Managing Governance Risk

Risk identification, ownership, and monitoring sit at the highest levels of organisations and are the ultimate responsibility of a firm’s board of directors.

Risk identification, ownership, and monitoring sit at the highest levels of organisations and are the ultimate responsibility of a firm’s board of directors. We hear much about ESG but focus on the E and S acronyms, i.e., ‘environmental’ and ‘social’ aspects. However, risks arising from the ‘G’ – governance – should be at the forefront of directors’ minds. But what do we mean by the term governance risk, and how can it be effectively managed?

In this podcast, Dr Sabine Dembkowski, Founder and Managing Partner of Better Boards, discusses managing governance risk with Liz Lynxwiler, Company Secretary at Brightwell Pensions.

Some of the key takeaways of the conversation include:

“One of the key governance risks is around decision making”

Liz explains that governance risk is wrapped up in many other risks, but the first step is to define what governance risk means for your organisation. In her experience, one of the key governance risks is decision-making and unclear roles and responsibilities, usually when delegations and powers are not sufficiently identified and defined. This can result in decisions being made by individuals, groups, or forums lacking the right (or any) delegations in place. One of the main benefits of a robust governance structure is to ensure that boards maintain sufficient oversight of management and the business’s day-to-day activities. If individuals or groups are acting outside of their powers, it deprives the board of the opportunity to challenge decisions or courses of action. There is also compliance to consider for firms that are heavily regulated, listed, or public interest entities. Liz emphasises the risk around ensuring that the board can meet the stakeholders’ expectations, whether they be shareholders, regulators, or the government. As with any risk, boards need to ensure the right controls are in place to mitigate the likelihood of any risk developing, and governance professionals, in particular, act as one of the most important controls around governance risk.

“It’s very easy to hide key information in a 30-page paper”

Liz believes that one of the key things (and a by-product of how the UK corporate governance framework operates) is the natural information asymmetry between the board’s non-executive and executive directors. A non-executive by proxy is not involved in the business’s day-to-day activities, so they need to lean on their governance teams to ensure management information provided for meetings is on time, clear and concise. If boards are given insufficient time to read papers before a meeting, it is very easy to lose key messages. She explains that at Brightwell, they work systematically through management information to ensure they provide data as clearly as possible. They continue to evolve that information and recently changed their approach to reporting, asking those contributing to board or committee reporting to think critically about what they would want to know if they were sitting outside the business but still responsible for it. The result has been management information that tells a story rather than just reporting.

“Board Papers are a sticky issue, regardless of how much is written about them”

Liz agrees that board papers are too long, and she outlines the tension between the business wanting to tell the board everything and the board just needing the information that is relevant and clear enough for them to challenge. Every company secretary and director she speaks to agrees this is a key issue. Simple things like executive summaries are key. Brightwell has done a lot of Report Writer training and treats the executive summary as an elevator pitch with only a minute or two to get key points across. Why is this coming here, what is important about it, and what do you want to get out of it? They also take time at the end of meetings to reflect on the meeting itself and the management information. Was it the right information? Too much or too little? What would they like to see more (or less) of next time? Liz explains it is always an evolving process.

“In reality, the risks are owned by everyone”

Liz believes that governance risk is one of those rare risks jointly owned between the first line and the board because, ultimately, governance risks sit with the board, and it is up to them to maintain oversight of what is happening on the ground. In the division of responsibilities, executive management should monitor and manage the risks regularly and escalate them as appropriate. The board works with management to determine the appropriate level of risk and probes the executives on how they manage that on behalf of the board. Liz explains the three types of governance risk. Firstly, enduring risks that remain static and vary from firm to firm. Secondly are point-in-time risks, which will impact the firm and crystallise and fade away. Lastly, emerging risks may be far on the horizon but potentially a big issue for the firm.

“How do you ensure that all of these topics received sufficient attention on the board agenda?”

Liz advocates starting by assessing the importance of a topic for the organisation, its relevancy, and its likely impact. If it is crucial, it needs sufficient time on the agenda. If a particular issue or topic needs a deep dive, it could be delegated to a committee for more in-depth information or probing before escalating it back to the board. Standalone deep dive sessions could also be set up on a particular topic that needs sufficient time but doesn’t necessarily need to form part of a formal board agenda.

“It’s our responsibility as governance professionals to monitor what the board needs and to work with the business to make that happen”

Liz explains that sometimes there will be topics that need training on, particularly areas around corporate governance changes, but governance professionals act as a facilitator between business and board. Because they are in every meeting, they know what the board members are asking and whether there are gaps. She recommends getting feedback from the Chair and members directly.

The three top takeaways from our conversation are:

• Be open.
  Feedback is the breakfast of champions, and sometimes it can be difficult to receive feedback on processes or ways of working that the business has spent a long time building up. But one of the best ways to build trust and strong relationships with the board and other stakeholders is to really listen and take action on areas that might need improvement.
• Don’t shy away from being bold.
  If there is an opportunity to be more efficient, take it. Just make sure there are clear parameters and adequate checks and balances around any delegations.
• Trust your governance professionals, who are there to give boards and management impartial advice on how best to maintain the integrity of the governance framework.

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