The destiny of any organization is guided by many different factors, but ultimate responsibility rests with its senior leadership. The buck stops here, as the old expression goes – both in terms of positive results and negative repercussions.
A company’s corporate ethos and core values are reflected through its board. Ideally, it should represent an appropriate mix of experience, industry knowledge and specialized expertise, enabling it to bring practical wisdom, and mature judgment to bear when considering the long-term interests of shareholders.
The board of directors is a major component of senior leadership with responsibility and oversight comprising four critical areas:
- Corporate governance;
- Business strategy;
- Risk intelligence; and
- Organizational/reputational integrity.
Corporate governance is legally vested in a board of directors who have a fiduciary duty to serve the interests of the corporation’s shareholders rather than their own interests, or those of the firm’s management. As such, the board bears ultimate responsibility for overall enterprise performance, and must hold the CEO and management team accountable for their actions.
The Chartered Accountants of Canada (CICA) defines the role of the board as follows:
“They will oversee the processes that management has in place to identify business opportunities and risks. They will consider the extent and types of risk that it is acceptable for the company to bear. They will monitor management’s systems and processes for managing the broad range of business risk. And most important, on an ongoing basis, they will review with management how the strategic environment is changing, what key business risks and opportunities are appearing, how they are being managed and what, if any, modifications in strategic direction should be adopted.”
In its Framework for Board Oversight of Enterprise Risk, the CICA goes on to describe the board’s role in the oversight of risk as being akin to that of an audit committee which doesn’t prepare financial statements or maintain the system of internal control, but bears responsibility for overseeing the reporting and control processes. “Similarly, boards of directors are not expected to unilaterally identify, analyze, mitigate and monitor enterprise risk,” it states. “Rather boards must oversee the risk management systems and processes as well as continuously review the outcomes and planning associated with such processes.”
The board of directors plays an important role in the strategic management process. The board oversees the framework of controls designed to identify, manage and mitigate strategic risks. Boards also commonly audit various components of an organization’s strategic management process in order to make it more effective and efficient.
For example, the board can demand re-examination of the company’s mission, its long-term goals, its corporate strategy, and its approach to the competition. To quote Harvard scholar and “father of corporate strategy”, Kenneth Andrews: “A responsible and effective board should require of its management a unique and durable corporate strategy, review it periodically for its validity, and use it as the reference point for all other board decisions.” (Directors’ Responsibilities for Strategy, Harvard Business Review, Nov-Dec 1980)
Boards that diligently integrate risk management with development of the company’s strategic direction and business plan can contribute immensely to the likelihood of success by identifying (and then mitigating) potential risk exposure that might otherwise detract from the achievement of strategic objectives.
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