Deloitte Global 2018 Directors’ Alert: Boards Must Play Critical Role in Enhancing Company Reputation
- Linking CEO succession to organizational culture, strategy to risk appetite, and digital innovation to strategy can drive reputation risk and reward for boards, leadership
- Board oversight of digital innovation has not been keeping pace with organizational needs
Published: 17 April 2018
A new publication from Deloitte Touche Tohmatsu Limited (Deloitte Global) examines the board’s role in protecting and enhancing an organization’s reputation in today’s hyper-connected world where information—whether positive or negative, true or false—travels fast. The 9th annual publication, Directors’ Alert 2018: Linkages to Success, highlights governance topics that boards around the world will be focused on in the coming year including key strategies boards can pursue to protect and enhance their organizations’ reputation.
“Reputation is one of the most important assets for a company, and protecting as well as enhancing it is critical to an organization’s future,” said Dan Konigsburg, senior managing director of the Deloitte Global Center for Corporate Governance. “By putting the right measures in place, boards can be proactive rather than reactive, and identify risks to their organization’s reputation before they strike.”
Strengthening the link between strategy and risk appetite
As risks and challenges continue to multiply and evolve, boards must focus on increasing their oversight of risk. One way boards are enhancing their risk oversight practices is by clarifying—and formally approving—the organization’s risk appetite, or, in other words, the aggregate level of risk that management is willing to take in pursuit of its strategy. But, as a first step, boards must also understand—and formally approve—management’s strategy.
“Taking risks to create value is as essential as avoiding risks that erode value. The board has a vital role to play in embracing a strategic view of risk and developing a relationship with the CRO that will help drive informed decision making that balances the company’s short- and long-term needs,” said Sam Balaji, Deloitte Global Risk Advisory Business leader.
While directors realize it is their role to oversee risk appetite and strategy, conversations linking risk appetite to strategy are usually informal, if they happen at all. Moreover, the board’s understanding of risks, especially nonfinancial risks, is often more intuitive than explicit.
According to the report, boards can bring their oversight of risk appetite and strategy to the next level for the good of the organization, its stakeholders, and its reputation. Boards can strengthen the link between strategy and risk through a number of efforts including:
- Asking management to define risk capacity, appetite, tolerance, and profile
- Challenging management on the risks to strategies
- Updating reporting media on key developments
- Convening key stakeholders in the same room, requesting a review of strategic planning and risk management
Linking CEO succession and organizational culture
More than any other management role, the CEO determines how culture evolves in an organization. According to the report, a CEO candidate’s past performance, industry experience, and stature in the business community may trump cultural needs, but neglecting these needs invites missed opportunities, and even disaster. By the same token, fulfilling these needs preserves and enhances reputation.
Boards should ensure CEO candidates meet the following criteria in order to minimize risk to an organization’s reputation:
- Fit the desired culture and behaviors. Through their daily communications and behaviors, leaders exert tremendous influence over the culture, and boards must understand a candidate’s ability to lead in that manner.
- Understand his or her fit with the culture to drive positive change. Leaders who understand their own fit with the existing culture can lead more effectively by knowing when to leverage existing ways of working and when to call for change, informing an intentional approach to daily decisions and actions that shape the culture.
- Connect with hearts and minds to create common purpose. To sustain an effective culture, leaders must somehow connect emotionally with employees to create shared purpose and motivation. This is particularly relevant to millennials and other highly purpose-driven cohorts.
Exercising oversight over digital innovation
According to the publication, many oversight practices from the pre-digital age simply don’t apply in the digital era. However, at many organizations, board oversight of digital innovation has not been keeping pace with organizational needs. Successful digital innovation hinges on new modes of thinking and acting.
In order for boards to “think digitally,” there must be a shift in the risk oversight mindset to match the shift in digital technologies that are impacting organizations. First, boards should understand that exponential change is the goal, and think about new business models rather than products. Boards must also zoom in and zoom out, and establish platforms that enable people to work faster in collaboration with a broader range of people and entities. Finally, boards must deepen their understanding of digital innovation and consider oversight accordingly.
Drawing on an interview conducted with a highly experienced Chinese business executive and INED, Deloitte China INED Program Leader David Lung pointed out that it has become inevitable for businesses to embark on their respective digital journeys. However, apart from financial services institutes and technology firms, most companies have yet to successfully integrate digital innovation into their strategies and business models.
"It is important to leverage assistance from outside specialists and develop buy-in at both the board and management levels, which would propel strategic and operational changes needed to drive digital innovation. In order to do this, companies will have to take into account potential reputational risks, arising from problems such as potential adjustment on human resources due to robotic process automation, as well as the viral social media impacts related to customer dissatisfaction and changes in market sentiment," Lung added.
“Despite challenges in the landscape, this is an exciting time to serve on a board,” continued Konigsburg. “While risks are evolving every day, the opportunity to make a positive impact, both for an organization and society at large, presents a unique opportunity for the board leaders of today and tomorrow.”