Boards’ focus in the economic crisis post-mortem should be on returning to “real” governance

As the global financial crisis faded, many management teams and their decision-making abilities were placed firmly under the spotlight. But the focus has since moved to the Board level, kick-starting a post-mortem on Board structures, composition and responsibilities.

However, this should no longer be a debate around risk management, according to John Farrell, an advisory partner and member of KPMG’s Risk & Compliance Think Tank in the US.

“Perhaps this should now be a debate around governance effectiveness in its full, unabridged format, not the foreshortened ‘tick in the box’ format which seemingly became the fashion in the pre-economic crisis days,” he says.

This latest round of risk-related finger pointing should signal a period of significant introspection and assessment on the behalf of Boards the world over, and Farrell believes it will force them to think very carefully about what exactly the role of the Board is when it comes to risk management and whether they have the requisite skills to fulfill this role.

Risk management doesn’t suddenly need Board-level decision making and tinkering just because of the events of the past two years, he argues.

“To use a domestic analogy, if there is a problem with your house’s plumbing, by all means question the suitability of the plumbing or the quality of your plumber. But whatever you do, don’t think you can turn yourself into a plumber and fix it yourself. Know and respect your limitations and boundaries; that would be my message to any Board,” he advises.

However, that’s not to say there isn’t work to be done at Board level, Farrell adds. “What needs to happen here is a return to ‘proper’ governance,” he explains.

“Governance is so much more than the occasional compilation of a report which superficially shows that cursory checks and balances have been implemented, with little or no real thinking beyond that.”

Proper governance is about having appropriate people in place, with appropriate skill sets, overseeing appropriate checks and balances, he says.

“This is actually a whole process in itself. The fact that we are where we are suggests that previous efforts in this area were not up to the job,” says Farrell.

“Top of the current governance ‘to do’ list will be to properly educate Board members in some of the finer nuances of risk. We must dispel the myth that Board members already know everything they need to – and provide them with some more contemporary education.”

Board-level attention must also be given to the role of the most senior risk executive, as Farrell believes this role will continue to grow in importance, acting as the Board’s eyes and ears on risk issues.

“This person’s very presence should prompt further independent thinking and augment the risk processes. Plus, the [chief risk officers] of today are likely to become the much needed risk experts on the Boards of tomorrow, thus making them incredibly important players in our new risk-conscious world,” Farrell asserts.

“On that point, Boards really do need to have a close look at their own skills and competencies around risk assessment and management. If they are brutally honest, they would probably admit that these are areas in which weaknesses may often be found – exposing skill-set deficiencies which need to be addressed.”

Encouragingly, Farrell is already seeing Boards renewing or refreshing their members and their oversight objectives and governance structures. However, what they should resist is the temptation to tinker with the finer detail of corporate risk management just for the sake of it, he says.

“This is about the governance umbrella which rests above that. Right now, the best directors should be taking a decidedly thoughtful and considered approach to the rigorous overview processes which they must ensure are in place to monitor the risk related activities at management level,” Farrell says.

“There is a definite distinction to be made between risk management and corporate governance. At this delicate time, I hope that people do not mistake one for the other.”