Information glass ceiling keeps non-execs in the dark and increases risk of corporate failure

Information glass ceiling keeps non-execs in the dark and increases risk of corporate failure

An invisible glass ceiling is preventing vital risk information from getting to non-executive directors (NEDs) and other board members. This is one conclusion drawn from a hard-hitting report by Cass Business School on behalf of the risk management association Airmic, published in full today. This barrier lies behind many big corporate failures, say the researchers, and it will continue to do so until lines of communication are improved.

The Cass research, Roads to Ruin, looks in detail at twenty three companies with aggregate pre-crisis assets of more than $6 trillion, all of which suffered potentially life-threatening corporate crises. They include AIG, Arthur Andersen, BP, Northern Rock and Cadbury Schweppes.

Six of the firms studied collapsed (with three having to be rescued by the state) while most of the rest suffered large losses and significant damage to their reputations. Around twenty chief executives and chairmen subsequently lost their jobs, and many NEDs were removed or resigned in the aftermath of the crises.

“Events that bring down or seriously damage otherwise successful companies don’t just happen. They are commonly the result of boards failing to see underlying risks that threaten the company,” said Professor Chris Parsons, who led the Cass research team.

“This report makes clear that there is a pattern to the apparently disconnected circumstances that cause companies in completely different sectors to fail,” said Airmic chief executive John Hurrell. “More big corporate failures are inevitable as long as directors are blind to the risks they face.”

“Whilst the crisis at News International came too late to form part of the study, it appears to conform to a common pattern,” said one of the report’s authors Anthony Fitzsimmons. “In particular, the report finds that NEDs and other board members often lack the skills to monitor and control executives nominally under their supervision.”

 “NEDs should be aware that there may be important ‘unknown knowns’ - things that are known within the company but unknown to its leadership,” said Anthony Fitzsimmons, one of the report’s authors. “It’s typically a deep-seated culture or wrong incentives that keep them hidden.”

The Cass report calls on companies to re-think risk management at all levels so that the missing risks are included in risk maps. It adds that risk and internal audit professionals may need to develop additional skills to fulfil this role adequately.

 “Our report shows that boards, and particularly their Chairmen and NEDs, need to recognise the importance of risks that are not captured by current techniques”, said Professor Steve Haberman, Deputy Dean of Cass Business School. “They also need to find ways of ensuring that the missing risks are captured.”

The report calls on companies to re-evaluate their procedures and structures so that risk managers and others who identify weaknesses are encouraged to draw them to the attention of their directors. It adds that risk and audit professionals may need to develop additional skills to fulfil this role adequately.

It highlights seven risks that frequently underlie corporate crises across all sectors:

1. Inadequate board skills and inability of NED members to exercise control
2. Blindness to inherent risks, such as risks to the business model or reputation
3. Inadequate leadership on ethos and culture
4. Defective internal communication and information flow
5. Organisational complexity and change
6. Inappropriate incentives, both implicit and explicit
7. ‘Glass Ceiling’ effects that prevent risk managers from addressing risks emanating from top echelons 

For further information, contact Mark Baylis, 07775 693994, mark.baylis@airmic.co.uk