Glass ceiling stops risk info from reaching top management says Airmic report

The barrier between top management and those that should report to it causes a risk blindness that lies behind many big corporate failures, the researchers say. And will continue to do so until lines of communication are improved, they add.

The report, Roads to Ruin, looks in detail at 23 companies with aggregate pre financial crises assets of more than $6tn that all suffered potentially crippling crises. They include AIG, Arthur Andersen, BP, Northern Rock and Cadbury Schweppes.

According to Professor Chris Parsons, who led the Cass research team, the case studies revealed that ‘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’.

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“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,” he added.

The report, released in full this week, finds that NEDs and other board members often lacked the skills to monitor and control executives nominally under their supervision, and they often showed risk blindness as they pursued reward and opportunity.

“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 rethink 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 fulfill 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.”

Speaking at the publication of the report’s executive summary at Airmic’s conference in June, Paul Hopkin, Airmic’s Technical Director, said that directors are too often asleep at the wheel and blind to the risks they face.

“The way businesses exchange risk is increasingly interconnected but there is a major disconnect between boards, non-executive directors and their risk management teams. Even successful organisations can see their reputations shredded at the click of a mouse,” said Julian James, CEO at brokers Lockton International and one of the report sponsors. “Global corporations will come seriously unstuck, unless their boards fine-tune their risk radars.”

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.

“Boards, and particularly their chairmen and non-executive directors, need to recognise the importance of risks that are not captured by current approaches. How they do so will vary by company and there can be no single template solution, but there’s no doubt firms that address these issues will become significantly more robust,” explained Mr Hopkin.