Saturday, January 13, 2007

What Should Boards Worry About?

According to an article in the January/February 2007 issue of Corporate Board Member entitled "Is Your Company Prepared for Bird Flu?" (here), boards should be anticipating and preparing for the potential impact of a bird flu pandemic. The article quotes former Secretary of Health and Human Services Tommy Thompson as saying that smart boards are preparing now, by reviewing contingency plans and establishing lines of authority in the event company leadership is stricken by the bird flu. The article does acknowledge that "[s]ome directors privately conceded that little attention is being paid to the specific challenges posed by a pandemic."

As someone who has spend the better part of my professional career thinking and worrying about board focus and function, I have to admit that under the current circumstances I have a hard time seeing bird flu as belonging anywhere the top of the list of things boards at most companies are or ought to be worrying about. Along those lines, the article does contain the following:

Damian Brew, a managing director with Marsh’s professional-liability practice, says the risk of a pandemic pales against other exposures, including oil-price fluctuations, and adds that underwriters of directors’ and officers’ liability coverage are more concerned with options backdating and CEO pay disclosure. "Boards have a limited amount of time, and there are financial issues that should take priority over something that’s not likely to happen," he says.
I agree with these statements. But the article goes on assert that boards that fail to plan for a bird flu pandemic "could find themselves targeted for dereliction of duty." The article quotes one attorney as saying that Sarbanes-Oxley requires boards to take into account almost every conceivable problem that could put the company in jeopardy. The article quote another attorney as saying that "If the business has trouble functioning, you could have shareholders saying ‘Why wasn’t there a plan in place?’ You aren’t going to be able to say you hadn’t heard about it."

Undoubtedly boards could allocate a portion of their scarce time together to worry about bird flu. They could also spend time worrying about global warming, land use policy, plate tectonics and its implication for seismic and volcanic activity, and the hole in the ozone layer. There are a limitless number of things that boards conceivably could spend their time on. At some point though, boards have to be focused on whether the company is on the right track, has the right management in place, or needs to make strategic changes. There undoubtedly are risks in every company’s environment, and boards should of course take reasonable steps to ensure that the company has a flexible catastrophe plan in place and that the plan adequately addresses the specific risks to which the particular company may most likely be prone. There are many threats facing companies today. Boards are doing their job best if they focus on the threats and opportunities that matter most immediately for their company.

2 Comments:

Blogger julie said...

Kevin is so right!
I wish I had a dollar for every article on the latest buzz-word (buzz problem?) that boards should worry about. Or fifty cents for every list of twenty questions a board should ask. The authors of these pieces have obviously never been board members and don't have a clue about how we operate.
In some great research from Australia Neil Buckland surveyed real company directors on what risks they thought were most likely to impact their companies. His initiative revealed 16 categories of risk which, when read by, or to, company directors got a real recognition as things that are worried about and that lead to a discussion of what to do to make the worry lead to action that reduces the risks.
I have followed up on that research and have interviewed 241 company directors on the largest risk facing their company. Unsurprisingly the number one risk was financial but (sad news for the audit community) it was not financial statement misstatement or fraud, but simple cash flow risk that kept most directors awake at night. Fixing this is a question of strengthening the business model not improving reporting or ticking a box in the board room.
Directors the world over are focused (as they should be) on running businesses properly and generating wealth in an environmentally and socially acceptable manner. If bird flu is important for the business they will focus on that. If not, they will focus on what is important. They will know what is important because they have been selected for their business judgement and because they can evaluate such things. They have usually demonstrated success in the past.
They may get it wrong occasionally (all boards, when they are being honest, have a decision they regret in their history) but it rarely is so wrong that they can't fix it before the company goes to the wall. And, even if their oversight does kill the company, that is what corporate enterprise is all about; taking the right risks, managing them and occasionally failing to manage them. If there is no risk there is no reward!
Anyone who suggests that every risk should be a board focus is either totally inexperienced in the board room or hoping to sell the board something.

8:21 PM  
Blogger julie said...

Kevin is so right!
I wish I had a dollar for every article on the latest buzz-word (buzz problem?) that boards should worry about. Or fifty cents for every list of twenty questions a board should ask. The authors of these pieces have obviously never been board members and don't have a clue about how we operate.
In some great research from Australia Neil Buckland surveyed real company directors on what risks they thought were most likely to impact their companies. His initiative revealed 16 categories of risk which, when read by, or to, company directors got a real recognition as things that are worried about and that lead to a discussion of what to do to make the worry lead to action that reduces the risks.
I have followed up on that research and have interviewed 241 company directors on the largest risk facing their company. Unsurprisingly the number one risk was financial but (sad news for the audit community) it was not financial statement misstatement or fraud, but simple cash flow risk that kept most directors awake at night. Fixing this is a question of strengthening the business model not improving reporting or ticking a box in the board room.
Directors the world over are focused (as they should be) on running businesses properly and generating wealth in an environmentally and socially acceptable manner. If bird flu is important for the business they will focus on that. If not, they will focus on what is important. They will know what is important because they have been selected for their business judgement and because they can evaluate such things. They have usually demonstrated success in the past.
They may get it wrong occasionally (all boards, when they are being honest, have a decision they regret in their history) but it rarely is so wrong that they can't fix it before the company goes to the wall. And, even if their oversight does kill the company, that is what corporate enterprise is all about; taking the right risks, managing them and occasionally failing to manage them. If there is no risk there is no reward!
Anyone who suggests that every risk should be a board focus is either totally inexperienced in the board room or hoping to sell the board something.

8:21 PM  

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