Balancing governance and performance  

14 January 2009:

Today’s businesses face more regulation, increased stakeholder expectations and heightened public scrutiny. The capital markets, shareholders, employees, governments, regulators and even special purpose groups hold companies responsible for the manner in which they conduct business and execute their corporate strategies. As a result, governance, risk management and compliance have never been higher on a board’s list of  priorities and concerns.

The global sub-prime crisis and corporate failures are  mainly the result of risk taking by people who failed to  assess both the opportunity and the possible consequences  of their actions. Ultimately, it is the human element that  leads to success or otherwise. It is therefore critical that there is proper governance in place to enable people to consistently assess circumstances and make the best decisions possible.

Internal controls and transparency are the foundation and bedrock of many global companies, with managers and C-suite executives being personally accountable for their actions, forcing an evaluation of both the potential rewards and pitfalls of risk taking. Some people say these companies are failing to thrive, with regulation making it difficult for them to identify and seize the opportunities they need to exploit  in order to succeed in the market place.  CEOs identified over-regulation as the greatest threat to business growth in a recent PwC survey. In some quarters, there is also the misguided belief that companies have eliminated risk through compliance with regulation.  But in truth risk has not been eliminated, it has been  driven underground. The constant focus on complying  with regulatory requirements has obscured discussions  on risk-taking thresholds. Some companies are neither performing nor conforming. There needs to be a balance  and risk-adjusted business decisions are necessary for a company to create shareholder value.

Steps to balance regulation and risk 

  1. Align performance with compliance. This requires:management to understand and define its risk appetite to enable commercial opportunities to be properly assessed. 
  2. Enhance performance through effective risk-taking, link risk appetite to business strategy and daily operations,  so that management can choose the best way to operate without compromising commercial performance. 
  3. Embed the defined risk appetite throughout the company so that risk responses are part of everyday processes and procedures. This will enable consistent and systematic management of risks, ie, calculated risk taking. 
  4. Monitor and report the key risk indicators that have an impact on business performance targets to the board. 

Questions for board members and C-suite executives

 

  • Do you have the balance of skills, knowledge and experience in your board, necessary to enable each and every board member to contribute critically? 
  • Do all board members prepare well, listen, stay actively engaged, and provide valuable input within their area of expertise? Are they, therefore, effective as a part of the company’s senior leadership team?
  • Can you clearly articulate the company’s vision and strategy, and do you understand the major risks facing the company, and how these risks are being managed and reported to you on a regular basis?
  • Does the board strike a balance between being supportive and challenging? One extreme is the board getting in management’s way and the other is a board failing to exercise its authority and active oversight over management. A board has a continual balancing act, needing to have its arms around the company without getting its fingers into it.
  • Does the board get sufficient information from management, not just on financial reporting matters  but also accurate and timely business performance information with performance measures and key  risk indicators? 

Good governance is about improving the quality of management at all levels of the company, and about understanding  and managing risk and making better risk-based business decisions. By improving their governance, businesses will be better run and better able to assess business opportunities quickly. This will help them gain the competitive advantage and increase shareholder value over time. As Madeleine Albright, the former US secretary of state  said: ‘In examining the risks (in US foreign policy), it is important to examine the consequences of failing to act...  our purpose should not be to eliminate risk, which is impossible, but to manage it, which we must do, if we  are to prosper.’


Gautam Banerjee is executive chairman Singapore and chief operating officer east cluster at PwC.

SOurce: PwC

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