29 November 2019 Open with your browser  
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Reimagining the Corporate Board

Written by: Mr. Rafael Cheng – Risk Consultant

Good corporate governance benefits an organization with long term success, such as effective risk management and positive economic growth. Given that board members are now facing increasing pressure to provide an effective oversight of risks and governance issues that are piling up, certain events occurred in the summer of 2019 may be crucial in helping organizations navigate how a modern corporate board should operate in order to maintain a strong and effective corporate governance.

Failure of Blue Bell Creameries in legal compliance and risks management
The US Delaware Supreme Court issued a ruling in June 2019 which overturned a previously dismissal decision for the lawsuit against the board of Blue Bell Creameries, an ice cream manufacturer, which led to a deadly listeria outbreak in 2015. The court affirmed that in certain circumstances, ignorance about poor risk management is not a defense against board liability.

In this case, the board failed to provide proper and necessary oversight and governance in the food safety across its production facility, which was essential and mission critical to the organization. The court further pointed out the deficiencies of Blue Bell Creameries’ corporate governance, i.e. the board failed to establish a committee to monitor food safety or devote time discussing food safety compliance issues during meetings.

Emphasis on corporate social responsibility in Business Roundtable’s new statement
The influential Business Roundtable, a group of CEOs from a number of major US companies, announced a new “Statement on the Purpose of a Corporation”, which might change the way a corporation and its board operates. The statement proposed a significant shift of its fundamental philosophy from only shareholder supremacy to an expanded view of corporate social responsibility, which raises the involvement of corporate social responsibility to a new level and elevates customers, employees, suppliers, and communities to the same level as shareholders.

In fact, corporate social responsibility has received increasing attention from the corporate world and became an integral part of the business, e.g. more corporations have adopted the environmental, social and governance (ESG) practices in their business. More importantly, the new business roundtable statement has enhanced organizations’ approach to fulfill corporate social responsibility as it advocated that the concept of corporate social responsibility is essential, and should be incorporated into the core mission, vision, and values of organizations.

Actions should be taken by the board
These two seemingly unrelated events discussed above could be the signal of a fundamental operational change in corporate governance practices. The level of corporate governance achieved by an organization will be depending on the knowledge of the board, including their approaches in executive management, proactive board oversight, information gathering, and support for risk assurance that is independent of management. The board should play a more active role in understanding the risk and opportunities that affect company performance. The boards should evolve in their roles to address the following emerging risk factors that are driven by technology advancement:

Cybersecurity
Due to the increasing reliance on information technology, organizations are becoming more vulnerable to cyber threats, such as cyberattack or data breach. The board should ensure the organization's cybersecurity approach is agile and strategic. The board should require the executive management to provide regular updates on emerging cyber risks and the counter measures implemented by the organization.

Talent Management
The rapid technological change, particularly in artificial intelligence, has brought significant change in working environments, where repetitive tasks are replaced by automation. The board should ensure the organization has adopted effective talent acquisition strategies to attract members who are more tech savvy, diverse, open to innovation, and who can bring creative insights.

Technology
The technological advancement has also enforced organization to become more astute and attuned in doing business. The board should closely monitor the development of new technology by actively engaging with outside expert to receive the latest information on new technology and evaluate the potential risks arising from it and the influence on business processes and strategies.

Under the shareholder and regulatory pressure, there will be growing importance for managing different emerging risk factors. Boards should understand the risks that may derail the organization's goals, as well as the organization's ability to manage those risks. The board should establish a reliable information network that includes the use of external resources and ensure all relevant information are accurately and completely processed in a timely manner.




Source:

The Institute of Internal Auditors (October 2019). Reimagining the Corporate Board. Tone at the Top, Issue 95.



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