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May 8, 2008
A group of seasoned board experts discussed valuable lessons learned from the past and what can be done to avoid the next crisis at a breakfast meeting of the NACD in Chicago on May 8, 2008.
Alice Peterson, President of Syrus Global, led the panel discussion, and was joined by the group of Paul Choi, a partner at the law firm of Sidley Austin, Samme Thompson, President of Telit Associates who has served on a number of corporate boards, and Kreg Weigand, the Midwest Enterprise Risk partner for KPMG.
The panel’s collective experiences include:
- handling SEC investigations
- dealing with allegations of criminal activity
- providing grand jury testimony
- undergoing Chapter 11 bankruptcy
- guiding companies in financial distress
There was strong agreement that involvement in a crisis changed one’s view of the world thereafter. For directors, this resulted in reading more carefully, listening more carefully, picking up on yellow flags or red flags and asking probing questions, and studying more deeply to understand complex issues.
The panel’s goal was to spread the knowledge of those who had “walked through fire” to the broader audience of corporate and not-for-profit directors so that future crises might be avoided.
These ideas were among the board prescriptions for reducing the probability of a crisis:
1.Oversee the identification of risk. This process can take many forms, and although there is no one right way, expect to see a depiction of the major external and internal risk areas; among the internal ones, we typically see strategic, financial and operational risks identified. The major risks should be ranked by their quantitative and qualitative impacts, as well as expected frequency. Management and the board should determine which risks warrant management or mitigation other than what is currently practiced. Sometimes this activity is initiated by the Audit Committee, but it is a topic for the full board to understand and discuss.
2.Get a 360-degree view of risk – top down and bottom up. Be sure the employee/vendor ethics reporting system is functioning optimally.
3.Be open to changing the board routine to address red flags or special risks. Directors have to do what it takes to really understand the issues, which often requires a deep dive into a particular topic and calls for special meetings and additional board work.
4.Inquire about Disclosure Committee discussions and actions. This is a good way to “dig beneath the surface,” said Paul Choi. The answers provide insight into where early-stage risk may lie.
5.When a problem crops up, jump right on it. Be attentive and alert to never-dreamed-of issues.
6.Disclose risks in published financial reports in terms that investors can readily understand and digest. Having a “Risk Factors” section and Management Discussion and Analysis with everything but the kitchen sink mentioned as a potential risk is not helpful. Provide clear insight as to what risks management believes to be material.
7.Risk is the necessary counterweight to opportunity, and as such, it isn’t really a 4-letter word. The trick is to create an organizational culture where employees and vendors consider the impact of the actions they take day-in and day-out. “Risk is not a checklist,” Kreg Weigand of KPMG said.
8.If the organization is international, have foreign local leaders who are trustworthy. Be sure the board has directors with cultural sensitivity and knowledge, and “get the board out to see foreign operations from time to time,” said Samme Thompson.
9.Have a crisis team, or teams, and a crisis plan. Keep contact lists and crisis plans up to date. Just identifying lawyers, Public Relations professionals, financial experts, and others who would be called on in the event of a crisis saves valuable time when a serious issue arises.
10.Meet with management below the CEO, and/or contact members of management directly with questions. Make it your business to know what’s really going on.
Alice Peterson has been a corporate director since 1996. She currently serves on two public company boards, Hanesbrands and Williams Partners. Ms. Peterson is also on the board of trustees of the Ravinia Festival (summer home of the Chicago Symphony) and the Music Institute of Chicago. She is the founder and president of Syrus Global, a leading provider of ethics and compliance solutions headquartered in Chicago. The company’s Listen Up™ ethics reporting, helpline and case management programs are widely acclaimed for their effectiveness in surfacing early-stage problems, which when acted upon, avert crises and result in a stronger enterprise.
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