Do Boards Understand Behavioural Risks to Reputation?

As regular readers know, we have analysed the annual reports of about 40 FTSE100 companies.  Our aim is to ascertain the extent to which boards and their companies demonstrate a good understanding of reputational risk, behavioural risk, organisational risk and cultural risk together with the extent to which the companies show an understanding of learning from errors and experience.  This approach is derived from our research insights, which are explained in more detail in "Rethinking Reputational Risk: How to Manage the Risks that can Ruin Your Business, Your Reputation and You"**

We have extracted their performance using five criteria.

Regular readers will recall our scoring system:



These disappointing results will represent a combination of accurate reporting of reality and poor reporting of better quality work.  We believe the former is much more likely than the latter: boards that understand these areas and their importance are unlikely to hide their company's strengths.

The least disappointing results emerge from 'cultural risk' with an average score of 2.8 and median of 2.5.  Given the strong emphasis given to culture by politicians and regulators, it is perhaps not surprising that culture has produced the least bad performance.  There is considerable room for improvement.

The worst results, sharing a disappointing average score of 1.7, were 'reputational risk' and 'learning from errors and experience'. Their medians were 1.5 and 2 respectively.

'Learning from errors and experience' was highly skewed: eleven companies scored zero whilst two scored 4 and three scored 3.5. This kind of learning is critical to long term success and stability.  A company has to get many underlying behavioural, organisational and cultural factors right to achieve a justified high score.  That makes this measure a particularly powerful pointer that regulators, investors and D&O insurers can use to differentiate between fragile companies and those that are systemically resilient.

These results also suggest widespread board skill gaps in this risk area.  The FRC anticipated this when it added behavioural, organisational and reputational risks to boards' explicit responsibilities.   The Risk Guidance provides that boards should consider:

“whether it, and any committee or management group to which it delegates activities, has the necessary skills, knowledge, experience, authority and support to enable it to assess the risks the company faces and exercise its responsibilities effectively. Boards should consider specifically assessing this as part of their regular evaluations of their effectiveness”

 These include the explicitly added areas of behavioural, organisational and reputational risk.

 The FRC also recommends that the board should:

"satisfy itself that [its] sources of assurance [on risk] have sufficient authority, independence and expertise to enable them to provide objective information and advice to the board."

Where shortcomings are found, the remedy is clear: arrange board education from people with "authority, independence and expertise".

In the meantime, we are extending our cohort to include regulators while we watch for correlations between bad scores and disastrous performance.  We shall report on results as they emerge.

Anthony Fitzsimmons

Reputability LLP

London

www.reputability.co.uk

@reputability

** You can claim a 20% discount code on a purchase of 'Rethinking Reputational Risk' through this link using code RRRF20.