- IMD Business School

Board at Risk

31 min.
March 2016

Boards are at the forefront of risks. It is at the heart of the board’s mission to assess and supervise risks, as well as to steer the organization towards major opportunities. This requires board members to be proficient in risk knowledge, which spans from techniques to philosophy.

Beyond classical risk thinking, the dramatic economic, technological and social changes we are witnessing globally has led boards to explore new combinations of social conservatism, value-based leadership and disruptive entrepreneurship. In the process, boards are venturing into uncharted waters and encountering new types of risk.

Concluding the March 2016 instalment in TMS Academy’s Directors-in-Dialogue series was a panel discussion on what boards can do to anticipate and manage risk. In particular, the discussion zoomed in on the issue of reconciling today’s renewed focus on governance and compliance on the one hand with an organization’s capabilities in entrepreneurship and innovation on the other. The nature and implications of disruptive change were explored at length, as were the broader, underlying trends related to business and its role in society. The panel included Erich Hunziker, Chairman of BB Biotech AG; Tan Suee Chieh, Group CEO of NTUC Enterprise Co-operative Limited; and Teo Swee Lian, Independent Director at Singapore Telecommunications Limited.

Classical Risk Thinking

Risk thinking used to be reserved for the back office and risk reports used to put board members to sleep. Not anymore. The confusion and the impact of risk has increased dramatically, and those companies that have developed special skills, flexibility and acumen, have gained a terrific advantage.

We find that best risk practices are aligned along the following four dimensions:

  1. Physical health check – What are we exposed to?
  2. Mental health check – Are we capturing the right problems?
  3. Strategic check – Are we doing the right moves?
  4. Governance check – Are we well structured for continued awareness?

Too many boards limit board thinking to the first dimension only. Slippage on any one of the four dimensions may doom a company to failure or underperformance. When times were good, underperformance was often acceptable because everybody was doing well. In today’s tough times, underperformance is no longer acceptable. Being unhealthy during an epidemic is not the same as being unhealthy during good times. Money has become scarce, the generosity of fund providers is waning and the competition is becoming tougher. We all know that some will do particularly well.

Fortunes are also made during these times of survival of the fittest. In the following paragraphs, we discuss, in more detail, the four dimensions critical to maintaining adequate risk fitness. It is important that corporations focus on all four dimensions to ensure success. If a company does not balance its focus across all four, then they can jeopardize their risk fitness.

The Physical Health Check: Technical Risks

First and foremost, a physical health check is necessary. By now, every firm should be aware of where it hurts. Ideally, they will also be aware of where its major clients and suppliers are feeling pain.

We are puzzled by companies that are almost surprised when they encounter difficulties through volatility of well-known risky quantities such as interest rates, currencies, oil and other commodity prices. The high variance of these has long been demonstrated and the last 20 to 40 years only inform us of the incredible uncertainty that we can rely on. In today’s world, nothing should surprise us anymore. We need to open our minds to new risks, to all risks, and somehow prepare ourselves for them. While preparation can never fully prepare an organization for the actual risks, it still helps frame the mind, the organization and the network so that those prepared can react faster, better and stronger. There are immediate lessons on risks that can be taken from financial markets recent evolution.

Lesson 1: There is no single best way to measure risk

We have to say that techniques have value. Financial models look for simple solutions such as volatility or standard deviation to match with the real world in an effort to eliminate risk. Are these measures working?

One major issue with these measures is the linkage of risks. In extreme situations, risk linkages are very different. Copulas, one of the most sophisticated risk tools, is a mathematical function that models how risks link. However, copulas are highly unstable. At best, these measures give a view, often biased, of risk under certain framework.

Using these tools poses a great challenge, as they might fail. The financial market does not equate to physics. In reality, when you take action, your behavior may alter the risk profile and start a feedback loop that invalidates your reasoning. Professional managers often fail when the framework does not work.

What are we to do when risk measures do not work? Having several technical frameworks to think about risk and developing a risk culture are key. For non-normal distribution, we have technically an infinite number of risk measures that work. When the world evolves toward non-normal set up, we have to consider many risk measures.

Lesson 2: Irrationality can drive risks and diversification itself is at risk

Market irrationality has been demonstrated to hold for long times, sometimes beyond a decade. Bubbles can be long lasting. This threatens rational risk methods. It is commonly considered that if one cannot measure risk, it is best to eliminate risks through diversification. Stated simply, diversification is based on correlations. However, correlation measures rarely work.

When looking at risk, we tend to view it as cyclical. Risk does not need to come back and diversification might not work. We have to integrate the emotional and speculative sides into analysis. The reality is that we do not need a physical correlation; it could be the result of a mental view or due to psychological linkage. Stability of the links is then highly suspicious.

Lesson 3: Risk picking is a major risk by itself. Not picking risks is picking risks

Major mistakes at the top of the bank have been a bigger source of failure than any other Basel risk. The UBS case is an illustration of the behavior risk of arrogance. UBS’s ambition was to be the leading investment bank in the world. UBS’s board neglected a major risk, through its lack of knowledge; it was unaware of how exposed to the CDO market it was, despite its bringing 40% of the bank’s profits. There was also the strategic risk due to its aspiration to be the number one investment bank. This aspiration reinforced its decision to stay in the market and to weather the storm.

Lesson 4: Risk does not have a shape and renews itself all the time

Markets evolve; risks evolve. New products often entail untested risk. In 2012, JP Morgan Chase lost $7 billion, “a tempest in a teapot” as Jamie Dimon put it. A trader in London, “the London whale,” who was hedging the balance sheet of the bank, lost $7 billion on a simple derivative CDX.NA.IG.9. The trade was supposed to hedge the default risk of the loans for the large corporations. Apparently, the hedging became speculation. On the board’s risk committee, there were three independent directors. None of them had banking or risk experience- one was the director of a museum. Boards can be the new risk of organizations, through their lack of knowledge, lack of commitment, or lack of preparation.
Hence the justified public consideration for boards as a risk factor.

As threats and opportunities may come from many different sources, risks are converging, interconnecting and amplifying complexity. For example, in oil and gas, the drop in oil prices has created ripple effects that go much beyond revenues and impact the value chain much beyond the organization itself, touching suppliers, countries, clients and affecting geopolitics. Thus, we cannot rely on our old estimates. Instead, we must put the plan on the drawing board again. For this, we suggest the following four-step process for technical risk mastery:

  1. Identify your Risks
    Identifying risks is too important be left to a bottom up approach. Your employees – whether it is a single person or a single department – will often miss the big picture. The view of the top level of management must be fed by bottom up of reporting (with open lines of communication in the corporation).One well-known company, when it started risk reporting to their board, decided to conduct a large survey, which involved most employees. It then compiled the data and reported its findings to the board. The major risk – i.e. the one that was consistently rated as having high impact on each and every employee – was VAT compliance, which was hardly a major corporate risk. Thus, the compilation of individual employees’ views of major risk, without the benefit of top-management’s view, may not result in a good view of risk for the whole corporation. However, taking the bottom up approach and listening to different viewpoints is still important as the following example illustrates. In April 2007, a trader at UBS reported difficulties on subprime structured products to his boss. This could have been a strong signal to top UBS management. The chairman’s office did not see the signal, closed the trader’s outfit and integrated it in the UBS Investment Bank with little proper risk identification. And we all know how that ended.Old ways of risk identification also need to be revisited. For example, bank deposits may have looked stable in the past. But, rethinking that exposure may be essential in today’s uncertain world.
  2. Assess your Risk
    Once major risks have been identified, it is crucial to assess them to gain a better understanding of these risks. Even non-quantifiable risks can be assessed. The assessment does not need to be exact, as risks cannot be fully assessed. Otherwise, they would not be risks. The role of the assessment is not to be successful in the assessment, but rather, to grow awareness and develop a common language that can then be used to communicate and prepare for the risk.Many tools are available for assessment. The use of multiple tools is recommended for large investments or in sensitive areas. Sensitivity analyses (tornado diagrams or spider diagrams), scenarios and Monte-Carlo simulations are all useful tools, with different granularity and different ease of use. A verbal assessment done by those closest to risk is also useful. The goal is not to increase paperwork; instead, the role is to increase awareness, and thus, we welcome all tools that help us get closer to a true awareness of the potential impact of the identified risks. No one technique can be right and thus the compact use of multiple tools is a necessity for proficient boards.
  3. Manage your Risks
    If risks are present, isn’t it best to eliminate them? If this is the case, then managing risks may become fundamental. Here, we would like to highlight that being too conservative is an issue. Your investors expect you to take risks. You should only eliminate those risks that are not core, and then risk management should be conducted with full transparency. For example, gold mines hedging gold prices without full disclosure may be misleading investors that have chosen them for their gold price exposure. We find that the best risks to manage are those that create more downside than upside. Airlines’ exposure to fuel costs may be a good example. An airline has more to lose when oil prices are very high than it does with when they are very low. Southwest’s remarkable move to hedge fuel costs at about $25 per barrel from 2004 to 2009 has been the major reason of its continued profitability while all other US airlines were in the red. BMW, on the other hand, stopped its euro/$ hedges too early thus losing €1.5 billion on these currencies. This shows that some are viewing hedges as a timing issue. If CFOs or treasurers were so good at timing, they would become traders, make more money and would be finished working by 5 p.m. Thus, for any risk management program, two questions should be asked: (1) Does it truly create value for our shareholders? Many risk management programs create comfort for managers rather than add value to the business. (2) Does it depend on timing? Any management program that depends on timing is a speculative program. You then have to ask the question: are you good at speculation?
  4. Structure your Risks
    Finally, the structuring of risks – or sharing of risks – has had dramatic success in recent times. This entails identifying different risk exposures in a company’s network of relationships (investors, clients, suppliers, etc.) and agreeing to share the risks with those least sensitive to them (i.e. those most able to overcome the risks), to create value for all. This principle has often been used in joint ventures and acquisitions (with earn outs) as well as in commercial contracts. For example, Syngenta, one of the largest producers of fertilizers and pesticides in the world, has boosted its Latin American business by providing farmers with yield guarantees. The high risk farmers (who typically go bankrupt in bad times) are able to pass on some of their risks to Syngenta. Syngenta, in turn, can direct them towards a commodity trader. In this way, Syngenta obtains more business, with less credit risk (since chances are that the “insured” farmers are more likely to pay) and at typically higher prices for its products. Syngenta’s lessons from Latin America can now be levered in the US and in Eastern Europe and Russia. In today’s turmoil, with parties so sensitive to risk, smart risk structuring can make a big difference.

Once the physical check is complete, it is time to address the mental check, the strategic check and governance check. We have kept these briefer, but it is important to note that deep investigation in these areas can also create much value.

The Mental Health Check: Behaviours

The question we ask is: How is your attitude? We all know that market sentiments have taken many by surprise; the reality is that such sentiments are well-known factors of risk nowadays. Markets are somewhat crazy, but markets may be just a reflexion of ourselves. Are we much better than they are? And, thus, this raises the question: Can we look at our failings?

We now have good views of typical behavioural risks that arise. As a checklist, senior management should test itself on the following different dimensions – a classical roster of seven behavioural risks:

  1. Herd behavior: Are you following the herd? Many prefer to have company when they are wrong rather than be wrong alone. This is particularly true of management levels where all cannot be fired at once. And, thus, it is typically much safer to be wrong with others. Unfortunately, this type of behavior has certainly contributed to getting us into today’s mess. Thus, it is useful to revisit past decisions, successful ones as well as failures, and see where you stand, you as an individual, you and your team, you and your company.
  2. Optimism: When asked if they are counted in the top 1% of the richest in America, a full 15% of the US population answers yes. Are you a better driver than average? A better manager than average? Is your company particularly insulated in the crisis? A reality check may be warranted.
  3. Over-confidence: The best professionals acknowledge that predicting oil prices is close to impossible. The same can be said for predicting currencies or predicting markets. What about you? Most of us have views and many of us start believing our own views. Thus, the question is: do you truly know how little you know? Not surprisingly, most of the senior managers with whom we have administered this test, fail it. They are leaders, and one does not lead others with self-doubt. Unfortunately, in difficult times, taking some time for self-doubt is important.
  4. Belief perseverance: Have you held the same views for a long time, despite the large shifts in the world? If so, are they steady or are they rigid? Most of us do not adapt fast enough; we do not have the flexibility. While humans have been remarkably adaptive as a species, we are still being pushed around. How fast can you evolve to the new environment we are facing? Do you still expect the old times to come back? If so, it’s time for a reality check.
  5. Hindsight bias: Are you the type of person who tends to think: “I told you so. I knew it.” If so, are you looking back in time truthfully, or are you second-guessing how you truly would have reacted from today’s situation, rather than from the past.
  6. Anchoring: Are you holding on to your stocks because they used to be worth three times more and, thus, it would be a loss to sell them now? Is your view of your assets linked to what they were a few years ago?
  7. Representativeness: Finally, do you believe that markets will come back up because they always do? Do you believe the cycle is four to five years as it traditionally has been? Are you looking for some pattern to repeat itself? Sometimes true, life-altering changes happen, e.g. the Russian revolution or nuclear development, and we have to accept that this is a possibility. Some events have changed the world in such a way that past patterns do not come back.

All of these behavioural patterns act as liabilities against your awareness of risks. Just checking where you stand, where your team stands and where your organization stands will help you figure out the reality.

Strategic Check

Strategic failure and blind spots can also pose serious problems for boards. For example, Kodak was the inventor of digital photography in 1975, but was unable to find a way to adapt its business model to take advantage of the opportunity. Kodak went bankrupt in 2012.

As major shifts happen, strategies need to be revisited. Holding on to past strategies does not make sense. But developing new strategies, or adjusting passively to the markets, is not much better. While strategic thinking is complex, and the building of strategies requires much work, from client and competitor awareness to abilities to build on one’s core distinctiveness, there are ways to test overall strategic choices for their pertinence. And, thus, the question we ask is simple: Is your strategy shift a smart move?

A. Typical strategies: There are a limited number of typical strategies. Using Paul Strebel’s “Smart Big Moves” framework, all big moves can be classified into five categories:
  1. Going for growth, which happens when you roll out a product for example.
  2. Restoring profitability, as when a company needs restructuring.
  3. Finding a new game, when a company attempts to reinvent oneself
  4. Relaunching growth, when a company levers its distinctiveness to differentiate itself from competitors or substitutes
  5. Realignment, when a company realigns its value proposition to its customers through a revised value chain, with capability development, for example with process efficiency.
B. Smart or stupid? Once the move is well identified (and this can be done for clients and suppliers as well), one needs to question it. Is the strategy smart? Overall, smart moves will:
  1. Lever the company’s distinctiveness, i.e. its objectives, values, culture and capabilities, in terms of skills and resources, and its resources, in terms of assets, clients and partners.
  2. Not fall into psychological traps: such as we can beat the competition no matter what we do, we know what the customer needs or we never admit defeat; we always move forward.
  3. Address significant market opportunities.

First, assess the strategy and the move considered. Then confront to competitors’ moves, customers’ needs and value chain opportunities). Then use change management techniques together with quality leadership, align the organization towards the newly defined goal and consistently drive success. Of course, even smart strategies can fail: the environment can change, competitors can move unexpectedly, etc. Then comes the need to possibly align again, revisiting all previous risks. High quality leaders will recognize this. But, of course, mistakes can also be made at the leadership level. This takes us to our next and last level of risk, governance.

Governance Check

Leaders fail. It happens. It is not the worst problem by itself. Leaders are human and while the selection process may be rigorous, good leaders in some circumstances may prove to be bad leaders in others. The problem comes when a failing leader is in place for too long. This is where governance risk happens. In order to control for that risk, governance rules need to apply. Not to constrain but simply as a matter of fact, to make sure that leadership failure, when it happens, does not become too costly to the organization.

There are some well-known governance risk factors that can be self-checked in any organization. In particular, classic risk factors include:

  1. A poorly defined role of the board
  2. A domineering CEO (or chairman)
  3. An inefficient board: size, independence, personalities, the role of outsiders, the structure of the board committees, all matter
  4. Conflicts of interest at the board or senior management level
  5. Compensation schemes that have strong side effects
  6. A board that is not well aligned to its mission (whether supervisory, strategic, connecting or hands-on).
  7. A poor governance culture (values, understanding and dynamics)

Good governance should be maintained even when things go well. Actually, the best time to make improvements is when things are going well because it is usually not as hectic as when things are not going well. Once the structures are in place for continued corporate awareness, good governance is ensured.

Today’s Risks: Disruption is the word

Today’s world is going through a stage of social transformation. Chief among the buzzwords heard in the boardroom are terms like “disruption”, “disruptive”, “disruptor”. Organizations are coming to terms with the notion that expecting the future to bring more of the same, and extrapolating directly from the past when shaping and preparing for the future, may be the riskiest behaviour of all. They are also aware that disruption, innovative challenge and creative destruction are rarely initiated or necessitated by the centre or “the core”. Nearly always, these changes come from what they have traditionally regarded as the periphery of their universe.

On the socioeconomic front, young people are the ones who have internalized to an unprecedented degree the logic, necessity and value of disruptive change. In a stark departure from the past, theirs is a generation that is no longer virtually guaranteed a rise in living standards, let alone one that is achievable by seeking the security that once came with a lifetime spent in a corporate job. Therefore it is not surprising that the millennials have been on the vanguard of blurring many familiar lines in consumer habits, services provisioning, content creation and consumption, and organizational behaviour.

The inevitable question, and one that has become pressing for many boards, is: how to reconcile this unstoppable process of breaking old rules and paradigms with the expectation, heightened in the aftermath of the 2008 crisis, of companies subjecting themselves to tighter governance and more stringent regulatory standards? And furthermore, how to make boardroom diversity – of generations but also perspectives and attitudes – a truly strategic, as opposed to general, principle of board composition?

Drawing on his experience in successfully transitioning from a CXO role with a global multinational corporation to heading a start-up company, Erich Hunziker voiced his encouragement for companies to reinvent themselves on a daily basis, almost as if they didn’t possess a past at all. Illustrating how a board can harness the creative energy and imagination of the company’s young executives, he recommended assembling a task force of high-potential workers aged 35 and below; encouraging them to visualize the market in which the company will operate in five or ten years’ time; articulating what type of an organization, in their view, is likely to be a winner in this newly-evolved market landscape; comparing this projection with where the company stands today; and analysing and discussing the gap. Although it may be tempting to outsource this exercise to a team of external consultants, this would very likely defeat its purpose. Granted, a CEO may be nervous initially about the outcomes and the broader ramifications. But evidence shows that most CEOs will eventually not only support the initiative but in fact actively use it to generate new ideas for boosting the firm’s competitiveness and long-term business prospects.

It is simple: If we just wait, the future will arrive and brush us aside.”

Boards’ guidance is also essential in designing the best framework for experimenting with and materializing disruptive innovation. Audience members concurred that in highly-regulated industries where an organization’s conduct is closely scrutinized by regulators, it can be difficult tread on grey areas – no matter how noble the spirit of intrapreneurship and of anticipating disruptions. Discussion pointed out that useful as it is to embrace new ways of thinking, at the end of the day it may often be more practical to incubate outside the organization. But this should not stop companies, including large enterprises operating in strategic sectors, from finding ways to plant modest amounts of seed money, ideally at some remove from the corporate centre. That may be a great way of eliciting new thought and perspectives on trends that are soon bound to become critical for the organization’s profitability and well-being, such as overcoming long-standing barriers and bringing innovative products and services across international borders. In addition, securing the presence of a board member in these sessions can be a good way of exerting pressure, albeit subtly and indirectly, on the board itself.

Is governance killing entrepreneurship?

The competing objectives of regulation and entrepreneurship may be a source of tension in the boardroom. This is something that quality boards must accept. The dominant discourse over the past decade may have shifted to regulation, compliance and risk aversion, but entrepreneurship never ceased to require passion, dedication – and indeed, a lot of risk. Against this background, what this means is that a board member’s ideal mindset can be described as that of an “optimistic paranoiac” – steadfast in furthering the company’s aspirations yet constantly preparing for new threats.

I haven’t seen a board that was highly successful in the absence of dissent. There must be creative tension and rumblings on dissent surrounding major board decisions.”

There are many facets of a board member’s previous experience that will stand him or her in good stead when approaching the new dynamics of today’s boardroom. Teo Swee Lian related her journey as a former industry regulator joining the board of a private company in her new capacity as independent director. She believed that her years in a regulatory role had equipped her with quite a few of the ‘softer’ attributes that are necessary to maintain a diplomatic but constructive relationship with management; to know how and when to ask probing questions, and to persevere, with a healthy dose of scepticism, in the probing, especially when decisions and situations are presented as containing no risk or low risk.

As an independent, you have a view of things you can draw on when making decisions. You bring a perspective; you add value. In many situations, this gives you the ability to connect the dots for management.”

One of the lessons which was served up by the recent crisis, and which has direct repercussions for how boards recruit directors, has to do with the purportedly rational and quantifiable nature of markets. As Tan Suee Chieh observed, numbers clearly aren’t everything. As immensely useful as quantitative and mathematical models are, particularly for an industry player that has traditionally been active in the insurance space, many of the qualities and attributes a director should display will by definition transcend the bounds of statistics and of mathematical understanding. In the post-crisis business environment, these are precisely the qualities that have come to the fore: Caring, wisdom, all-round knowledge, the ability to penetrate the exterior and go to the heart of a matter.

In order to nurture creative, entrepreneurial and at times disruptive thinking, board committees must likewise learn to anticipate, rather than stick to old and established formal roles as sign-off bodies. Similarly, the board chairman has a role to play in structuring the various committees and making sure that individuals feel comfortable voicing their ideas and observations without undue self-censorship or running the risk of being branded as rabble-rousers. Of course, and partly reflecting cultural traits and sensitivities rooted in specific national as well as organizational contexts, many companies currently do not address the chairman’s performance as directly as they should. The possibility of rotating the chairman more often should not be seen as taboo; in fact, in specific sets of circumstances, chairman evaluation should expressly allow for chairman removal.

Business and society: business in society

The dual imperatives of strengthening governance and embracing disruptive change have raised fundamental questions about the role of business in society, and exposed the limitations of some of the 20th century’s most influential management theories. Yesterday’s business mantras like “maximizing the return to shareholders” have come to be seen as embodying a focus on the short term, and a limited view of the many and complex stakeholders who are affected by business activity. For too many market players in the pre-crisis world, the key motivation became to manipulate the market in order to scoop up the rewards. At present, in keeping with the prevalent spirit of soul searching and going “back to basics”, simple words such as “good” have been bandied about more than ever in before in modern-day executives’ memory: Building on good foundations; starting with good intentions; pursuing the common good, etc.

The back-to-basics approach has also inspired a number of leading organizations to revisit, re-examine and reinterpret their historical roots in pursuit of new relevance. The story of NTUC, for instance, has been largely synonymous with the story of modern independent Singapore – both dating their origin back to the 1960s. Neither the phenomenal growth in the nation’s wealth over the past five decades nor the country’s transformation into one of the world’s most advanced economies have dampened NTUC’s tireless quest for relevance. Staying true to its ethos of social enterprise has been the main principle to guide the organization and the 62 affiliated unions under its umbrella, even as the landscape of social services delivery evolves and new competitors continue to emerge. At first glance, the social need in 2016 may have different characteristics compared with 1969, when the impetus was on maintaining fair prices and providing insurance to workers who would not be eligible under conventional insurance terms. Nonetheless, going back, continually and creatively, to the spirit and the values of the organization’s founding fathers in the 1960s has proven a rich source of ideas and solutions. These speak to the fabric of Singapore’s 21st-century social infrastructure and its attendant issues such as health, aging and income inequality.

Our existential question is: How to protect and enhance our legacy for the next generation while consistently creating social impact?

Increasingly, achieving social impact means borrowing from social science disciplines such as philosophy and psychology. To be a true partner to one’s stakeholders means to understand the underlying motivations and collective aspirations involved. There is growing recognition, especially among the business communities in emerging markets that many of the western leadership models were built on facts and numbers. As a result, they turned out to be under-socialized. The search is on, in Asia possibly more so than elsewhere, for locally relevant, historically sensitive and culturally appropriate models of genuine leadership and organizational stewardship. The experience of the region’s well-stewarded companies like Matsushita, Tata, Hai’er and many others shows that once business leaders tweak their thought paradigms, “profit” can be defined, and measured, in radically new ways, including through investing in people, utilizing social capital and making a contribution to society.

Testing the limits of governance

As with all rule-based undertakings, governance is not devoid of the dangers of formalism – in other words, of going through the motions, creating ever more layers of bureaucracy and upholding the letter but not necessarily the spirit of the originally-agreed purpose. The stakes are high, especially given that the large-scale value destruction that occurred during and in the aftermath of the global financial crisis has been shown to stem from insufficient regulation. But many board members agree today that the pendulum may have swung too far in the opposite direction, continuing to pile up new rules on businesses in a measure that may be starting to border on counter-productive. Where rules could be complied with through simplicity of action and honesty of conduct, an attitude is beginning to prevail which could be described as “if it is in writing, it must be true.” In consequence, companies’ annual reports have ballooned from 50 pages to 300 and more pages. Once a governance code – meant to be a tool for guidance – has stipulated, for example, that annual reports should be fair, balanced and easy to understand, almost inevitably a flurry of written guidelines and definitions crops up, offering detailed definitions of just what exactly is meant by fair, balanced and easy to understand. Companies that have never in their history crossed paths with instances of child labour can become overnight darlings of good governance by adding this particular criterion to their checklist. In this governance “game”, the sense of absurdity is palpable.

Panellists and audience members agreed that no stakeholders’ interests are meaningfully served by board members and executives getting bogged down in “ticking boxes”. They also agreed that there is no “one size fits all” method. As Erich Hunziker commented, if a company was to strive to please everyone, it would be doomed to perish. There is no denying that at particular points in time, a company will do well to preoccupy itself with making money before it can afford to think about giving back to society. This is not to say that small companies are unable to contribute. The EU’s refugee crisis, to refer to a current topic, has mobilized many SMEs across Western Europe to create employment and absorb more migrant workers.

Know your customer

The old dictum of understanding one’s customer still rings true in the post-crisis world. According to Teo Swee Lian, putting the customer first and acting consistently for the customer’s benefit has in too many companies given way to an operation revolving around profit centres and of pushing products onto customers who may or may not have use for them. Customer focus must permeate right across the organization. This includes the board, whose members should have intimate knowledge of the issues the company’s customers are tackling, as well as of what levers and mechanisms and internal culture the company has put forward to reinforce this focus. How much board members actually know about the customers and about their own company’s organizational culture can be a good litmus test and a powerful indicator of the company’s preparedness for future risks.

As participants noted in some of the concluding comments, personal integrity of the chairman and the CEO are of utmost importance amidst the dramatically changing business and corporate realities. Stress testing can be another source of great strength in watershed moments. In this context, we must pay attention to the way successful organizations build scenarios and beyond that, create compelling narratives about their organizations.

One of the biggest risks facing the corporate sector is not to be integrated with society – or worse, to be marginalized in society.


When companies have done their physical check, their mental check, when they have smart strategies in place and when their structures ensure good governance, there is a sound basis for success even during difficult times. Difficult times then suddenly become times of reincubation, times when a company’s distinctiveness can be deepened and new opportunities fuel success. For successful companies at handling their risks, these are the times now. It is key to rethink governance versus entrepreneurship and whether governance is killing the latter. No business will prosper in changing times without a healthy amount of entrepreneurship and many a board has had nefarious impact there. As boards evolve from protecting companies from the worse to being a competitive asset towards success, new types of diversity can be encouraged, that will include social understanding and government abilities. They will test the limits of governance for the better and will regenerate their board’s activities in a distinctive ways, thus not only assessing and managing risks but also creating new opportunities for the organization in a complex landscape.

Didier Cossin is Professor of Finance and Governance at IMD and director of the IMD Global Board Center. He directs High Performance Boards, a program for supervisory board members and chairpersons.


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