The document discusses cultural risk and how boards can better manage it. It notes that boards are responsible for the long-term health of businesses but many companies have failed due to issues with senior executive behaviors like lying about finances or taking on excessive risk. To address this, the document suggests that boards more actively observe executives, set up protected whistleblower processes, conduct regular 360 reviews of executives, and ensure the HR function has a direct line to the board chair on ethics issues. This would help boards better understand and manage cultural risks posed by executives' conduct.

1. Cultural Risk
John Colvin
November 2013

2. Cultural Risk
• Boards are responsible for the long term
health, sustainability and performance
of the business
• The nature of business is to take on and
manage risk at a level that is appropriate
for each business
• Boards and management apply various
processes to manage a variety of risks
that impact businesses
• Reporting fair and accurate
financial account to the market –
audit firms ensure this and also
detect fraud
• Every major M&A transaction has
a myriad of advisors doing due
diligence on the deal
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• During the GFC, CFO’s had a critical role
in managing liquidity risk – this was the
most important focus of many boards
• General Counsel are employed to make
sure legal risk is managed across the
business
• CRO’s are employed by many major
companies today to help manage a
variety of risks in conjunction with CFO’s
and GC’s
• Terrorist risk
• Hacking into computer systems
• Political risk
• Business continuity risks
• Sovereign risk – paying bribes in
third world countries
• What about cultural risk?

3. Cultural Risk
• Lots of companies have failed because of a
breakdown in the behaviours of board
members and senior executives
• Lying about the true state of the
business’s financial affairs
• Taking on a level of risk that the business
could not absorb – and failing to spot that
and or deal with it
• Most of the banks that failed were
guilty of this – and they took on
excessive risk partly because of the
way bonus schemes were structured
• Lots of companies have suffered significant
reputational damage because senior
executives have not lived the code of conduct
values that have been espoused by the
company
• Boards have not been aware of these
behaviours, or
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• Boards have been aware of these behaviours
and have chosen to ignore them
• In this example, the board has not done its
job, and serious questions need to be asked
about the ongoing composition of such a
board
• Indeed many corporate failures can be laid
squarely at the feet of boards that simply
didn’t do their job
• The question is - how can boards be fully
informed about the behaviours of senior
executives of the business that are outside the
company’s code of ethics and are potential
threats to brand of the business
• What is certain is the following – senior
executives in every company on the planet are
watched constantly by people in the business –
and when they do something wrong, the whole
business will know about it almost
instantaneously
• How do boards tap into this knowledge

4. Cultural Risk
• Board members are observing senior executives in a variety of forums and have the opportunity
to test the integrity of leaders in a variety of ways
• Active board members are out in the business talking to people throughout the business – and
they have the opportunity to “smell” issues – even when most people are reluctant to blow the
whistle on their senior leaders
• Some companies set up independent processes where people can communicate breaches in a
protected way
• Some companies use outside consultants to do 360 degree assessments on all key executives on
a regular basis
• The HR function also needs to play a key role here – and should have a direct line into the
chairman on matters of ethics that could have serious reputational impacts for the business
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5. Contact Details
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John Colvin
Principal
E: jcolvin@johncolvin.com.au
M: +61 409 183 174
S: +61 2 8823 3485
Level 36, Governor Phillip Tower
1 Farrer Place, Sydney NSW 2000, Australia
Sandra Heinig
Senior Associate
E: sh@johncolvin.com.au
M: +61 416 731 897
S: +61 2 8823 3485
D: +61 2 8823 3487
Level 36, Governor Phillip Tower
1 Farrer Place, Sydney NSW 2000, Australia
Sian O’Shaughnessy
Research Analyst
E: sian@johncolvin.com.au
D: +61 2 8823 3485
Level 36, Governor Phillip Tower
1 Farrer Place, Sydney NSW 2000, Australia