Feb 152016
 

Non-Executives are key to productive boardroom conversations

Boards of directors carry many responsibilities of course, and balancing the demands on the board’s time is one of the key challenges for all chairmen.

Many well-informed commentators, such as the Institute of Directors, agree that critical roles for the board include setting direction and strategy, governing risk and monitoring performance.

For Non-Executive directors (NEDs) in particular, fulfilling these roles can be especially challenging; yet they have a unique accountability for the board’s effectiveness in these areas.

non-executivesRoots of failure

Many of the most spectacular company failures in recent years have had their roots in a failed conversation about strategy.

For example, in his book Making it Happen, which describes the failure of the Royal Bank of Scotland, Iain Martin notes how the board conversation about the ultimately fatal decision to acquire ABN Amro moved almost instantly from “Should we do this?” to “Can we do this?”

As Martin relates, an RBS director subsequently rued that the board paid insufficient attention to the critical strategic question of whether the proposed deal made sense.

What can NEDs do to improve their boards’ conversations about strategy?

Most importantly they can recognise that while their own knowledge and experience is valuable, it is often likely to be less influential in their decision making than factors they fail to recognise.

These include a whole slew of natural cognitive biases that surreptitiously drive their individual and collective judgements, such as biases towards optimism, overconfidence, and conformity, as well as the influence of framing and anchoring. These are not flaws in personality or competence of individuals; they are unavoidable human traits.

While NEDs and boards cannot avoid these biases, they can be aware of the pitfalls they can cause and take steps to minimise them through employing specific processes and techniques in their decision-making.

These include methods such as red-teaming, de-correlating errors, “pre-mortems”, and others that are grounded in research and have been proven to improve decision quality.

When specialist external consultants facilitate the board’s strategy conversation these processes and techniques are made even more effective.

The second critical conversation boards must have concerns existential strategic risk – threats that can sink a strategy or kill a company, but which are often outside the scope of enterprise risk management processes.

The first question to ask here is whether the board’s current approach is sufficient to adequately anticipate, assess, and adapt to these threats. It probably is not, for two reasons. First, audit & risk committees’ main focus is usually on the long list of other issues for which they are responsible, specifically audit, operational and financial risk and regulatory compliance.

Too often existential threats get short shrift on audit committee agendas.

Second, since most risk management (as opposed to governance) activity happens in the day-to-day operation of the business – as it must and should – the executive team’s focus is quite properly on short-term operational and financial risks.

However the almost inevitable consequence of this is a risk register that either fails to identify the key strategic threats that the board should be focused on or, if it does include them, applies simplistic estimates of their probability and impact that often categorises them as “moderate”, and thus keeps them off the board’s agenda.

Too often the consequence of these two factors is a board that believes it has effective control and delegation of risk management but which in fact is neglecting its critical risk governance role, particularly when it comes to existential threats to the company’s survival.

Categories of risk

In performing their critical risk governance role, non-executives also need to understand that they are essentially dealing with three very different categories of risk.

The first and smallest of these is the “realm of probability”, or “known knowns.”

In this realm the historical frequencies of a range of outcomes and their consequences are both known, which enables these risks to be described using the language of statistics. This makes them relatively easy to price and transfer via insurance, derivatives, or other means.

These risks are almost always identified on company risk registers. Even so, they can still cause expensive failures, usually due to quantitative risk models not accurately capturing their potential co-occurrence and/or severity.

In the more challenging and larger “realm of uncertainty”, boards confront “known-unknowns,” whose full spectrum of possible outcomes, probability of occurrence, and/or potential consequences are not, and often cannot be, fully understood. In this realm, risks are usually impossible to price and transfer.

Yet, confusingly, these uncertainties are still often described using the language of probability.

However, the probability estimates used reflect not historical frequencies, but rather degrees of subjective belief about the likelihood of a risk’s occurrence and/or the potential size of its impact.

The most frequent risk governance failures in this realm are failing to properly assess the nature of potential threats and not taking steps to adapt to them until it is too late.

The largest of the three realms of risk is the “realm of ignorance”, or “unknown unknowns.” Here directors are unaware of potential threats to the success of their strategy or the survival of their company. However, it is not the case that all of these threats are proverbial “black swans” which are impossible to foresee.

Many adverse outcomes are possible to anticipate and are preceded by weak signals hinting at what lies ahead, which too often are explained away or ignored. Hence the most important source of failure in this realm is a board’s inability to anticipate future risks.

Standing back

Non-executives are uniquely positioned to stand back from the routine, day-to-day tasks, and drive effective board conversations about strategic risk governance. Once again structured processes and techniques will help them to meet this challenge. For example, the anticipation of existential threats can be substantially improved through an understanding of the likely sources of such risks.

Study of past corporate failures reveals that the most fatal combination is one of a few common external shifts combined with failures in the strategic risk governance process.

One of our clients employed a structured and facilitated risk governance conversation to identify four threats that their board wished to focus on, none of which was described in the existing risk register. For each existential risk an adaptation or mitigation strategy was identified, along with early warning indicators and a board process for monitoring them. The board recognised that the executive team and middle management had neither the time nor the inclination to search for the often-weak early signs of existential threats that might never materialise. They realised that this critical monitoring function was clearly a board role.

Normally, such monitoring will require the help of an external, specialist service provider, which is unencumbered by conflicts of interest and not deeply invested in the assumptions that underlie the current strategy. Without effective monitoring all the difficult work that a board may have accomplished in anticipation and assessment will be undone if insufficient forewarning of an emerging, anticipated threat fails to allow sufficient time to implement adaption and mitigation tactics.

Retail signs

Consider the UK retail sector, which is undergoing significant structural shifts as previously dominant players, such as Tesco, experience the uncomfortable sensation of being attacked by competitors with both superior quality and lower cost offers.

The emergence of the low cost discounters was the early warning signal. However some senior executives dismissed this sign by asserting that: “UK housewives will never want to shop at discount outlets!”

At the time this observation appeared true. But it also became a strategy assumption that was never tested, since the steady progress of Aldi and Lidl was assumed to be irrelevant. The early warning sign was missed and when the financial crisis hit, shoppers’ preferences shifted quickly towards the discounters, and left the established mass-market chains struggling to adapt.

While this shift in consumer preference has not yet proved fatal for any mass market retailer, their failures in anticipation, assessment, monitoring and mitigation have been very costly. In 2014 Tesco experienced market share loss, a falling share price, an accounting scandal leading to a serious fraud investigation, the replacement of the chairman and CEO and reported a £6.3bn loss, it’s worst ever result and the largest reported loss in the history of the UK retail sector.

Challenge for Non-executives

The role of the non-executive is an increasingly visible, demanding and difficult one. Non-executives are expected to demonstrate independence of thought and apply sound judgement in conditions of great pressure and ambiguity.

The range of subjects that non-executives must comprehend and the pace of evolution in the breadth and depth of knowledge required are dizzying. If non-executives’ judgement is found wanting they may be held personally liable. Students of governance question the feasibility of the critical role that non-executives are now expected to play.

Is their role feasible? In his book Thinking, Fast and Slow, Nobel Prize winner Daniel Kahneman sets out his powerful and remarkable conclusions about the psychology of judgement and decision making, following decades of research into the topic. He concludes that it is immensely difficult for us all to avoid biases in our decision making, about which we are mostly sublimely ignorant.

Yet the constant self-questioning of our judgements would be “impossibly tedious”. Kahneman says the best that can be done is to recognise when mistakes in judgement are most likely to occur, and to take steps to minimise them when the stakes are high. Nowhere is this more true than in the case of non-executives who are tasked with governing existential strategic risk.

Yet the challenge is not an impossible one to meet. Non-executives need to ensure that their board has the right structure. Without the right number and balance between executive and non-executive directors an effective board conversation is near impossible.

They also need to use the right processes. Given the stakes and the problems, using appropriate methods and external expertise and facilitation can be of great benefit. Lastly they need to ensure that the right systems are in place, especially for monitoring early-warning indicators and learning from failures, both other’s and their own.

© 2016 Britten Coyne Partners

About the author

NeilPhotoNeil Britten CDir is a director at Britten Coyne Partners, international experts
in board strategic risk governance.

Neil is a UK Institute of Directors, qualified Chartered Director, non-executive chairman and director with over a decade’s board level experience of strategy, risk governance and strategic performance monitoring.

Prior to roles as a professional director he was Vice President for a major international consulting firm focused on strategy and strategic change and an executive with a major oil and chemicals conglomerate.

His experience spans work, in the UK, France, Australia and over 20 other countries, as an executive in and advisor to mostly large, multinational corporations in technology, oil & gas, consumer goods, manufacturing and financial services sectors. He has also acted as an advisor to private equity investors in start-ups and SMEs.

Neil has an engineering degree from Bristol, and an MBA from INSEAD.

Nov 102015
 

“Reasons why I don’t …”

by Andy Farrall

Andy Farrall Health and SafetyHealth & Safety specialists never cease to be amazed by the “reasons” given by senior managers as to why they don’t see the need for effective Health & Safety management systems, and some of these “reasons” are analysed below.

What is rather worrying, is that the people advocating these “reasons” are otherwise astute business people who presumably understand the ways of the world!

  1. We don’t need a system – it’s only common sense:

Ah yes, but unfortunately this “common sense” that people talk about really isn’t very sensible! If you don’t believe it then how do you explain those drivers on the motorways who think it’s fine to sit six inches off the preceding car’s tail lights while still doing 70mph in heavy rain? Would common sense have not told them that they haven’t got a snowball’s chance of stopping safely in an emergency? Have they never seen news reports about multi-vehicle accidents on motorways in bad weather?

  1. We don’t need a system – we’ve done it this way for years:

There are two possible explanations for why you haven’t had a problem yet. Either you’re doing things correctly (which is always good news) or you’re actually making mistakes which haven’t caught up with you just yet (which is always bad news). There is a philosophy underpinning Health & Safety theory which says that every time you commit an unsafe act, or allow an unsafe condition, you are rolling the dice. And that one day the dice will go against you with possibly catastrophic results! Having an effective management system in place means that you can rest assured you’re doing things properly and aren’t gambling with somebody else’s safety.

  1. We don’t need a system – it’s too expensive:

If you think health & safety management is too expensive to set up and run then try looking at the real cost of having an accident! Think about the cost of fines (possibly in six or seven figures); compensation claims; increased insurance premiums (assuming anybody is still willing to give you insurance!); damage to the firm’s reputation; amount of management time involved in investigating/ defending legal actions; and so on. Unsurprisingly, some companies never survive the financial aftermath of a serious accident.

We could go on, but we think you get the point.

To conclude, Health and Safety experts would argue that advocating such flawed – yet damaging – criticisms of proper Health & Safety practice should be seen as the hallmark of a poor director, one who is either incapable of doing his job properly or who is ignorant of his legal responsibilities.

We say this because surely a director who encouraged ignoring taxation law on the basis that it was complicated wouldn’t last long in the boardroom, and rightly so, so why should a director who advocates ignoring Health & Safety law be treated any more leniently?

Failing to pay taxes only costs money, whereas failing to provide effective health & safety management can cost lives!

About the author:

Andy has his own health & safety practice, Management & Safety Training Ltd, which in turn has its own specialist industrial accident investigation division, iNDAXCON. He is a highly experienced and internationally qualified investigator, consultant and trainer, qualified in both the health & safety and training sectors.

A Fellow of the International Institute of Risk and Safety Management, a chartered safety & health practitioner (chartered both with IOSH in the UK and SIA in Australia) and a member of the UK Occupational Safety & Health Consultants Register (OSHCR), he has a proven track record in fields as diverse as accident investigation, lone worker safety, construction safety, and health & safety training.

Previously a specialist investigator with two élite UK law enforcement agencies (including responsibility for the management of complex international fraud enquiries) he became an accredited security trainer and assessor with the City of Bristol College. His move into the health & safety sector has included a wide range of training/ consultancy projects.

Oct 022015
 

“Plan for an accident? Why ever should I do that?”

by Andy Farrall

Andy Farrall Health & SafetyIn my previous article, “Health & Safety law just ain’t fair!” , I pointed out that UK health & safety law is sometimes biased against employers, and so it’s vital that companies have an accident management strategy in place before the accident happens.

In this article I want to look at some of the topics which I believe should be considered when companies are developing this strategy.

There are many issues which management will need to consider when investigating serious accidents, and these include – in no particular order of importance – questions such as:

Who will actually run the investigation?

 The obvious answer would seem to be “the manager” but is that really the best solution? What will happen, for example, if the accident was actually due to that manager’s incompetence? Is he (or she) going to conduct an unbiased investigation and then put himself on the gallows with a brave smile – or is he more likely to lie through his teeth and blame somebody else?

And even when the manager is innocent, are you not putting him in an impossible situation? Whatever the outcome, no matter how scrupulous and diligent he is, he still leaves himself open to malicious gossip implying that he manipulated the investigation to protect himself. He just can’t win!

How will you control the investigation budget?

The initial response to this question may well be: “Why do we need a budget?” so let me pose a hypothetical question.

Assume that the accident involved a forklift truck which had just been serviced by the dealer, and assume also that the driver alleged that the brakes failed.

Who will you ask to conduct an independent inspection of the braking system?

You can’t ask the dealer because they have a vested interest in finding the brakes to be perfect. Furthermore, no matter how honest their inspection is in practice, they may still have left themselves open to allegations that they distorted their findings. It’s the same argument as that regarding the use of internal managers which I outlined above.

Can the company use its own maintenance people to check the forklift? No, of course not, because they will also be perceived to have a vested interest in the findings.

The solution is to employ an external consultant engineer to check the brakes. He’ll give an honest answer but his services will come at a cost, a potential expense which must be considered beforehand as part of the accident management budget.

The above are just samples of the many topics which need to be considered. Such planning may seem at first to be a little over the top, but, then again, you already plan for unlikely events such as fire evacuations and computer failure don’t you? Well, don’t you??

About the author:

Andy has his own health & safety practice, Management & Safety Training Ltd, which in turn has its own specialist industrial accident investigation division, iNDAXCON. He is a highly experienced and internationally qualified investigator, consultant and trainer, qualified in both the health & safety and training sectors.

A Fellow of the International Institute of Risk and Safety Management, a chartered safety & health practitioner (chartered both with IOSH in the UK and SIA in Australia) and a member of the UK Occupational Safety & Health Consultants Register (OSHCR), he has a proven track record in fields as diverse as accident investigation, lone worker safety, construction safety, and health & safety training.

Previously a specialist investigator with two élite UK law enforcement agencies (including responsibility for the management of complex international fraud enquiries) he became an accredited security trainer and assessor with the City of Bristol College. His move into the health & safety sector has included a wide range of training/ consultancy projects.

 

Sep 212015
 

“Health & Safety law just ain’t fair!”

by Andy Farrall

Andy Farrall Health & SafetyNot the most grammatical of headlines, I grant you, but the sentiment is one that many directors and managers might feel is well justified – especially if they’ve been on the receiving end of a Health & Safety prosecution.

Is their sentiment reasonable, or is it just a case of directors and managers expressing their resentment at having been caught out? Let’s look at the facts (and, just to be clear, I’m speaking here as a chartered safety practitioner and not as a lawyer).

The first thing to bear in mind is that the law treats breaches of Health & Safety legislation as criminal matters, as issues which are so serious as to justify punishment by either a fine or imprisonment (and sometimes both). Providing effective health & safety management is a clear legal requirement – not an optional extra.

UK criminal law normally works on the basis that the accused party must be assumed innocent until the prosecution proves beyond all reasonable doubt that they are guilty. Unfortunately for business directors and managers this situation doesn’t always apply in Health & Safety cases – even though these offences can be punished severely.

The problem lies with the wording of the Health & Safety at Work Act 1974, which is the underpinning legislation supporting health & safety in the UK.

The Act requires employers to do all “so far as reasonably practicable” to ensure the safety of their employees in the workplace. Note that this obligation represents a strict legal requirement in that the Act says that “It shall be the duty of every employer to ensure …“

The Act also says that, should there be a dispute over whether the employer did all that was reasonably practicable to keep their employees safe, it will fall to the employer to prove that he had done all that he could. It is not necessary for the prosecution to prove that he fell short of the mark.

These may seem arcane points of boring law, but when taken together they form an explosive mixture.

Put simply, if there is an accident in the workplace resulting in an employee being injured then there is a clear case for saying that the employer has failed to take care of that employee’s safety. In order to defend himself against this charge the employer must actually prove his own innocence – he cannot just rely on challenging the prosecution case.

With all the above in mind it quickly becomes clear just why it’s so important for employers to plan in detail the management of their competent accident investigations – and draw up these plans before the accident happens.

Leave it all to chance, rely on a strategy of “it’ll be alright on the night”, and life could get both unpleasant and expensive!

About the author:

Andy has his own health & safety practice, Management & Safety Training Ltd, which in turn has its own specialist industrial accident investigation division, iNDAXCON. He is a highly experienced and internationally qualified investigator, consultant and trainer, qualified in both the health & safety and training sectors.

A Fellow of the International Institute of Risk and Safety Management, a chartered safety & health practitioner (chartered both with IOSH in the UK and SIA in Australia) and a member of the UK Occupational Safety & Health Consultants Register (OSHCR), he has a proven track record in fields as diverse as accident investigation, lone worker safety, construction safety, and health & safety training.

Previously a specialist investigator with two élite UK law enforcement agencies (including responsibility for the management of complex international fraud enquiries) he became an accredited security trainer and assessor with the City of Bristol College. His move into the health & safety sector has included a wide range of training/ consultancy projects.