Knowing the Unknown Disruptive Risks
Directors must rethink how they assess unforeseen risks that could imperil companies.
Board members spend most of their time looking backward, but in today’s disruptive business environment it’s imperative directors also spend time looking at “what’s coming at us,” says Kelvin Westbrook, director at Archer Daniels Midland Co., Camden Property Trust, Mosaic, and T-Mobile.
When it comes to assessing disruptive risks -- risk that can impact a company’s bottom line, reputation, etc. -- directors should “look at how the agenda is set up and how time is allocated,” Westbrook says. “If you find yourself having to set up a special meeting once or twice a year, so be it.”
It’s all about being proactive and trying to unearth the risks you don’t know, says Westbrook, who also cochairs the NACD Blue Ribbon Commission. On Monday, the commission released a report titled Adaptive Governance: Board Oversight of Disruptive Risks.
Unfortunately, boards spend so much time on known risks that they have no time to assess unknown risks. Less than 20% of the directors say they are extremely or very confident that their management teams have the ability to handle these types of risks, according to NACD statistics.
NACD’s Disruptive Risks report — put together by more than 25 directors and leading governance experts — provides guidance on how to deal with this lack of risk consciousness and how to bolster “situational awareness in the boardroom,” says Peter Gleason, NACD’s CEO.
Managers are focused on day-to-day operations, explains Susan Cole, who cochairs the commission along with Westbrook. The board’s role is to so “see the forest instead of the trees,” Cole says.
“Risks are hiding in plain sight and can make or break an organization’s long-term success,” adds Cole, who is a director at Biscuitville, Diversified Trust, Martin Marietta Materials, and NACD.
The commission’s report contains a host of recommendations, including:
• Boards and management teams need to define what disruptive risks look like.
• Seek outside resources that can help boards better assess risk, outside experts, education, etc.
• Become aware of cognitive biases. Self-awareness is key.
• Foster a culture of skepticism.
• Learn from past mistakes, but don’t dwell on them.
“A lot of people missed [the disruptive potential of] Amazon,” notes Westbrook. He recommends that instead of lamenting that failure, directors should engage in a discussion about how it was missed so it doesn’t happen again.
He acknowledges that directors today have more on their plates than ever before. The question, he says, is, “Are directors prepared to do the job? The board evaluation process is critical.
“I’m not your typical director,” Westbrook asserts. He notes that he recently traveled to the Consumer Electronics Show in Las Vegas to learn about 5G communications so he can better understand emerging technologies and be in a position to ask the right questions. ”I want to be my best self.”