A New Tool to Sniff out Boardroom Risk

Article excerpt

Byline: Anthony Hilton city comment

CHRIS Willford, finance director of Bradford & Bingley at the time of the financial crash, failed in a legal move last week to block a disciplinary case against him. He was alleged not to have ensured the finance department furnished him with the latest available information, leaving him unable to be on top of information that should have been supplied to the board when the company was trying to organise a rights issue to help it cope with the crisis.

Bradford & Bingley's rights issue failed and the company was broken up, the operational bit being sold to Santander and the back book of troubled loans nationalised.

But what is important is not the case brought against the unfortunate Willford but rather the lessons others can learn from it.

First, it does not matter how sophisticated your risk systems are, they're all useless if people don't behave as the computer model has forecast them to.

This is a theme highlighted in the latest piece of work -- Deconstructing Failure: Insights for Boards -- by Anthony Fitzsimmons and others and published by Reputability, a boardroom governance consultancy of which Fitzsimmons is chairman. A couple of years ago, the same team published, in conjunction with the Association of Insurance and Risk Managers in Industry and Commerce (Airmic) and Cass Business School, a study called Roads to Ruin which looked at corporate collapses and sought to discover if there were common themes.

This latest work builds on that base, with analysis of no fewer than 41 recent corporate crises, and seeks to identify whether there were common causes for the failures.

It found there were indeed common causes and they were almost all in the boardroom. Time and again, the board lacked the skills needed to call executives to account, or was blind to risks which threatened the firm's licence to operate or its reputation, or the working assumptions on which the business was based. Not far behind came defective information flows to boards -- pace Bradford & Bingley -- flaws in leadership and risks associated with complexity.

Financial companies with these problems tended also to have others, one of which is depressingly predictable. In stark contrast to the non-financial sector, incentives played a part in destroying financial businesses. So too did flaws in leadership and ethos and, as we have seen, poor-quality information.

The problem this throws up for companies is threefold. First, these issues are behavioural rather than accounting and reflect the fact that companies are best thought of as being biological rather than mechanical in the way they behave and evolve. …