Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
Boards of directors have the responsibility of preserving and extending shareholder value and holding the CEO and management team accountable for developing and deploying strategies to deal with a dynamic market. Smaller corporate governance often overlooks a very important part of this responsibility – risk governance.
Risk management is often a matter of trying to understand what you do not know. Even a small corporate board composed of seasoned business leadership can develop a risk management plan. A risk management plan involves using basic common sense strategies to deal with daily operations.
All corporations should take risk management seriously. It is a cost of doing business, and, by focusing on risk mitigation, they insure themselves against the unexpected. Risk management is at least partially concerned with avoiding accidents. Management that takes a ‘we will deal with it when it happens’ attitude will deal with the negative impact of risk issues a lot more often than the management team taking a proactive stance toward reducing or eliminating risk. The leadership style of the CEO is a major factor in how a company handles its safety program. The board needs to be aware of this and deal with the CEO accordingly.
Corporate boards with strategic plans regarding risk management can hold the CEO accountable for operational policies to reduce risk. Occupational Safety and Hazard Administration (OSHA) compliance is an effective starting place for establishing a baseline assessment of corporate performance. Many industrial manufacturers index their accident rates to the OSHA rate, and many compensation committees factor accident rates into the total compensation bonuses paid to senior management.
Senior management leadership on accidents related directly to corporate ethics and corporate culture. Risk management is a function of the value a corporation puts on its employees. When the corporate culture highly values their employees, senior corporate management places more emphasis on safety issues. Senior management will not tolerate falsifying accident documents simply to lower the total accident rates. Senior management will insist on a full, complete and accurate assessment of how the accident occurred and how to avoid similar ones in the future. Repeat violators are severely disciplined and/or terminated for both their own safety and the protection of the corporation.
Proactive management assessments will look for potential accidents in the workplace. An advisory board of employees, usually led by a corporate management person, will conduct a thorough walk-through of the shop or manufacturing area reviewing work habits and basing opinions of potential accident areas on their experience and on documentation of previous accidents. The advisors will then strategically plan safe work practices for each department of each manufacturing step. Corporate management involvement is critical because management will have to enforce the policies once the board has adopted them.
Companies usually adopt coaching as a step to increase awareness of new safety policies. Coaching allows the use of trained non-management personnel to work with other employees to explain the need for the new policies and to train others to accomplish the job in an efficient and safe manner. Coaching is especially effective in peer-to-peer situations where practical issues can be addresses by leaders who understand the process.
The board of directors plays a crucial role in risk management. The policies boards establish send signals to the CEO of the importance the board places on safety. The professional governance of risk has evolved into an industry unto itself, and many boards engage professional risk management agencies to act as advisers to the company on many safety issues. The board of director’s governance on risk involves more than adopting policies and strategic plans. Sarbanes-Oxley places the responsibility for compliance and ethics on the board of directors. Therefore, boards must also hold the CEO and corporate management accountable for risk and compliance management issues as they would any other operational issue.
© Dr. Earl R. Smith II
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Related Articles:
- Good Governance – Balancing Eight Key Factors
- Governing in a Crisis
- Governance and Risk Management Strategic Plans
- Managing External Influences on Governance
- Corporate Risk Management
- Lessons of Complacent Boards
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