Gap 4: Repeated Inaction or Strategic Kaos | Beyond the Blazer
Ignoring this in the boardroom is opening up serious sinkholes.
Repeated Inaction or Strategic Kaos spells RISK. Badly, I admit, although in my experience putting the word ‘risk’ into a title will immediately banish the article to the never-read pile. Not continuing to read is now a risk for you.
For Australian companies, boards’ risk management framework and practices will be subject to increased audit scrutiny as of the end of this financial year. This starts with specific reporting in your annual report. Your auditor is in a position to explain this further to you so I will talk about five of the greatest risks I currently see in boardrooms of registered clubs and NFPs.
1. Board Quality
The old adage is that the more you learn the less you realise you know. If you don’t know that you don’t know, then that’s a risk right there… and the risk doesn’t end there. The risk extends into a board who don’t know that they don’t know and refuse to learn. I spoke about this in Gap 1: Purpose and Gap 3: Perspective.
Boards open themselves to the risk of poor board quality a number of ways:
Succession planning: Ineffective nominations and elections management that does not, at least, start to actively encourage or break down the barriers to board entry from people with diverse perspectives (like women on an all-male board)
Education: When individual directors complete baseline mandatory director training, attend free seminars… and that’s about it, with no effort to transform learning into action.
2. Financially Illiterate
A majority of directors do not have the financial literacy skills to meet the changing challenges of the future according to the findings of the Grant Thornton Financial Literacy Survey. I wrote a summary of this survey here.
The report found that Boards that are selected only from a membership base are at the greatest risk of not possessing the right skills to ensure financial sustainability.
Despite the clear relationship between director education and reducing organisational risk, less than one in five boards will invest in training or setting up a robust financial report and learning to understand the financial story. By not investing in training and better reporting, you could be at risk of breaching of the business judgement rule number three;
Informed themselves to the extent reasonably appropriate.
3. Appetite Not Defined
Risk appetite is defined through policy. The policy is designed to allow the board to maximise opportunities, minimise potential losses, make better decisions, improve pro-active planning and improve the allocation and use of resources. Risk appetite generally balances the protection of existing assets with the prevention of loss without surrendering the opportunity for the organisation to gain competitive advantage.
Risk features in a number of other policies as well, such as asset protection, CEO succession planning and dispute resolution, procurement and health and safety.
4. Not planning… or planning for business as usual
Many of us plan our futures with a ‘business as usual’ mindset. What happens when we imagine the future of our key strategic drivers with different horizons. Called ‘environmental scanning’ or ‘signals of change’, we consider the uncomfortable futures of politics, demographics, technology and cyber threats, the economy, ecological change, inter-cultural impacts, to name a few.
Further, it’s a risk to only plan for operations and building projects. Remember there is leadership and governance to consider as well as marked changes in our communities’ needs and wants. What is unknown is the hardest risk to bear, and poor research underpinning a strategic plan is a risk.
5. Dysfunctional Culture and Leadership
Sonnenfeld (2002) states that what distinguishes exemplary boards is that they are robust, effective social systems with a virtuous cycle of respect, trust, and candour in which one good quality builds on another. Dysfunctional boards are a risk.
If a director cannot trust management, even when technical experts such as accountants, auditors, lawyers, governance experts and other industry experts have shown that results are being achieved in an ethical manner, then the leadership issues rests with the director.
Leadership and culture are intertwined. Group culture has a large impact on the behaviour, attitudes, and satisfaction of each group member. It affects such things as the pace at which work gets done, how outsiders are treated, how people are recruited, the attention paid to details, or risks that the group takes. These influence the success of the group in meeting its strategic goals.
One more risk: me, my benefits and my status as a director
There are those directors, and some CEOs, who are a risk because of their personal affection for their title and the fear if they no longer were a part of the board group. The blazer, the annual holiday slash conference, and the complex identity tied up in a club directorship become risky liabilities for an organisation that needs to take calculated risks but lacks perspective from directors that cannot or will not broaden their skills and perspective.
Often, it is these directors that oppose change, oppose planning, oppose learning and oppose evaluations. The board is their life… take it away and what is left?
How is your board discussing and managing these potential risks?
1. Appropriate board quality – improving nominations and elections management and encouraging diverse perspectives to consider a directorship
2. Financially literate – investing in group training specific to your board and considering better ways to understand the broader financial narrative
3. Risk appetite defined – discussing the financial and membership ratios in strategic considerations, from both a historical viewpoint and setting measures of return
4. Robust strategic planning – that considers uncomfortable futures, bold opportunities for growth and beyond a project by project approach, and that affects a change in the boardroom learning and decision-making culture.
5. Understood culture and leadership – awareness of the group’s actual and preferred cultural and leadership style and building triggers into decision making that ensures alternate viewpoints are considered.
One more… how are you emotionally tied to your identity as director or CEO? What would your identity be if you weren’t a member of the board group?