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Reputability LLP are thought leaders in the field of reputational risk and its root causes, behavioural risk and organisational risk. Our book 'Rethinking Reputational Risk' received excellent reviews: see www.rethinkingreputationalrisk.com. Anthony Fitzsimmons, one of its authors, is an authority and accomplished speaker on reputational risks and their drivers. Reputability helps business leaders to find these widespread but hidden risks that regularly cause reputational disasters. We also teach leaders and risk teams about these risks. Here are our thoughts, and the thoughts of our guest bloggers, on some recent stories which have captured our attention. We are always interested to know what you think too.

Monday, 27 November 2017

Designing Better Boards


At a recent workshop, Tom Peters tackled board composition.  His prescription for a perfectly composed business board of ten?
  • Two under-30s
  • At least three women
  • One data and IT 'superstar'
  • A brace of entrepreneurial types
  • One person of stature who seems weird - Peters suggested artists, rappers, rock musicians and shamen because they look askance at the world.
  • A design guru
  • No more than two over-60s
  • No more than three MBAs
That spec, taken from his forthcoming book "The Excellence Dividend", provides ample ingredients for vigorous discussion about board composition.  We would add two more categories to the cauldron:
  • at least one person who understands how people work: a graduate in psychology, sociology or social anthropology, preferably a strategic HR 'superstar' too; and
  • at least two highly analytical types with the character to deliver constructive challenge. Good lawyers, academics and journalists should have skill and curiosity needed: but without the strength of character to challenge and persist they are worthless.

How do these characteristics compare with real boards? We have extended our recent survey of mainly FTSE100 companies to include Non-Executive Director (NED) board composition as described in Annual Reports.  We thought it would be interesting to include regulators too.  Using website information we have similarly analysed the boards of the UK's main financial regulators, the FCA, FRC and PRA; and three non-financial regulators, the IPCC (police), the SRA (solicitors) and the CQC (healthcare).

Here is a snapshot of our results.  Bear in mind that they represent what these companies and regulators have decided to say about themselves and that the figures are not about Executives but NEDs.


UK BoardsLarge UK CompaniesFinancial Regulators Non-financial Regulators Population Baseline
Females % 31%27%32%51%
BAME % 3%0%16%14%
CEO or MD experience?46%48%26%
C-Suite experience94%61%48%
Relevant trade?52%52%29%
HR experience2%0%3%
Psychology, behavioural economics and social sciences1%3%10%
IT and Data experience?9%0%3%
Journalist, Academic or Lawyer7%9%35%

Beginning with social justice, it is well known that women still trail men; Black, Asian, and Minority Ethnic (BAME) populations are even more under-represented in all except our sample of non-financial regulators.

It is reassuring that about half of FTSE board members have experience of their trade.  But it is disturbing that over half of financial regulator boards appear to be drawn from people of the kind they regulate.  The same is true of the SRA which is dominated by solicitors.  The problem is only slightly less acute as regards our other non-financial regulators.  

People with experience in and around the C-suite overwhelm FTSE boards and are a major presence elsewhere.  Such people, with their years of experience of leading large organisations, are an essential part of any board.  But their dominating presence is risky because it limits board perspectives, attitudes and horizons.  Most of the real world lies beyond the C-suite's knowledge horizon.  Shared perspectives and attitudes are as dangerous as they are comfortable. 

Not all Annual Reports in our cohort provide age data, but for the seventeen companies where age data was provided, the youngest NED was 44, the oldest 80 and the average 60.  7% were under 50 and 55% were over 60.  This probably reflects the predilection for people with CEO and C-suite experience.  For comparison, Facebook's youngest was 41, its oldest 72 with the average at 54; though at Alphabet, Google's owner, ages ranged from 57 to 71 with the average at 65.

All organisations, even Tech giants, are still dominated and led by people, but NEDs with deep knowledge and skill in understanding how people really tick are rare.  Such people have degrees in subjects such as psychology, organisational behaviour, behavioural economics, sociology and anthropology.  Some may have been HR stars.  We found virtually no such NEDs.  Our non-financial regulators did slightly better though the sample size was tiny.

It is the same with IT and data.  Organisations no longer use IT and use data.  They depend on IT and data just as life depends on water; but boards lack Peters' IT superstars.  9% of NEDs with IT experience looks reasonable.  But a third of those in our sample were in just four companies in the IT, media and telecoms sector - essential trade skills.  Of the balance, over 70% of our cohort, had no board member with declared expertise in this field.

Those with obvious professionally honed challenging skills were also rare.  Less than 25% of companies had a lawyer on their board.  Of six academics on boards, three were medical or pharmaceutical professors on pharma boards.  We found no journalists.

Our research, highlighted in 'Rethinking Reputational Risk - How to Manage the Risks that can Ruin Your Business, Your Reputation and You' shows that inadequate board skills - not just IT and people skills - and ineffective challenge were among the most frequent causes of failure in almost all our 40+ case studies.

Adapted from 'Rethinking Reputational Risk' Fig 14.1 © the authors



These criteria for well-constructed boards do not pretend to be a perfect, universally applicable set of rules.  Neither are they comprehensive: for example they barely touch on personal attributes such as NED character. But they do provide a useful set of attributes against which to compare your organisation's NEDs.  So I shall leave you with five questions:

  • How does your NED team compare to these criteria? 
  • Where are the gaps and what are their consequences?
  • What do you believe is wrong with or missing from these criteria, and why?
  • What do you believe is wrong with or missing from your own board's NED team, and why?
  •  How would you change your own board's composition to make it more effective?


Anthony Fitzsimmons
Reputability LLP
London
www.reputability.co.uk 
@Reputability

You can get a 20% discount when you buy Rethinking Reputational Risk - How to Manage the Risks that can Ruin Your Business, Your Reputation and You through this link by using the code RRRF20


























Sunday, 12 November 2017

Do Boards Understand Behavioural Risks to Reputation?

As regular readers know, we have analysed the annual reports of about 40 FTSE100 companies.  Our aim is to ascertain the extent to which boards and their companies demonstrate a good understanding of reputational risk, behavioural risk, organisational risk and cultural risk together with the extent to which the companies show an understanding of learning from errors and experience.  This approach is derived from our research insights summarised in "Rethinking Reputational Risk: How to Manage the Risks that can Ruin Your Business, Your Reputation and You"**

We have extracted their performance using five criteria.



Regular readers will recall our scoring system:



These disappointing results will represent a combination of accurate reporting of reality and poor reporting of better quality work.  We believe the former is much more likely than the latter: boards that understand these areas and their importance are unlikely to hide their company's strengths.

The least disappointing results emerge from 'cultural risk' with an average score of 2.8 and median of 2.5.  Given the strong emphasis given to culture by politicians and regulators, it is perhaps not surprising that culture has produced the least bad performance.  There is considerable room for improvement.

The worst results, sharing a disappointing average score of 1.7, were 'reputational risk' and 'learning from errors and experience'. Their medians were 1.5 and 2 respectively.

'Learning from errors and experience' was highly skewed: eleven companies scored zero whilst two scored 4 and three scored 3.5. This kind of learning is critical to long term success and stability.  A company has to get many underlying behavioural, organisational and cultural factors right to achieve a justified high score.  That makes this measure a particularly powerful pointer that regulators, investors and D&O insurers can use to differentiate between fragile companies and those that are systemically resilient.

These results also suggest widespread board skill gaps in this risk area.  The FRC anticipated this when it added behavioural, organisational and reputational risks to boards' explicit responsibilities.   The Risk Guidance provides that boards should consider:

whether it, and any committee or management group to which it delegates activities, has the necessary skills, knowledge, experience, authority and support to enable it to assess the risks the company faces and exercise its responsibilities effectively. Boards should consider specifically assessing this as part of their regular evaluations of their effectiveness
 These include the explicitly added areas of behavioural, organisational and reputational risk.

 The FRC also recommends that the board should:
"satisfy itself that [its] sources of assurance [on risk] have sufficient authority, independence and expertise to enable them to provide objective information and advice to the board."
Where shortcomings are found, the remedy is clear: arrange board education from people with "authority, independence and expertise".

In the meantime, we are extending our cohort to include regulators while we watch for correlations between bad scores and disastrous performance.  We shall report on results as they emerge.

Anthony Fitzsimmons
Reputability LLP
London
@reputability

** You can claim a 20% discount code on a purchase of 'Rethinking Reputational Risk' through this link using code RRRF20.