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Information glass ceiling keeps non-execs in the dark and increases risk of corporate failure


An invisible glass ceiling is preventing vital risk information from getting to non-executive directors (NEDs) and other board members. This is one conclusion drawn from a hard-hitting report by Cass Business School which is part of City University London on behalf of the risk management association Airmic, published in full today. This barrier lies behind many big corporate failures, say the researchers, and it will continue to do so until lines of communication are improved.




The Cass research, Roads to Ruin, looks in detail at twenty three companies with aggregate pre-crisis assets of more than $6 trillion, all of which suffered potentially life-threatening corporate crises. They include AIG, Arthur Andersen, BP, Northern Rock and Cadbury Schweppes.

Six of the firms studied collapsed (with three having to be rescued by the state) while most of the rest suffered large losses and significant damage to their reputations. Around twenty chief executives and chairmen subsequently lost their jobs, and many NEDs were removed or resigned in the aftermath of the crises.

“Events that bring down or seriously damage otherwise successful companies don’t just happen. They are commonly the result of boards failing to see underlying risks that threaten the company,” said Professor Chris Parsons, who led the Cass research team.

“This report makes clear that there is a pattern to the apparently disconnected circumstances that cause companies in completely different sectors to fail,” said Airmic chief executive John Hurrell. “More big corporate failures are inevitable as long as directors are blind to the risks they face.”

The report finds that NEDs and other board members often lacked the skills to monitor and control executives nominally under their supervision, and they often showed risk blindness as they pursued reward and opportunity. “NEDs should be aware that there may be important ‘unknown knowns’ - things that are known within the company but unknown to its leadership,” said Anthony Fitzsimmons, one of the report’s authors. “It’s typically a deep-seated culture or wrong incentives that keep them hidden.”

The Cass report calls on companies to re-think risk management at all levels so that the missing risks are included in risk maps. It adds that risk and internal audit professionals may need to develop additional skills to fulfil this role adequately.

“Our report shows that boards, and particularly their Chairmen and NEDs, need to recognise the importance of risks that are not captured by current techniques”, said Professor Steve Haberman, Deputy Dean of Cass Business School. “They also need to find ways of ensuring that the missing risks are captured.”

Cass Business School
Cass Business School, which is part of City University London, delivers innovative, relevant and forward-looking education, training, consultancy and research. Located in the heart of one of the world’s leading financial centres, Cass is the business school for the City of London.
Our MBA, specialist Masters and undergraduate degrees have a global reputation for excellence, and the School supports nearly 100 PhD students. Cass offers the widest portfolio of specialist Masters programmes in Europe and our Executive MBA is ranked tenth in the world by the Financial Times.
Cass has the largest faculties of Finance and Actuarial Science and Insurance in Europe. It is ranked in the top 10 UK business schools for business, management and finance research and 90% of the research output is internationally significant.
Cass is a place where students, academics, industry experts, business leaders and policy makers can enrich each other's thinking. For further information visit: cass.city.ac.uk

Lundi 18 Juillet 2011
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