The Board’s Role in Risk Management & Restructuring a Fraternal
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Two presentations that preceded a workshop on how to structure a board to support policy and strategy priorities of the corporation.
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The Board’s Role in Risk Management & Restructuring a Fraternal
- 1. THE BOARD’S ROLE IN RISK MANAGEMENT Alex Todd presenting to: Toronto Police Widows & Orphans Fund GovernanceCommittee.com
- 2. WHAT IS THE PURPOSE OF CORPORATE GOVERNANCE? GovernanceCommittee.com
- 3. WHY DO WE NEED CORPORATE BOARDS? GovernanceCommittee.com
- 4. WHAT SHOULD CORPORATE BOARDS DO? GovernanceCommittee.com Profit Risk Management Collaboration Leadership Sustainability BUSINESS Golden Rule
- 5. WHAT’S THE DIFFERENCE BETWEEN RISK AND UNCERTAINTY? Risk Management Innovation
- 6. WHAT ARE THE EXPECTED OUTCOMES OF RISK AND UNCERTAINTY?
- 7. HOW CAN BOARDS CREATE VALUE? GovernanceCommittee.comGovernanceCommittee.com Tactical Risk Price gouging Strategic Risk Premium brand Systemic Risk Externalizing risk Profiteering High profit margins Economic bubble Tactical Uncertainty New market Strategic Uncertainty New offering Systemic Uncertainty New business Revenue growth Competitive advantage New value
- 8. HOW MUCH VALUE IS REQUIRED? Global Business/ Societal Innovator* Global Industry Structure Innovator New Business Model Innovator New Product, Service Market Innovator Process Innovator Safety Value Potential Belonging Esteem Self- Actualization Harmony Time Horizon Maturity * Levels of Work labels (Van Clieaf and Kelly, 2005, p. 5) GovernanceCommittee.com
- 9. HOW DO WE KNOW THE BOARD IS ACCEPTING APPROPRIATE RISKS TO CREATE REQUIRED VALUE? GovernanceCommittee.com Ad hoc •Undocumented ; in a state of dynamic change; depends on individual heroics Preliminary •Risk defined in different ways and managed in silos. Process discipline is unlikely to be rigorous. Defined •A common risk assessment / response framework is in place. Organization- wide view of risk is provided to executive leadership. Action plans implemented in response to high priority risks. Integrated •Risk management activities coordinated across business areas. Common risk management tools and processes used where appropriate, with enterprise- wide risk monitoring, measurement and reporting. Alternative responses analyzed with scenario planning. Process metrics in place. Optimized •Risk discussion is embedded in strategic planning, capital allocation, and other processes and in daily decision- making. Early warning system to notify board and management to risks above established thresholds. Source: Measuring the Maturity of Risk Management – Marks on Governance, March 29, 2011
- 10. HOW DO WE KNOW THE BOARD HAS THE CAPACITY TO OPTIMIZE RISK-ADJUSTED VALUE CREATION? Principle 1 Ensuring the Basis for an Effective Corporate Governance Framework Principle 2 The Rights of Shareholders and Key Ownership Functions Principle 3 The Equitable Treatment of Shareholders Principle 4 The Role of Stakeholders in Corporate Governance Principle 5 Disclosure and Transparency Principle 6 The Responsibilities of the Board GovernanceCommittee.com OECD Principles of Corporate Governance
- 12. RESTRUCTURING A FRATERNAL FOR THE 21ST CENTURY AND BEYOND Alex Todd presenting to: Toronto Police Widows & Orphans Fund GovernanceCommittee.com
- 13. WHAT ARE THE PRIMARY CONSIDERATIONS? GovernanceCommittee.com Global Business/ Societal Innovator* Global Industry Structure Innovator New Business Model Innovator New Product, Service Market Innovator Process Innovator Value Potential * Levels of Work labels (Van Clieaf and Kelly, 2005, p. 5)
- 14. HOW DOES THE BOARD ADD VALUE TO MANAGEMENT? GovernanceCommittee.com Global Business/ Societal Innovator* Global Industry Structure Innovator New Business Model Innovator New Product, Service Market Innovator Process Innovator Value Potential * Levels of Work labels (Van Clieaf and Kelly, 2005, p. 5) CEO’s Level of Work Governance Level of Work Cognition Hierarchy Network Market Hierarchy Network Market Time Horizon Board Board
- 15. HOW DOES THE BOARD KNOW IT IS MAKING VALID DECISIONS? GovernanceCommittee.comGovernanceCommittee.com Global Business/ Societal Innovator* Global Industry Structure Innovator New Business Model Innovator New Product, Service Market Innovator Process Innovator Value Potential * Levels of Work labels (Van Clieaf and Kelly, 2005, p. 5) Stakeholders Hierarchy Network Market Hierarchy Network Market
- 16. HOW DOES A BOARD ENSURE THE BUSINESS IS SUSTAINABLE? GovernanceCommittee.comGovernanceCommittee.com Global Business/ Societal Innovator* Global Industry Structure Innovator New Business Model Innovator New Product, Service Market Innovator Process Innovator Value Potential * Levels of Work labels (Van Clieaf and Kelly, 2005, p. 5) Hierarchy Network Market Hierarchy Network Market Empowerment Risk Transference Adaptive Capacity
- 17. HOW DOES THE BOARD ASSESS THE VALUE OF A RISK? GovernanceCommittee.com Strategic Stakeholders Customers Investors Various Various
- 18. HOW CAN WE STRUCTURE THE CORPORATE GOVERNANCE SYSTEM? GovernanceCommittee.com Shareholders / Members Board of Directors Employee s
- 19. HOW CAN WE STRUCTURE THE CORPORATE GOVERNANCE SYSTEM? GovernanceCommittee.com Shareholders / Members Board of Directors Employee s Supervisory Board / Member Council
- 20. HOW CAN WE STRUCTURE THE CORPORATE GOVERNANCE SYSTEM? GovernanceCommittee.com Shareholders / Members Board of Directors Governance Board* Stakeholder Congress* Employee s * Terms from Shann Turnbull’s Network Governance
- 21. HOW CAN WE STRUCTURE THE CORPORATE GOVERNANCE SYSTEM? GovernanceCommittee.com Board of Directors Employee s Senate* Shareholders / Members * Terms from Shann Turnbull’s Network Governance
- 22. HOW CAN WE STRUCTURE THE CORPORATE GOVERNANCE SYSTEM? GovernanceCommittee.com Board of Directors Employee s Senate* (Watchdog Board) Shareholders / Members Stakeholder Congress* * Terms from Shann Turnbull’s Network Governance
- 23. HOW DO THESE CONSIDERATIONS CORRESPOND WITH BEST PRACTICES? GovernanceCommittee.comGovernanceCommittee.com Global Business/ Societal Innovator* Global Industry Structure Innovator New Business Model Innovator New Product, Service Market Innovator Process Innovator Value Potential * Levels of Work labels (Van Clieaf and Kelly, 2005, p. 5) Hierarchy Network Market Hierarchy Network Market Empowerment Risk Transference Stakeholders Cognition OECD Principles: • #1- Ensuring the Basis for an Effective Corporate Governance Framework • #6 - The Responsibilities of the Board OECD Principles: • #4 – The Role of Stakeholders in Corporate Governance • #5 - Disclosure and Transparency OECD Principles: • #2 - The Rights of Shareholders and Key Ownership Functions • #3 - The Equitable Treatment of Shareholders
Editor's Notes
- It is my privilege (maybe your misfortune) of speaking with you three times this weekend. I hope you find the information I share with you to be enlightening and, relevant, and inspiring. In this session, I hope to provide you with added perspective on the essential nature of corporate governance and how boards should view risk. After this morning’s break, I will build on that foundation by introducing key considerations for structuring a board. We will use these criteria in tomorrow’s workshop to define the factors that will confirm or re-shape the structure of the board.
- Abraham Maslow was an American professor of psychology, created Maslow’s Hierarchy of Human Needs, which states that the most basic level of needs must be met before the individual will strongly desire (or focus motivation upon) the secondary or higher level needs. Analogous to the risk considerations of bringing up a child; they evolve with the child’s maturity. For example, when my daughter, Natalie was a toddler we need to have someone take care of her while my wife and I were working. We hired a recently immigrated nanny. One day, we found out she was simply warming up the frozen, uncooked chicken fingers to feed Natalie. Today, Natalie is 18 years old. The risks we are concerned about are very different as she becomes more independent, going away to university and travelling alone with friends. Our role as parents is constantly changing and we are consciously adapting our parenting styles and risk management considerations according to her aspirations and abilities. The same is true for corporations. The base consideration is survival, namely profitability. Once a company is profitable, it can begin to focus on maintaining profitability, namely managing against the risks of losing profitability, or becoming unprofitable. Once it feels sufficiently established, the company can begin to reach out to other parties in its business ecosystem to amplify the impact of its core competencies. Once it becomes accepted as a valued member in its business community, it can begin to seek stature in the form of taking initiatives that build recognition and a following, to become category leaders. And, only the leaders who have overcome their deficiency needs can realistically aspire to realizing their higher-order, being ideals. Corporate boards should therefore focus on the risks appropriate for the company’s level of maturity.
- Risk is measurable.
- Process Innovator: 1 – 2 years New Product, Service Market Innovator: 2 – 5 years New Business Model Innovator: 5 – 10 years Global Industry Structure Innovator: 10 – 20 years Global Business / Societal Innovator: 20 – 50 years
- Level 1: Ad hoc. Undocumented; in a state of dynamic change; depends on individual heroics Level 2: Preliminary. Risk defined in different ways and managed in silos. Process discipline is unlikely to be rigorous. Level 3: Defined. A common risk assessment/response framework is in place. Organization-wide view of risk is provided to executive leadership. Action plans implemented in response to high priority risks. Level 4: Integrated. Risk management activities coordinated across business areas. Common risk management tools and processes used where appropriate, with enterprise-wide risk monitoring, measurement and reporting. Alternative responses analyzed with scenario planning. Process metrics in place. Level 5: Optimized. Risk discussion is embedded in strategic planning, capital allocation, and other processes and in daily decision-making. Early warning system to notify board and management to risks above established thresholds.
- OECD Principles of Corporate Governance I. Ensuring the Basis for an Effective Corporate Governance Framework The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities. II. The Rights of Shareholders and Key Ownership Functions The corporate governance framework should protect and facilitate the exercise of shareholders’ rights. III. The Equitable Treatment of Shareholders The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. IV. The Role of Stakeholders in Corporate Governance The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. V. Disclosure and Transparency The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. VI. The Responsibilities of the Board The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
- In the next session, we will examine the factors that influence the design of the governance framework, and what those might be for a fraternal.
- We left off the last session with some principles that characterize good governance. Now we will look at the factors that will help us make decisions about the corporate governance framework (recommended by the OECD) that might be best suited for the Fund.
- The first factor is the level at which the business is currently operating and level it aspires to achieving (i.e. what do we want to be when we grow up?) Process Innovator: 1 – 2 years New Product, Service Market Innovator: 2 – 5 years New Business Model Innovator: 5 – 10 years Global Industry Structure Innovator: 10 – 20 years Global Business / Societal Innovator: 20 – 50 years
- Each level of work is defined by a longer time horizon. The horizontal dimension represents diversity and incorporating different prespectives. Cognitive capacity deals with the ability of directors to deal with ambiguity – a space where there are no right or wrong answers, just judgment based on many interrelated considerations.
- Similarly, to address risk and uncertainty, for perspective and validation, boards need to tap into multiple sources of information – to gain clarity on issues.
- 150 years ago, Charles wrote about, “the Extinction of less-improved forms.” Darwin’s logic applies to organizations today. Boards need to adopt a deliberate approach to variation-selection-retention. Adaptive Capacity addresses this requirement by explicitly considering the right balance of empowering stakeholders to affect change and tying their own hands with fixed policies and risk appetite.
- However, the board also has to make strategic choices to create value and balance those against the firm’s policy constraints. And the governance structure and practices need to be designed to support those strategies. My research has revealed governance styles to be associated with financial performance. Different governance styles may be more or less appropriate depending on the business strategy and create value in terms of the strategic priorities. It also suggests that the business may want to accept higher risks relative to strategic stakeholders in order to fully realize the potential value of the strategy.