CIMA CFO forum sheds key insights on ‘Risk in the Boardroom Agenda’

Wednesday, 27 August 2014 00:00 - - {{hitsCtrl.values.hits}}

By K. Berman CIMA last week held its 2014 CFO Forum on the topic ‘Risk in the Boardroom Agenda’. Reyaz Mihular, the immediate past Chairman CIMA Sri Lanka Board and KPMG Managing Partner, shared a few thoughts about the evening’s topic before he introduced the main speaker of the event CIMA Education Executive Director Dr. Noel Tagoe to deliver his presentation. Risk remains in the spotlight for boards, more strongly illuminated by every corporate crisis and catastrophe that occurs. No business can operate effectively without risk. Managing and governing risk is about more than compliance and box-ticking. It is about building a resilient organisation to achieve long-term sustainable business success. Dr. Tagoe addressed various aspects of risk and emphasised that boards maybe blind to some key risks or do not understand them as deeply as perhaps they should. Following were the highlights of his presentation. Risk and strategy are inherently intertwined Risk and strategy are inherently intertwined. Boards cannot and should not be involved in the detail of risk management but should devote enough time for it. Their role is to set the agenda, drive the culture for risk and oversee implementation throughout the organisation. “You need to be able to prevent a risk event from occurring and then be able to mitigate the risk but before that you need to understand that there is a risk.”

“Risks when brought all together are not additive or multiplicative but exponential. So I’m saying that it’s increasingly complex. In the past, organisations didn’t think of having Chief Risk Officers but now organisations are thinking of having Chief Risk Offices and some organisations already have it,” said Dr. Tagoe setting the context to his presentation. CIMA’s Advisory Panel comprising of chief executives and finance directors of FTSE 100 companies have been questioned about the main risk issues that keep them awake at night. The highlighted points have been the impact of the digital world which is imposing a major structural change. Followed by the trust in business agenda where people lose trust in businesses and consequently require better regulations. The issues also included the need for new types of information, forward looking predictive analysis as well as transparency in conviction in an era of social media and focus on the customers and big risks. Dr. Tagoe called to attention that “Risk is everywhere; you’re facing risks everywhere and all the time. Boards cannot afford not to talk about it.” Afterwards, he discussed the research work ‘Roads to ruin’ carried out by Cass business School on behalf of Airmic. This research identified certain underlying causes that make companies especially prone both to crisis and to the escalation of crisis into a disaster. Out of the risk issues they identified the first was the board not having enough skills. Next was the blindness to inherent risks. “For example, think I decided to live in the UK so I inherit all the risks that come from the UK. I am Ghanaian and I use a Ghanaian passport and any risks that come with a Ghanaian passport I have it,” he said.

Inadequate ethos and leadership in the culture The inadequate ethos and leadership in the culture, and defective internal communication and information flow were the other issues discussed. Explaining the last three risk issues, he said, “Of course we live in a world that is increasingly complex and changing and we cannot do anything about it. We have inappropriate incentives in organisations which sometimes forces people to take risks without bearing the cost of the risk. They see the upside of the risk but not necessarily the downside. We see this mostly in the investment banking industry. The final thing they talked about is that there seems to be a glass ceiling that prevents the practical or operational risks permeating up the executive and board level.” Dr. Tagoe then focused on ways to manage the aforementioned risk issues. He drew facts from ‘Roads to Resilience’, a report prepared by Cranfield School of Management on behalf of Airmic. This highlights that boards own the risk agenda because they own the strategy. This report describes five principles that would characterise a resilient company. These are the exceptional risk radar; valuing and building relationships internally and externally; leaders who are respectful and are respected; ability to respond rapidly and diversified resources. Referring to a graph he mentioned, “If you think about dealing with risks in two axes, one is to increase the ability to respond and recover and the other is the ability to prevent. One is proactive and one is reactive and we should be good at both.” Balance in being reactive and proactive There should be a balance in being reactive and proactive. If an organisation is only reactive to risks then there will be a time when adequate actions cannot be taken. On the other hand, organisations that are only proactive will not enjoy at all because they will be unduly cautious about everything around them. Nevertheless, an organisation should know where it stands in terms of risks as it will depend on their risk appetite, risk tolerance and risk capacity. Additionally, he discussed some questions that members of the board can ask to better identify the risks facing their business and ensure that they are more resilient to these risks. These questions were based on risk appetite, people and culture and governance etc. One of the questions he focused on was ‘to what extent are we rewarding risk awareness through our remuneration and incentive strategy’? “Let me give you an example, the receptionist or the contact centre people are not the highest paid people, are they? But they are the ones who can cause you a lot of damage. Because they are in the front line; they are often the first point of contact” he said following with an anecdote. “Several years ago I used to work at BP in an African country. They used to transport petroleum products in heavy road vehicles. In that climate you tend to lose petroleum products due to evaporation and things like that. The organisation’s losses always exceeded the standards of the allowable loss for the petroleum firm. I was asked to do some work with them from the London centre. I asked them, do you use contractors to transport your products and how much are they paid. Then I asked them why they are paid so low and I was told that they were just drivers. Then I asked, do you know how much they carry of the organisation’s revenue base and if something goes wrong what a loss it can cause”. After having this discussion he has asked BP to promote these drivers from junior staff to supervisory staff and give them a sense of responsibility. Consequently the losses have reduced dramatically. Dr. Tagoe further explained that the complexity of an organisation creates risks. “One of my personal mantras is to make the complex simple and the simple compelling.” He added. Finally, he summarised the governance, roles and relationships of the CFO as a key executive position of the board. He explained that the CFO acts as a partner to the CEO and is often the one who leads investor relations. The CFO’s liaison with the audit committee and risk committee is vital; while the CFO is a company director who will be forced to obey the corporate governance regulations.