Risk Forum For Attendees


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Risk Forum For Attendees

  1. 1. Corporate governance - stretched to breaking point?<br />Richard Anderson<br />22 September 2009<br />
  2. 2. Copyright and disclaimer<br />This slide deck was presented at the IRM Forum at Warwick University on 22 and 23 September 2009. The slides include material drawn from a report prepared for the OECD, a copy of which can be found on the OECD website, and also at http://randerson-assocs.co.uk/oecd.aspx. <br />Except where references show otherwise, other material is proprietary to Richard Anderson & Associates and should not be used without prior written consent. Nobody should take any action on the basis of these slides without taking appropriate advice beforehand. No liability will be accepted in the event that anyone takes action without such advice from Richard Anderson & Associates.<br />These slides are copyright protected and nobody is authorised to reproduce these slides without first seeking written approval from Richard Anderson & Associates.<br />
  3. 3. Part 1 – the background<br />
  4. 4. The wall of shame...<br />$15 Trillion<br />
  5. 5. One year on from Lehman<br />Obama urges banks to accept new sense of responsibility<br />Gordon Brown &apos;apalled&apos; [sic] at continued City bonus culture<br />Source: Telegraph.co.uk, 15 September2009<br />A year after Lehman Brothers collapsed, a think tank has warned the lessons of the crisis have not been learned. <br />The Institute for Public Policy Research (IPPR) says the rapid return to the City&apos;s bonus culture shows that real reform has been &quot;very limited&quot;. <br />Source: Guardian.co.uk 14 September 2009<br />Archbishop condemns bank excesses <br />Source: BBC.co.uk 14 September 2009<br />The Archbishop of Canterbury has told the BBC he fears financiers feel no &quot;repentance&quot; for the excesses which led to the economic collapse.<br />Source: BBC.co.uk 14 September 2009<br />
  6. 6. Saving the world...<br />Cartoon removed – Superman<br />
  7. 7. A spot of bother...<br />
  8. 8. SUCCESS<br />A recipe for success...<br />
  9. 9. Corporate Governance<br />FAILURE<br />Remuneration<br />Risk Management<br />... that fed disaster<br />
  10. 10. ... and created<br />Global Recession...<br />
  11. 11. Part 2 – the failure of Corporate governance<br />
  12. 12. The supposed benefits of CG<br />“Good corporate governance should contribute to better company performance... If it is ignored, the consequence may well be vulnerability or poor performance. Good governance ... Can deliver shareholder value over the long term.”<br />Source: FRC Combined Code, June 2008<br />“The presence of an effective corporate governance system ... Helps to provide for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth.”<br />Source: OECD Principles of Corporate Governance, 2004<br />“Had a code such as ours been in existence in the past, we believe that a number of the recent examples of unexpected company failures and cases of fraud would have received attention earlier.”<br />Source: The Committee on the Financial Aspects of Corporate Governance, known as The Cadbury Report, 1992<br />
  13. 13. My reading...<br />Corporate Governance has been sorely tested – and found wanting:<br />Almost voluntary<br />Fierce investor pressures to do things not in best interests of organisation<br />NXD oversight stretched<br />External audit all but bust<br />Internal audit struggling<br />Regulators, financial analysts and rating agencies poor source of assurance<br />Which leaves reliance on internal RM, the Co Sec and internal management<br />
  14. 14. Part 3 – How do we fix it?<br />“But what I want to emphasize is this: normalcy cannot lead to complacency.”<br />Source: President Barack Obama in a speech to Wall Street, 15 September 2009<br />
  15. 15. Five themes<br />Balanced riskmanagement<br />Ethics programmes<br />Maturing risk management<br />Risk management and assurance framework<br />Organisation<br />
  16. 16. Achieving objectives depends on...<br /><ul><li>Taking more managed risk</li></ul>– risk of taking on too much risk which becomes unmanageable<br /><ul><li>Avoiding unnecessary problems</li></ul>– risk of avoiding everything, resulting in total inaction<br /><ul><li>Creating the right performance culture</li></ul>– risk of over-stretch resulting in burn-out<br /><ul><li>Setting appropriate corporate “ethics” and behaviours</li></ul>– risk of sclerosis as every stakeholder of every decision is consulted<br />
  17. 17. And doing the right amount of each<br />High<br />Zone 2<br />Performance<br />Zone<br />Zone 3<br />Dead Zone<br />Zone 1<br />Dead Zone<br />Long Term Performance<br />Low<br />Low<br />High<br />(i) Managed Risk Taking or (ii) Avoiding Pitfalls or (iii) Performance Culture or(iv) Corporate Ethics and Behaviours<br />Attribute:<br />
  18. 18. Balanced risk<br />Performance<br />Culture<br />Dead<br />Zones<br />Performance<br />Zone<br />More Managed<br />Risk<br />Avoiding<br />Pitfalls<br />Corporate<br />Ethics<br />
  19. 19. Enron? Or the Big Banks?<br />Performance<br />Culture<br />Dead<br />Zones<br />Performance<br />Zone<br />More Managed<br />Risk<br />Avoiding<br />Pitfalls<br />Corporate<br />Ethics<br />
  20. 20. UK plc?<br />Performance<br />Culture<br />Dead<br />Zones<br />Performance<br />Zone<br />More Managed<br />Risk<br />Avoiding<br />Pitfalls<br />Corporate<br />Ethics<br />
  21. 21. The objective<br />Performance<br />Culture<br />Dead<br />Zones<br />Performance<br />Zone<br />More Managed<br />Risk<br />Avoiding<br />Pitfalls<br />Corporate<br />Ethics<br />
  22. 22. The evidence from ethics surveys<br />5% of employees use hotlines in any given year. Of those, 1% are reporting a problem and 4% are seeking guidance.<br />Two surveys show some conflicting evidence: <br />74% of employees witnessed wrongdoing at work in previous twelve months. <br />56% of employees personally observed conduct that violated company ethics standards, policy, or the law. <br />The reasons given by employees for not reporting misconduct they witnessed at work were <br />Futility of reporting—nothing would change – 54%; and <br />Fear of retaliation – 36%.<br />Source: KPMG’s Integrity Survey 2008-09<br />Source: Ethics Resource Center’s National Business Ethics Survey (2007)<br />Source: ERC, National Business Ethics Survey p.6, 2007<br />
  23. 23. The evidence from ethics surveys<br />But they didn’t put forward recommendations for improvements either.<br />For the same reasons.<br />How can you re-engage your staff?<br />The “DANGEROUS SILENCE”<br />
  24. 24. Dangerous silence<br />Sensitivity to weak signals...<br />Needs a taser...<br />Needs valium...<br />
  25. 25. Failure to mature in the direction indicated will result in:<br />Operational freedom will be circumscribed, and major costs will be imposed<br />High exposures to major regulatory risks that will be a permanent feature of such organisations<br />From 3 to 1<br />From 4 to 2<br />Living at the whim of the regulatory network, with no control over your own destiny. Easy to lose your reputation (move to box 3)<br />1 – Masters of their own destinies<br />Excellent compliance reputation<br />2 – Living on the edge<br />From 2 to 1<br />There is little sympathy for repeat offenders in the regulatory network. Don’t expect any leniency for a second offence<br />4 – Living on borrowed time<br />3 – Has to follow others’ rules<br />Poor or indifferent compliance reputation<br />From 4 to 3<br />Little Attention from Management and the Board<br />Major Focus from Management and the Board<br />The power of ethical behaviours<br />
  26. 26. Five dimensions of maturity<br />Attitudinal<br />Process<br />Disaster prone<br />Corporate ethics and behaviours<br />Behaviours under pressure<br />
  27. 27. What you might look at<br />Individuals:<br />Fast Clockspeed Risk Management<br />Risk Management Maturity<br />Ethics and compliance<br />Process Maturity<br />
  28. 28. What you might look at<br />Corporately:<br />Heuristics, Churn, Complexity, Automaticity<br />Training, tone from the top etc<br />Linkages to objectives and clarity of purpose<br />Tools at fingertips<br />
  29. 29. Disaster-prone companies<br />Blame Culture<br />Bad Comms<br />Tight Coupling<br />Top Indicators of a Disaster-Prone Organisation<br />Internally focussed<br />Involuntary Automaticity<br />Poor Information<br />Time<br />Poorly Defined Goals<br />Over Confidence<br />Complexity<br />
  30. 30. The risk intelligent organisation<br />Risk management is about bringing a perspective to the management of complicated issues in complex organisations. It is about the management (and not the avoidance) of risk. It helps to prioritise your work and that of others in a fast moving context with an approach that is better than simple intuition and which facilitates communication between people. It is a style of thought, and is definitely not a paperchase.<br />
  31. 31. An assurance framework<br />Balanced risk<br />Ethics<br />Risk management maturity<br />Foundations for a Risk Management and Assurance Framework<br />
  32. 32. And what does a RMAF need?<br />A senior board level leader (leadership)<br />CEO and NXD sponsorship (business context)<br />Enterprise-wide buy-in (culture)<br />Decent processes (process) <br />Appropriate informational support (technology)<br />Constant consciousness of Risk Management and Assurance performance (awareness)<br />A Walker-style risk committee is of itself insufficient...<br />
  33. 33. Conclusion<br />Will this happen? Not without:<br />Massive campaigns by subject matter experts;<br />Enormous awareness campaigns;<br />The development of a truly influential professional body<br />Global buy-in<br />
  34. 34. And a last word<br />Risk management – a motto:<br />The disruptive intelligence that pierces “perfect-place” arrogance<br />
  35. 35. Corporate governance - stretched to breaking point?<br />Richard Anderson<br />22 September 2009<br />W: http://randerson-assocs.co.uk<br />E: rc.anderson@tiscali.co.uk <br />M: 07703 503196<br />