatory framework which is currently work-in-progress.
  3. Open the windows and doors – Look outside beyond the borders of your company and M&A objectives you are facing with a systems lens on. Create symbiosis between different companies and sectors.
  4. Listen to the crowds – They can’t be on the boards, but they have to be heard by the company.

Tools are available to support boards. A value chain approach should be adopted.

Tools are available to support boards in relation to setting up effective Climate Governance.  Specifically, there are eight climate principles outlined in the World Economic Forum White Paper “How to Set Up Effective Climate Governance on Corporate Boards – Guiding principles and questions”.  These are:

  • Principle 1 – Climate accountability on boards
  • Principle 2 – Command of the subject; boards need the knowledge to debate and stay informed re climate related decisions.
  • Principle 3 – Board structure; the board structure needs to be effective to embed climate in the decision-making processes of the board and senior management.
  • Principle 4 – Material risk and opportunity assessment; management should assess and manage short, medium and long term climate related risks and opportunities.
  • Principle 5 – Strategic integration; management should integrate climate considerations into their strategic and financial planning of the company
  • Principle 6 – Incentivisation
  • Principle 7 – Reporting and disclosure; reporting and disclosure should be undertaken with the same rigour as a financial report.
  • Principle 8 – Exchange; engage peers, regulators, investors and the whole value chain in the process.

All companies, including SMEs are crucial in relation to transforming value chains.  The role of the board is to support the broader value chain changes required.

A challenge is how can we bring on board others who are not yet convinced on the importance of the issue.  The Chair and CEO as well as a critical mass of directors play a critical role to put climate on the agenda of the board to support driving the change.

Top – Liselotte Engstam.  Bottom – Hagen Schweinitz

Following the opening remarks, the panellists and IDN members engaged in lively discussion in relation to topics including:

  • The importance of getting climate on the board agenda.
  • Being proactive on climate before rules becoming mandatory. Global requirements on climate are increasing rapidly.
  • Leadership agenda – Set goals which are not only financial, but also deal with other areas including climate, diversity etc. to drive the change agenda. The importance of the role of the board to drive this.
  • The increasing focus on climate being placed by investors in more recent times.
  • How do boards look at the risks and opportunities in relation to climate?
  • Sustainability reporting including accountability, accounting and valuation considerations.
  • Directors’ fiduciary duties in relation to climate.

As Liselotte Engstam concluded:

“There’s no question that we need to have increased focus from board directors, and it also needs to be more inclusive and holistic, and we are getting much more attention from investors… Don’t just look at this as negative it’s a fantastic time especially now to look at (it as) a source such as an opportunity to rethink and re-set”.

The next exclusive IDN webinar will be on Getting your First Board Mandate which will be held on 1 December 2020 at 1200 – 1300 CET.

 

IDN Webinar: Can Digital Committees solve board challenges?

Digital committees can help solve current board challenges

By Karen Loon, IDN Board Member and Non-Executive Director

With boards facing challenges including financial, sustainability and digital with increasing speed and impact, can digital board committees help?  Why are they set up and how do they work?  Who works on them, how do they integrate with board work, and why don’t more boards have them?

These were the key questions which IDP-C panellists and Non-Executive Directors Mary Antenen and Dimitri Chichlo, both based in Switzerland gave their personal perspectives on in an INSEAD Directors Network (“IDN”) webinar on “Digital Board Committees – Supporting the boards’ challenges and responsibilities” held on 29 September 2020, which was facilitated by IDN Board Member, Liselotte Engstam based in Sweden with Q&A support from Hagen Schweinitz, a fellow IDN Board Member based in Germany.

Following an introduction by Liselotte Engstam, the discussion covered a number of broad areas.  Key areas discussed included:

1. Digital is key to business in the future.

Digital is a tool and an instrument which cannot be ignored.  The pandemic has accelerated clients using digital channels, and has led to more staff working remotely.  Companies are increasingly partnering with third parties such as FinTechs for scalability and products, improved client service, profitability, and operations.  Digital allows organisations to enhance their business capabilities, simplify processes and improve customer experience.

Participants agreed that the recent pandemic had increased digital initiatives at their companies:

2. Digital is strategic

Boards and management need to understand the various digital options available to them. Their role is much more than creating a digital culture – they also need to be aware of the marketplace around them. Further, digital impacts an organisation front to back, is a key business driver and is more than IT which is often looked as outside of the business so difficult to integrate.

3. Digital transformation requires IT transformation and different ways of looking at things 

In digitising their businesses, companies need to not only look at their IT platforms but the impact on areas such as cybersecurity, operations models, risk management, and compliance. Increased digitisation also requires strengthening of internal controls and access to data and enhanced data usage capabilities.

As Mary Antenen commented

“Digitisation and IT transformation projects are complex and impact all areas of the organisation and often require specific governance around these initiatives.  The board and board committees need to adapt to this”.

For example boards need to address what the impact is of digitisation on the organisation’s strategy and business model and risk assessment; and how does the organisation look at partnerships, related models, and third-party risk, cybersecurity, and data protection.

4. There is no one right model of how the board should engage on digital.

The new reality is that boards need to deal with digital transformation and its discomfort.  Digital strategy and risk need to be integrated into the board discussion, and the board engaged and focused on it at the appropriate governance levels.  Further, digital and IT transformation is expensive.  How the board engages on digital may depend on whether the board has the right capabilities in digital or IT to deal with its initiatives taking into account the speed of change and disruption, and the need for faster and more effective engagement in the organisation on the topic.  Whether the company has diversity of experience from different industries and different domains of knowledge at the board and senior management levels will be a key consideration.

As Dimitri Chichlo said

“…the reason we should have such diversity at a board level is that each of us is framed by his or her own specialty. If you have only bankers sitting at a supervisory board, they will be thinking as bankers. If you only have operations, or lawyers, they will think in their frame … Diversity ensures that everyone is able to bring his or her own point of view when going digital”.

5. Having a digital advisory board, or subcommittee, may suit some organisations and allow some flexibility.

Webinar participants generally agreed that some form of digital subcommittee could enhance their board’s governance.

However, surprisingly few had discussed with their board the opportunity to complement the board’s work with a digital committee.

Participants learnt about some different approaches using digital subcommittees. One approach was organised as a formal subcommittee of the board and included both Operations and Digital, with members from about half of the board together with the CEO, CIO, CRO and COO from management’s side. This group met approximately 6 times per year.

The other was arranged as an advisory board, not a formal subcommittee. This involved both internal members (a supervisory board member, CEO, CRO, CIO) and a number of external advisors.  This group met approximately 4 times per year, and are now considering nominating one of the advisors to join the supervisory board.

It was shared that external advisors can bring to organisations different and complementary skills, for example customer experience and digitisation, data analytics and IT, cyber, technology architecture and knowledge and experience of agile transformation which can be tapped on from others who have gone through them, and led similar exercises.  They can also lift board competencies and bring fresh perspectives and understanding of future trends/market insights as well as new ideas.

Conclusion

As Mary Antenen concluded

“I think we recognise that this kind of transformation and discomfort is here to stay. It’s part of the new reality and we need to find ways of effectively dealing with it within our boards … whether it’s through subcommittees of boards (or) whether it’s through an advisory board.  I think the important thing is that digital strategy and risk needs to be integrated into the board discussion.  These discussions need to be in line with the speed of disruption and development that’s happening in the marketplace”.

Dimitri Chichlo further added

“Digital is not only about improving your efficiency or decreasing your costs, it’s about a strategy opportunity.  So, there are both sides here – it’s a tool and an instrument, but it’s also a way that shapes the behaviour of your customers or of your market. The board cannot afford ignoring it; you cannot be blind. So, you must have people who are willing to go in this direction and understand those options”.

IDN’s next webinar for members on “Board Dynamic Capabilities for Disruptive Times” will be on 16 October 2020 from 1345 to 1445 CET.

Why boards have a duty to reinforce resilience

By Didier Duret IDP-C, Non-Executive Director and Independent Adviser

Change is risky for firms and boards of directors must see beyond talk of disruption and innovation to ensure companies focus on their essential qualities and a handful of best practices

The current global lockdown, enforced by governments to minimise the Covid-19-led public health emergency, has led to the shelving of many firms’ multi-decade strategies to correctly allocate resources across different regions.

Boards of directors must now re-focus on their organisations’ long-term resilience. This must not be confused with short-term crisis management, which demands quick reactions, analysed relentlessly across digital media.

Prudence and strength

Resilience is a mixture of prudence and strength before a crisis and should be ingrained in firms. It is defined as “the degree of freedom we can deploy to act on events we cannot control”, by Boris Cyrulnik, French psychiatrist, author and Holocaust survivor. For most firms, it derives from a mix of efficient risk management and organisational flexibility. In order to boost resilience, boards must question assumptions, nail down governance principles and adopt sound stewardship.

The idea of resilience in business was popularised by Nassim Taleb in his 2012 best-seller Antifragile: Things That Gain From Disorder, which argued that both humans and organisations are poorly equipped to cope with shocks that accelerate change and have cascading consequences. While hardwiring to think in categories has helped our species survive, most phenomena in nature and society follow non-linear patterns with little respect for categories. Although we can model risk from yesterday’s data, we cannot apply it confidently to tomorrow’s uncertainties.

In modern corporate life, despite a professional culture that has elevated disruption to a virtue, change remains risky and unpredictable. Many start-ups do not survive, and large firms struggle to adapt. Disruptive ideas facilitated by ‘agile management’ have limited impact once they encounter bureaucratic inertia. The board is in a key position to see beyond management techniques and reflect on the essential qualities of a resilient firm.

Focus on what works

Rather than being hypnotised into a reverie of ‘innovation’, it makes sense to focus on a handful of best practices. Of these, financial resilience and access to cash is the most important. Heavy debt and weak solvency ratios undermine resilience. Boards have explicit responsibility for their firm’s capital structure and access to finance, plus oversight of remuneration and dividend and share buyback policies. In a crisis, when survival is at stake, board members may seek access to new capital, renegotiate bank loans or seek being bought out by a larger firm. Board oversight is crucial for the firm to exit a crisis with resilient, if battered, financials.

Diversification of activities, markets, products and suppliers makes good business practice. Diversity of opinions, talents and skills among management, staff and board members also contributes to strategic resilience. A mix of genders, races, cultures, languages and expertise strengthens reliability of operations and leadership competencies. External advisers and independent board members can help identify new trends signifying a paradigm shift. They reduce groupthink and corporate bias, constructing a vision differing from the past. External think-tanks or business school experts can be valuable resources for the board to refocus long-term strategy based on short-term crisis-induced changes.

Discernment through judgemental resilience is a major governance skill exercised by the board. It can be reinforced to balance quantitative resource optimisation versus qualitative operational resilience. Better data-driven “dashboards” do not mean better resilience, just as last week’s stock price does not tell us what next week’s will be. The board can ask the CEO to review crisis planning and solidity of the strategy though a qualitative-scenario lens differing from traditional quantitative-scenario planning. which, most of the time, is consensual to the industry or macro environment.

ESG goes mainstream

Environmental, social, and governance (ESG) policies have become mainstream, reinforcing resilience by reducing financial, operational, and reputational risks through selecting reputable commodity providers or avoiding financing controversial industries. But ESG-driven governance does not guarantee resilience. Recent 20-year-low oil prices are just as disruptive for power producers using wind farms and solar panels in the transition to renewable energy as for shale oil firms, radically transforming capital spending plans. But today’s unprecedented economic crisis is impacting global social and political dynamics as well as consumers’ visions of the world and leadership expectations. Authentic ESG culture may yet prove a competitive advantage in the post-Covid-19 ‘new normal’.

Humility offers a hidden dimension to resilience, counterbalancing the excessive risk-taking and corporate hubris associated with charismatic CEOs. Would WorldCom have survived with board members questioning its overmighty CEO Bernard Ebbers more explicitly? Good practice involves yearly independent assessment of performance and behaviour of the board chairman, members, CEO and executive committee. Humility does not mean timidity, as it can be courageous. An advisory board I sat on during the early weeks of the Covid-19 crisis pursued investment in strategic areas that had suffered from heavy losses through massive disruptions, but gave the CEO wide latitude to implement high-level decisions.

I believe boards of directors, by focusing more on conditions for resilience, can help firms achieve better financial, ethical and environmental results. Resilience in all its aspects, has become a strategic requirement and unless boards take a more socially-oriented and strategic outlook for their organisations, billions of people will suffer, to the ultimate detriment of these firms.

Didier Duret IDP- C is a non-executive director, an investment committee member, and independent adviser to several private family offices and foundations. 

This article was first published in the Private Wealth Management Magazine from the Financial Times on 23 May 2020, and can be found at https://www.pwmnet.com/Wealth-Management/Business-Models/Private-View-Blog-Why-boards-have-a-duty-to-reinforce-resilience

Board Governance during a Crisis

By Joergen Jakobsen IDP-C

When a company is facing a crisis the board leadership is put to the test. The actions of the board can be critical for how successful a company will emerge from a crisis – or if they will be able to emerge at all. Writing this blog during the time of the COVID-19 pandemic this is more evident than ever. In this blog I will examine the top 3 priorities a board need to focus on during times of crisis.

Framing of the crisis and its phases appropriately

As a company finds themselves in a crisis having a material impact on the company the risk of losing sight of appropriate governance is real for many companies. When facing a crisis, it is helpful for the board to break down the crisis into 3 key phases in order to frame the crisis with different time horizons allowing for appropriate options to be considered in the various phases. These 3 phases are:

1. The crisis phase

During this phase the frame is typically short term and relative narrow in scope.  The key consideration is about how to protect the company, the people and its key assets. It is about damage control, prevention of major harm to the company and its stakeholders – and maybe even about the survival of the company. This is often talked about as the Business Contingency Plan for the company.

2. The recovery phase

In this phase the frame becomes wider and more mid-term in. The focus turns to how the company will emerge from the crisis. In this phase a range of tactical options will typically be evaluated in the context of how the underlying market environment starts to improve. This is often talked about as the Recovery Plan for the company.

3. The New Normal

It is important to think about the post-crisis environment as a different market environment compared to the pre-crisis environment. The market conditions and the customer requirements might have changed. The competitive landscape might have changed. The stakeholder expectations might have changed. Thus, the frame required to plan for the New Normal must be wider and a new Strategic Plan is required for the company.

Although it is helpful to think about the 3 phases as different in frame and scope it is important for boards to have an overall view of the planning and decision framework required to bring the company from the crisis situation into the New Normal given the decisions made in prior phases can impact optionality of future phases.

Focus on what matters most during the 3 phases of the crisis

The objective of the board is to govern the company by setting the frame for the future of the company within which the CEO and the executive team will define and execute the strategy under the review and approval of the board. The role of the board is to preserve and enhance the value of the company as seen by both shareholders and other stakeholders while minimizing the risk. In this light let us evaluate the key governance priorities of the board pertaining to the 3 phases:

1. The board’s key focus during the crisis phase

The key priority in this phase relates to value preservation and risk mitigation to minimize the impact of the crisis on the company. Thus, the key areas of focus relate to organizational and financial resilience:

  1. Establish scenario planning to determine the worst-case scenario of the crisis. Establish a Business Contingency Plan to ensure the company can withstand the worst-case.
  2. Review organizational resilience and experience in handling a business crisis at the anticipated level. This includes review of the experience of the executive team and the board and if required involve external resources to address deficiencies. It also includes review of the company’s work processes to effectively handle the nature of the crisis.
  3. Review the financial resilience required to handle the crisis. Assess capital requirements related to the worst-case scenario and if required increase the company’s liquidity.
  4. Review the potential crisis impact to strategic customers and partners and determine how to mitigate this risk.
  5. Increase communication frequency to the employees and key stakeholders to ensure their understanding and buy-in for decisions made.

During the depth of the crisis the board often brings a key value in being less consumed in the day-to-day operational challenges than the executive team. They often bring perspectives and experience from how other companies and other industries handle the crisis which can prove valuable. Also, during this phase the board should increase their meeting frequency to ensure decisions are made in a timely manner.

2. The board’s key focus during the recovery phase

Pending the context of the crisis this phase might have a high degree of uncertainty as timing and nature of the recovery might be difficult to predict. Thus, it is important to stay agile and adjust the recovery plan as required. The key priorities by the board would be:

  1. Evaluate the probable scenarios and strategic business recovery options provided by the executive team against the company’s ability to execute. Challenge the board to ensure various scenarios and recovery options are presented before deciding on the best plan forward.
  2. Review the compensation plans to ensure it is aligned to the new business realities striking the optimal balance between motivation of the organization and the reduced business level.
  3. Ensure the executive team defines and reviews changes required to align the organization and the operational business processes required for the business recovery plan.
  4. Review and update the financial plan and ensure adequate capital is available and allocated to make the plan successful.
  5. Communicate the business recovery plan to the organization as well as key stakeholders to ensure their support and understanding of their role to execute the plan.

3. The board’s priorities preparing for the New Normal

As the company emerges from the crisis it will be facing a New Normal. Customer behaviors and expectation might have changed from the impact of the crisis. Competition might have changed and potentially consolidated. Business processes and associated technologies might have evolved during the crisis. In addition, stakeholder expectations or legal requirements might have changed. In short, the New Normal phase might look very different from the business environment experienced prior to the crisis.

With the above in mind the board should undertake the following activities to ensure the company is well positioned for the New Normal:

  1. The board should review and if required update the overall frame and vision of the company.
  2. Request the CEO and the executive team to develop strategy options aligned to the updated frame and vision for the company and aligned to the New Normal as well as the internal capabilities of the company. The board should review and approve the new strategic plan and its KPIs and empower the executive team to execute the strategic plan.
  3. Evaluate the profile of the CEO and the execution team in order to ensure the leadership has the adequate experience to carry out the new strategy of the company.
  4. Update the risk assessment framework of the company and define risk mitigation actions as required to ensure the risk of the company is managed at the adequate level. Ensure learning and experiences from the crisis are captured.
  5. Communicate the updated strategy to the organization and key stakeholders to ensure support and alignment to the new plan.
  6. Revert to a normal cadence and format for board meetings to manage the overall governance to the company and support of the CEO and the executive team.

Having appropriate board governance processes in place

In summary, it is critical for the board to adapt and contextualize their governance practice during a crisis situation. However, the fundamentals of good board governance continue to be critically important and should be in place before a crisis develops. Good board governance includes aspects like having a diverse and active board, understanding of the roles between the board and the executive leadership team, and having in place a strong board culture and processes to optimize the effectiveness of the board – which will be put to the test during a period of crisis.

First published on LinkedIn on 25 May 2020.

Joergen Jakobsen, IDP-C is a board member, business advisor and consultant leveraging more than 30 years of experience from multiple large global technology vendors. His consulting practice is mainly focused on board advisory, business performance management, leverage of partner eco-systems for profitable growth, and optimizing organizational and individual performance in a culturally diverse environment.

What can boards do to handle the Coronavirus Pandemic?

Webinar with PwC Singapore – 31 March 2020

On Tuesday 31 March 2020, the INSEAD Director Network held a topical webinar for its members on “What can boards do to handle the Coronavirus Pandemic”.

The webinar was facilitated by Liselotte Hägertz Engstam (IDN Board Member, Non-Executive Director & Chair at Listed & Private Companies), introduced by Karen Loon (IDN Board Member and Non-Executive Director), and featured guest presenters, See Hong-Pek and Marc Philipp of PwC Singapore, and with Q and A support by Gerard Forlin QC.

In her introduction, Karen Loon noted that COVID-19 is a wicked problem which globally is impacting all our lives personally and well as professionally. A challenge for all of us is dealing with the rapid change – how do we move from our fear zone (anxiety and ambivalence) to a learning zone, and ultimately a growth zone where we embrace this opportunity.   She also shared her experiences of both some short-term challenges of boards (especially helping people, business continuity and clients), as well as some medium term potential focus areas, and concluded that it is during these fluid times that it is important that we all leverage our networks for diverse ideas and perspectives.

Three waves of response

SEE Hong-Pek of PwC Singapore highlighted three potential scenarios (contained, pandemic with hot spots, and uncontrolled pandemic) concerning the evolution of the crisis which need to be taken into consideration by companies which will have different impacts on organisations.

Companies are likely to go through three different waves (mobile – immediate; stabilise – medium term; and strategise – long term) as they learn to adapt and accept the new “norm”.

Supply chain challenges

Marc Philipp of PwC South East Asian Consulting outlined some of the external and internal challenges which companies which PwC works with have experienced in relation to their supply chains.  These have included external (unpredictable demand; supply disruption; economy uncertainty; contractual challenge), and internal issues (production/internal supply, workforce limitations; financial and regulatory issues; operational issues).  An example of a challenge for some companies was to be able to manage the increase in demand for products in China after some restrictions were lifted.

He also suggested eight questions which boards could be asking in relation to their business continuity plans, operational risk assessment, scenario planning, alternative sourcing, risk assessment across supply chain tiers, critical supply chain data, temporary inventory and evaluation processes, and product redesign/material certification resources.

IDN members also raised questions, particularly in relation to legal matters including global legislation, work from home legal employer duties, data protection, and potential litigation.  The speakers all agreed that good communication with all stakeholders is vital, and that that board members play a key role in supporting the mental wellbeing of the people in our organisations, particularly CEOs.

INSEAD IDN will be arranging more webinars on managing during the crisis for our members in the next few months so do watch out for them!

SEE Hong Pek – Partner, Business Resilience, PwC Singapore  specialises in assurance and management consulting services in the areas of information technology, data privacy and business controls.  

Marc Philipp, Partner & Management Consulting Leader, PwC South East Asia Consulting has significant experience in corporate strategy, operating model design and digital supply chain transformation across Asia Pacific.

Align Risk Management with Strategy and Operating Performance, Reward and Remuneration

This blogpost is shared as part of a series of insights from INSEAD Directors Network, based on roundtable discussions held during INSEAD Directors Forum October 2018. The Directors Forum Round Table Discussions were held with IDN members led by IDN board members or IDN Ambassadors. Other Blogpost in Series shared last. 

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(Photo: Pixabay) 

The round table discussion “Align Risk Management with Strategy and Operating Performance, but also Reward and Remuneration” was led by Susana Gomez-Smith, NED and IDN Ambassador for Portugal with the introduction

As the ultimate steward of value and overseer of risk, the board must grasp the relationship between strategy and risk and assist management, in gaining that understanding but also in putting it to practical use. The Board must also ensure that remuneration policies/practices are consistent with and promote sound and effective risk management and in line with the business strategy.

  • Why should the Board consider and discuss strategy and risk appetite in tandem? How to do it in practice?
  • What can the board do to drive greater awareness of the risks to the strategy throughout the organization?
  • “Remuneration forms part of the culture and governance priority as set out in our Business Plan. As a key driver of behavior, remuneration of senior and risk taking staff is an important area of focus for the FCA to ensure that risk and reward are aligned in firms that we regulate through our Remuneration Codes (the Codes). Whilst our remuneration rules only apply to specific groups of firms, remuneration is a key driver of behavior for all firms and individuals. Implementing appropriate remuneration policies and practices helps to ensure appropriate outcomes and reduces the likelihood of harm from occurring “
    Financial Conduct Authority, Remuneration Codes

    How can Boards satisfy themselves that firms remuneration practices lead to appropriate outcomes and risk and reward are aligned?

Pre-readings:
Strategic Risk Management: A Primer for Directors, Harvard Law School Forum on Corporate Governance and Financial Regulation
The UK Corporate Code, Financial Reporting Council (from page 16)

Roundtable discussion

The strategy and risk areas has historically kept as quite separate topic, as the risk focus has tended to be quite operational in focus. As the strategic risk has been in steep increase for many companies the boards needs to find more appropriate ways to work with the topics in tandem.  Some key insights from the board members were noted as;

  • The strategy of the firm is and has to be the starting point of all the considerations
  • The Strategy should comprise the areas of the core business and potential new business areas
  • The risk appetite for both areas has to be set and will be overseen by the Board (in a regular exercise)
  • The risk culture is set at the top of the company!
  • The second line of defence (Risk Management, Compliance) as well as the third line of defence are supporting the first line (operations) – clear definitions needed
  • Especially the Risk Management and Compliance functions must be filled with experienced and independent staff
  • With regard to risk measurement and risk identification, the right KPIs (which are rather backward looking) and KRIs have to be defined (better start with few but the most telling ones). Monitor not only your risks but also how the probability, impact of such risk is evolving.
  • The Risk Management process is not static, it is a constant effort. Risk managers should be incentivized to identify emerging risks. Some companies on the side of the regular Risk Committees perform regular exercises to reflect on emerging risks. It is advisable to include in such exercises different areas of the company and not only a closed inward exercise of the risk department.
  • At Board level, a trade-off between investments in new business areas and investments to mitigate/eliminate existing risks has to be found
  • The remuneration should be linked to
  1. Implementation of the strategy (s-t, m-t, l-t) and hence parts of the variable compensation be deferred
  2. Accomplishments in the core business areas as well as in developing new business areas
  3. Risk taking and risk management
  4. Implementation and living the risk culture in the firm
  • The Remuneration Committee should be given the power to override formulaic outcomes of bonus schemes
  • Remember: The Management is responsible for Risk Management, the Board is responsible for Risk Oversight.

Conclusion: Strategy and risk needs a framework to be jointly considered as the strategic risk is increasing for many companies, and it needs to be fully aligned also with new and balanced remuneration schemes.

Recommended additional reading;

Enterprise risk Management – Integrating with Strategy and Performance, (COSO)

Using a Risk Appetite Framework to Align Strategy and Risk, (Moody’s)

Letters to Remuneration Committee Chairs (FCA UK)

 

By Susana Gomez- Smith,

Certified Independent Director IDP-C and IDN Ambassador Portugal

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Other blogpost in this series: 

Governance in a Disruptive World by IDN Board Member Liselotte Engstam

From Board oversight of Strategy, to creating a Sustainable Business, by Helen Pitcher OBE, IDP-C, Vice President IDN

Anticipate and manage for geopolitical trade, corporate governance codes and regulatory changes by Cleopatra Kitty, IDN Cyprus Ambassador 

The impact of technology on​ Strategy & Business Models by Mary Francia, IDN Board Member

Align Risk Management with Strategy and Operating Performance, Reward and Remuneration by Susana Gomez- Smith, IDN Portugal Ambassador

Accelerate Board Effectiveness by IDN Board Member Thomas Seale

 

More insight from INSEAD Directors Network, will be shared based on INSEAD Directors Forum 2018, Round Table Discussions – Look out for more upcoming blogposts!