How to reverse roads to ruin

With the government highlighting the risk responsibilities of senior business executives, Jennifer Lowe asks what is good corporate governance?


In early-April, Business Secretary Vince Cable ordered an investigation into the three HBOS directors held responsible for the bank’s downfall, requesting they be banned for life from being company directors.

It could be argued that risks like these are difficult to prepare for, but according to the Roads to Ruin report carried out by Cass Business School, City University London, on behalf of Airmic, the Association of Insurance and Risk Managers in Industry and Commerce, global chief executives and company chairmen have a responsibility to manage corporate risk.

Most organisations are needlessly at risk in a number of areas. Often the potential and consequential losses will be a major threat to businesses performance. To put them right and protect businesses, chief executives need to make sure that processes, procedures and systems are clear, tight, ordered and well managed.

While the risks can usually be identified quickly and effective plans drawn up, it usually takes a little help and some wider corporate consensus to get things done.

Bill Trueman, chief executive at Riskskill, says: “The first step necessary for many corporations in 2013 is to recognise the risks they run and the need for change itself. Until they do, our role is to highlight the risks most likely to be faced.”

Risk management is an integrated part of being a chief executive

“Risk is embedded in a business,” explains Paul Hopkin, technical director at Airmic. “If you run a business, you face risk and so part of running a successful business is getting your strategy, tactics, operations running effectively and efficiently, and there are risk issues that can stop that. Risk management is an integrated part of being a chief executive.”

The Financial Stability Board (FSB), an international co-ordinating body, recently published a thematic peer review on risk governance, and identified significant weaknesses in major financial institutions relating to the roles and responsibilities of corporate boards of directors.

Tiff Macklem, chairman of the FSB’s standing committee on standards implementation, says: “At the core of strong risk management is an effective risk-appetite framework, and firms’ progress to date is uneven in its development, comprehensiveness and implementation. Very few firms are able to identify clear examples of how they used their risk-appetite framework in strategic decision-making processes.”

Mr Macklem further explains that recent headline events surrounding activities at some large financial institutions underscore the importance of promoting and implementing a sound risk culture.

This view is echoed by Swee Lian Teo, chairman of the FSB’s peer review team on risk governance, who says that, while measures have been taken to improve risk governance, a recent review showed there are still gaps that need to be addressed by both firms and supervisors.

“The report [published in February by the FSB] sets out recommendations that will help supervisors everywhere raise the bar on their expectations for risk governance so that firms’ practices continue to improve through changing environments,” she says.

The dangers to a business that fails to appropriately manage risk have become increasingly evident of late. Northern Rock’s demise at the start of the global financial crisis was widely reported.

According to the Roads to Ruin report, in the case of Northern Rock: “The board failed to ensure stress testing of the core of the business model, with its heavy reliance on wholesale markets.”

Roads to Ruin identifies a number of high-profile cases – AIG, Shell (the UK’s arm of Royal Dutch Shell) and Railtrack, for example – and claims that of the 18 cases analysed in detail: “Several of the firms we studied were destroyed by the crises that struck them. While others survived, they often did so with their reputations in tatters and faced an uphill task in rebuilding their businesses.”

“The potential for severe and, in some cases, ruinous damage to corporate reputations is the biggest danger,” says Airmic chief executive John Hurrell. “If you look at product recalls and contamination, high-profile contract failures, incidents involving loss of life, and so on, these will almost always have an impact on reputation.

“Our Roads to Resilience research currently being undertaken by Cranfield, and to be published in June, studies companies who have a track record of sustained success and no big shocks. In every case, the tone and culture on risk management is clearly set at the very top of the organisation and reinforced at every level of management. It has become part of their demonstration of excellence to customers, investors, regulators and other key stakeholders.”