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.”

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