Clifford Chance

Boardroom concerns about risk may be stifling corporate growth and economic recovery

Criminalisation of companies and individuals is spreading across the globe, raising the stakes in risk management

Nearly three-quarters (74%) of global board members surveyed by The Economist Intelligence Unit (EIU) for international law firm Clifford Chance say they have seen an increase in the time boards spend on risk management compared to two years ago, with 40% admitting they are concerned their board has become too risk-averse and that this is inhibiting business growth. This perspective is shared particularly strongly amongst respondents in North America.

These findings are featured in View From The Top: A board-level perspective on current business risks, a report drawing on a global survey conducted by the EIU which canvassed the views of 320 board members of companies, each with over half a billion dollars in annual revenue.

In response to the survey findings, Guy Norman, Global Head of Clifford Chance’s Corporate practice said: “A consequence of increased board emphasis on managing risk could be a more conservative approach to new corporate initiatives which, in turn, may be contributing to a slower global economic recovery. Although it is imperative that directors take adequate steps to manage these risks and protect their organisation's reputation, they must allow space on the agenda for longer term business development and expansion. The most forward-thinking companies are attempting to implement a more integrated and holistic approach to this whole area, rather than simply 'parking' risk issues with their legal or compliance function. Over time, we believe this should help boards and chief executives to oversee and manage the sometimes competing objectives of managing risk and pursuing growth."

Risk-adversity is taking its toll in other ways too: nearly half (47%) of respondents admit they are reluctant to accept non-executive director roles because of the increasing exposure to personal liability. As a result, organisations may find that the pool of senior talent available to fill board roles becomes ever smaller.

Enforcement against corporations is also spreading. While the US has long been a leader other jurisdictions are catching up, especially in the UK and across Asia. For global corporates this makes for a complex environment – with activities across different jurisdictions attracting the attention of multiple enforcement agencies and creating an environment of competition between them.

Jeremy Sandelson, Global Head of Litigation and Dispute Resolution comments: “The range of risks facing companies is perhaps greater today than ever. It's a significant leadership issue requiring boards and the senior executive team to ensure that risk awareness is spread throughout the organisation – it has to start at the top for it to be embedded into every tier of the business. US-style enforcement and criminal action is now spreading across the world, aiming to stamp out wrongful behaviour. But with scandals continuing to emerge we have to ask ourselves, is onerous regulation and increased criminalisation actually making any difference? A legislative framework is only effective if it achieves the right results. Only time will tell.”

Other findings from View From The Top: A board-level perspective on current business risks include:

• Priority risk categories: The three most commonly cited areas of focus for the board are financial risk (75%), reputation risk (54%), and legal and regulatory risk (49%). In contrast, emerging risks such as cyber attacks and human rights breaches feature lower down the list, with only 15% and 6% of respondents identifying these as areas of focus.
• Rising investment in risk management: As well as nearly three quarters (74%) of respondents stating that more time is being invested by the board in risk management, some 58% confirm that this is matched by a significant increase in financial investment in risk management.
• Despite heavy investment, ensuring a global approach to risk remains a challenge for multinationals: 64% of respondent firms agreed that ensuring a uniform approach to managing risk is made more difficult by the cultural differences that exist across an organisation's international operations.
• Corporate culture is a concern:  Boards recognise that mitigating risks associated with unethical behaviour cannot be left solely to the risk function. However whilst over four-fifths (82%) think the reputational risk arising from unethical behaviour at their organisation has become much more important for the board, only 33% of firms have made risk management a measurable element for key staff. Boards recognise that they need to instil a strong corporate culture that permeates through the organisation – to date 24% of respondent firms have carried out a review of their corporate culture from a risk perspective, but a further 41% are planning to within the next two years.
• Political interference making boards uneasy: 25% of respondents cite political risk as an area of particular focus for their boards. The survey also reveals that the US is now ranked as the major economy with the highest political interference in business – ahead of Russia, China and India.