Boards need a good dose of
Boards need a good dose of ..
Ethical behaviour, interpretive-reflective thinking and the ability to ask searching questions is the cure some boards may need a good dose of.
Reflecting on the factors that catapulted the US banking sector into a worldwide financial crisis we now understand that the US's unregulated derivative market had a key role to play. As the facts are being unveiled it is clear we have learnt little for the collapse of Enron. Like Enron new concepts were readily and enthusiastically adopted, without consideration to the consequences.
For Enron it was 'Mark to Market accounting' and shortly after for the US financial industry 'derivatives' were welcomed as a new way to do business. While the introduction of such initiatives were readily adopted the potential of future risk attracted little attention. They went undetected and unchecked until it was too late to take action. Yet identifying, measuring, monitoring and mitigating risk is a key role for all boards.
So why did the decision-makers in the US accept, without consideration, the now obvious consequences and the impact? It appears that the profit motive was just like a disease, spreading through the organisation like poison in a vein and in doing so building a resistance against assessing such high risk initiatives.
More regulation is the standard treatment for such a disease. But will more regulation bring about the necessary change? Instead an injection of ethics and regular doses of fresh perspectives and unfettered decision-making may be a better and stronger antibiotic.
This suggests that the selection of board members is more than just seeking experienced directors or balancing skills sets and competencies. It's also about creating a team of independent board members who are prepared to challenge propositions brought into the boardroom, to ask the hard questions and to query then consider consequences of innovative concepts.
But to challenge initiatives board members need to carefully consider information provided to them, be able to interpret it, to identify and seek out information that should be considered (which may not be provided) then consider the consequences and associated risks before making a decision. It seems quite simple in theory but in reality it's a developed skill, one all board members need to acquire.
If only members of boards in the US had considered more carefully the consequence of operating in an unregulated derivative market the US investment institutions may have better weathered the then pending crisis and the infection may not have spread to some many other countries. If only they have learnt something from the greed mentality that brought down Enron.