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Boards at Risk 1

Copyright 2016 © IMD - Temasek Management Services Pte Ltd, All rights reserved.

Boards at Risk 2


SYNOPSIS

The Board's main responsibility is to steward its institution through risks and opportunities. Nonetheless, boards are

also at risk—their exposure goes beyond the immediate success or failure of the institution they supervise—they

need to balance long-term stewardship with short term survival. Boards are at risk because of their own ability (or

lack thereof) to steer complex institutions through the murky meanders of reputational hits, business disruptions,

economic shocks, leadership breakdowns and organisational failures.

Boards are ill-prepared to oversee and manage the rising complexity and normalisation of deviance. They need to

better understand what strong risk prevention and rich opportunity optimisation entails. They often rely on gut and

overlook the lessons from sophistication, thus putting themselves at risk.

Facilitated by Professor Didier Cossin, the session will explore best board risk practices, inspired by his clinical work

with boards in Asia, Africa, Europe and Americas and explore cases on reputation hits (VW, FIFA), economic tsunamis

(ICBC, the Fed, UBS, Sinopec), geopolitics (United Nations, Gazprombank, The Red Cross), misconduct (Standard

Chartered) and near-death experiments (Nokia). Professor Cossin will be joined by eminent chairmen and directors

to discuss:

• Risk lessons from recent times

• Causes of 95% of board failures

• The four pillars of risk thinking

• Disruptive behaviours and board breakdowns in front of risks

• Building the risk culture from the board

• Principles of risk education

• Diagnostics of risk preparedness

• Red flags of risk unpreparedness

This white paper includes a summary of the presentations, as well as key insights from the discussions at the forum.

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INTRODUCTION

Boards are at the forefront of risks. It is at the heart of the board’s mission to assess and supervise risks, as well as to

steer the organisation towards major opportunities. This requires board members to be proficient in risk knowledge,

which spans from techniques to philosophy.

Beyond classical risk thinking, the dramatic economic, technological and social changes we are witnessing globally

has led boards to explore new combinations of social conservatism, value-based leadership and disruptive

entrepreneurship. In the process, boards are venturing into uncharted waters and encountering new types of risk.

Concluding the March 2016 instalment of TMS Academy’s Directors-in-Dialogue series was a panel discussion on

what boards can do to anticipate and manage risk. In particular, the discussion zoomed in on the issue of reconciling

today’s renewed focus on governance and compliance on the one hand with an organisation’s capabilities in

entrepreneurship and innovation on the other. The nature and implications of disruptive change were explored at

length, as were the broader, underlying trends related to business and its role in society. The panel included Erich

Hunziker, Chairman of BB Biotech AG; Tan Suee Chieh, Group CEO of NTUC Enterprise Co-operative Limited; and Teo

Swee Lian, Independent Director at Singapore Telecommunications Limited.

I. CLASSICAL RISK THINKING

Risk thinking used to be reserved for the back office and risk reports used to put board members to sleep. Not

anymore. The confusion and the impact of risk has increased dramatically, and those companies that have

developed special skills, flexibility and acumen, have gained a terrific advantage.

We find that best risk practices are aligned along the following four dimensions:

1. Physical health check – What are we exposed to?

2. Mental health check – Are we capturing the right problems?

3. Strategic check – Are we doing the right moves?

4. Governance check – Are we well structured for continued awareness?

Too many boards limit board thinking to the first dimension only. Slippage on any one of the four dimensions may

doom a company to failure or underperformance. When times were good, underperformance was often acceptable

because everybody was doing well. In today’s tough times, underperformance is no longer acceptable. Being

unhealthy during an epidemic is not the same as being unhealthy during good times. Money has become scarce, the

generosity of fund providers is waning and the competition is becoming tougher. We all know that some will do

particularly well.

Fortunes are also made during these times of survival of the fittest. In the following paragraphs, we discuss, in more

detail, the four dimensions critical to maintaining adequate risk fitness. It is important that corporations focus on all

four dimensions to ensure success. If a company does not balance its focus across all four, then they can jeopardise

their risk fitness.

The Physical Health Check: Technical Risks

First and foremost, a physical health check is necessary. By now, every firm should be aware of where it hurts.

Ideally, they will also be aware of where its major clients and suppliers are feeling pain.

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We are puzzled by companies that are almost surprised when they encounter difficulties through volatility of well-

known risky quantities such as interest rates, currencies, oil and other commodity prices. The high variance of these

has long been demonstrated and the last 20 to 40 years only inform us of the incredible uncertainty that we can rely

on. In today’s world, nothing should surprise us anymore. We need to open our minds to new risks, to all risks, and

somehow prepare ourselves for them. While preparation can never fully prepare an organisation for the actual risks,

it still helps frame the mind, the organisation and the network so that those prepared can react faster, better and

stronger. There are immediate lessons on risks that can be taken from financial markets recent evolution.

LESSON 1: THERE IS NO SINGLE BEST WAY TO MEASURE RISK

We have to say that techniques have value. Financial models look for simple solutions such as volatility or standard

deviation to match with the real world in an effort to eliminate risk. Are these measures working?

One major issue with these measures is the linkage of risks. In extreme situations, risk linkages are very different.

Copulas, one of the most sophisticated risk tools, is a mathematical function that models how risks link. However,

copulas are highly unstable. At best, these measures give a view, often biased, of risk under certain framework.

Using these tools poses a great challenge, as they might fail. The financial market does not equate to physics. In

reality, when you take action, your behavior may alter the risk profile and start a feedback loop that invalidates your

reasoning. Professional managers often fail when the framework does not work.

What are we to do when risk measures do not work? Having several technical frameworks to think about risk and

developing a risk culture are key. For non-normal distribution, we have technically an infinite number of risk

measures that work. When the world evolves toward non-normal set up, we have to consider many risk measures.

LESSON 2: IRRATIONALITY CAN DRIVE RISKS AND DIVERSIFICATION ITSELF IS AT RISK

Market irrationality has been demonstrated to hold for long times, sometimes beyond a decade. Bubbles can be long

lasting. This threatens rational risk methods. It is commonly considered that if one cannot measure risk, it is best to

eliminate risks through diversification. Stated simply, diversification is based on correlations. However, correlation

measures rarely work.

When looking at risk, we tend to view it as cyclical. Risk does not need to come back and diversification might not

work. We have to integrate the emotional and speculative sides into analysis. The reality is that we do not need a

physical correlation; it could be the result of a mental view or due to psychological linkage. Stability of the links is

then highly suspicious.

LESSON 3: RISK PICKING IS A MAJOR RISK BY ITSELF. NOT PICKING RISKS IS PICKING RISKS

Major mistakes at the top of the bank have been a bigger source of failure than any other Basel risk. The UBS case is

an illustration of the behavior risk of arrogance. UBS’s ambition was to be the leading investment bank in the world.

UBS’s board neglected a major risk, through its lack of knowledge; it was unaware of how exposed to the CDO

market it was, despite its bringing 40% of the bank’s profits. There was also the strategic risk due to its aspiration to

be the number one investment bank. This aspiration reinforced its decision to stay in the market and to weather the

storm.

LESSON 4: RISK DOES NOT HAVE A SHAPE AND RENEWS ITSELF ALL THE TIME

Markets evolve; risks evolve. New products often entail untested risk. In 2012, JP Morgan Chase lost $7 billion, “a

tempest in a teapot” as Jamie Dimon put it. A trader in London, “the London whale,” who was hedging the balance

sheet of the bank, lost $7 billion on a simple derivative CDX.NA.IG.9. The trade was supposed to hedge the default

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risk of the loans for the large corporations. Apparently, the hedging became speculation. On the board’s risk

committee, there were three independent directors. None of them had banking or risk experience- one was the

director of a museum. Boards can be the new risk of organisations, through their lack of knowledge, lack of

commitment, or lack of preparation. Hence the justified public consideration for boards as a risk factor.

As threats and opportunities may come from many different sources, risks are converging, interconnecting and

amplifying complexity. For example, in oil and gas, the drop in oil prices has created ripple effects that go much

beyond revenues and impact the value chain much beyond the organisation itself, touching suppliers, countries,

clients and affecting geopolitics. Thus, we cannot rely on our old estimates. Instead, we must put the plan on the

drawing board again. For this, we suggest the following four-step process for technical risk mastery:

1. Identify your Risks

Identifying risks is too important be left to a bottom up approach. Your employees – whether it is a single

person or a single department – will often miss the big picture. The view of the top level of management

must be fed by bottom up of reporting (with open lines of communication in the corporation).

One well-known company, when it started risk reporting to their board, decided to conduct a large survey,

which involved most employees. It then compiled the data and reported its findings to the board. The major

risk – i.e. the one that was consistently rated as having high impact on each and every employee – was VAT

compliance, which was hardly a major corporate risk. Thus, the compilation of individual employees’ views

of major risk, without the benefit of top-management’s view, may not result in a good view of risk for the

whole corporation. However, taking the bottom up approach and listening to different viewpoints is still

important as the following example illustrates. In April 2007, a trader at UBS reported difficulties on

subprime structured products to his boss. This could have been a strong signal to top UBS management. The

chairman’s office did not see the signal, closed the trader’s outfit and integrated it in the UBS Investment

Bank with little proper risk identification. And we all know how that ended.

Old ways of risk identification also need to be revisited. For example, bank deposits may have looked stable

in the past. But, rethinking that exposure may be essential in today’s uncertain world.

2. Assess your Risk

Once major risks have been identified, it is crucial to assess them to gain a better understanding of these

risks. Even non-quantifiable risks can be assessed. The assessment does not need to be exact, as risks cannot

be fully assessed. Otherwise, they would not be risks. The role of the assessment is not to be successful in

the assessment, but rather, to grow awareness and develop a common language that can then be used to

communicate and prepare for the risk.

Many tools are available for assessment. The use of multiple tools is recommended for large investments or

in sensitive areas. Sensitivity analyses (tornado diagrams or spider diagrams), scenarios and Monte-Carlo

simulations are all useful tools, with different granularity and different ease of use. A verbal assessment

done by those closest to risk is also useful. The goal is not to increase paperwork; instead, the role is to

increase awareness, and thus, we welcome all tools that help us get closer to a true awareness of the

potential impact of the identified risks. No one technique can be right and thus the compact use of multiple

tools is a necessity for proficient boards.

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3. Manage your Risks

If risks are present, isn’t it best to eliminate them? If this is the case, then managing risks may become

fundamental. Here, we would like to highlight that being too conservative is an issue. Your investors expect

you to take risks. You should only eliminate those risks that are not core, and then risk management should

be conducted with full transparency. For example, gold mines hedging gold prices without full disclosure

may be misleading investors that have chosen them for their gold price exposure. We find that the best risks

to manage are those that create more downside than upside. Airlines’ exposure to fuel costs may be a good

example. An airline has more to lose when oil prices are very high than it does with when they are very low.

Southwest’s remarkable move to hedge fuel costs at about $25 per barrel from 2004 to 2009 has been the

major reason of its continued profitability while all other US airlines were in the red. BMW, on the other

hand, stopped its euro/$ hedges too early thus losing €1.5 billion on these currencies. This shows that some

are viewing hedges as a timing issue. If CFOs or treasurers were so good at timing, they would become

traders, make more money and would be finished working by 5 p.m. Thus, for any risk management

program, two questions should be asked: (1) Does it truly create value for our shareholders? Many risk

management programs create comfort for managers rather than add value to the business. (2) Does it

depend on timing? Any management program that depends on timing is a speculative program. You then

have to ask the question: are you good at speculation?

4. Structure your Risks

Finally, the structuring of risks – or sharing of risks – has had dramatic success in recent times. This entails

identifying different risk exposures in a company’s network of relationships (investors, clients, suppliers,

etc.) and agreeing to share the risks with those least sensitive to them (i.e. those most able to overcome the

risks), to create value for all. This principle has often been used in joint ventures and acquisitions (with earn

outs) as well as in commercial contracts. For example, Syngenta, one of the largest producers of fertilisers

and pesticides in the world, has boosted its Latin American business by providing farmers with yield

guarantees. The high risk farmers (who typically go bankrupt in bad times) are able to pass on some of their

risks to Syngenta. Syngenta, in turn, can direct them towards a commodity trader. In this way, Syngenta

obtains more business, with less credit risk (since chances are that the “insured” farmers are more likely to

pay) and at typically higher prices for its products. Syngenta’s lessons from Latin America can now be levered

in the US and in Eastern Europe and Russia. In today’s turmoil, with parties so sensitive to risk, smart risk

structuring can make a big difference.

Once the physical check is complete, it is time to address the mental check, the strategic check and governance

check. We have kept these briefer, but it is important to note that deep investigation in these areas can also create

much value.

The Mental Health Check: Behaviours

The question we ask is: How is your attitude? We all know that market sentiments have taken many by surprise; the

reality is that such sentiments are well-known factors of risk nowadays. Markets are somewhat crazy, but markets

may be just a reflexion of ourselves. Are we much better than they are? And, thus, this raises the question: Can we

look at our failings?

We now have good views of typical behavioural risks that arise. As a checklist, senior management should test itself

on the following different dimensions – a classical roster of seven behavioural risks:

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1. Herd behavior: Are you following the herd? Many prefer to have company when they are wrong

rather than be wrong alone. This is particularly true of management levels where all cannot be fired at once.

And, thus, it is typically much safer to be wrong with others. Unfortunately, this type of behavior has

certainly contributed to getting us into today’s mess. Thus, it is useful to revisit past decisions, successful

ones as well as failures, and see where you stand, you as an individual, you and your team, you and your

company.

2. Optimism: When asked if they are counted in the top 1% of the richest in America, a full 15% of the

US population answers yes. Are you a better driver than average? A better manager than average? Is your

company particularly insulated in the crisis? A reality check may be warranted.

3. Over-confidence: The best professionals acknowledge that predicting oil prices is close to

impossible. The same can be said for predicting currencies or predicting markets. What about you? Most of

us have views and many of us start believing our own views. Thus, the question is: do you truly know how

little you know? Not surprisingly, most of the senior managers with whom we have administered this test,

fail it. They are leaders, and one does not lead others with self-doubt. Unfortunately, in difficult times, taking

some time for self-doubt is important.

4. Belief perseverance: Have you held the same views for a long time, despite the large shifts in the

world? If so, are they steady or are they rigid? Most of us do not adapt fast enough; we do not have the

flexibility. While humans have been remarkably adaptive as a species, we are still being pushed around. How

fast can you evolve to the new environment we are facing? Do you still expect the old times to come back? If

so, it’s time for a reality check.

5. Hindsight bias: Are you the type of person who tends to think: “I told you so. I knew it.” If so, are

you looking back in time truthfully, or are you second-guessing how you truly would have reacted from

today’s situation, rather than from the past.

6. Anchoring: Are you holding on to your stocks because they used to be worth three times more and,

thus, it would be a loss to sell them now? Is your view of your assets linked to what they were a few years

ago?

7. Representativeness: Finally, do you believe that markets will come back up because they always do?

Do you believe the cycle is four to five years as it traditionally has been? Are you looking for some pattern to

repeat itself? Sometimes true, life-altering changes happen, e.g. the Russian revolution or nuclear

development, and we have to accept that this is a possibility. Some events have changed the world in such a

way that past patterns do not come back.

All of these behavioural patterns act as liabilities against your awareness of risks. Just checking where you stand,

where your team stands and where your organisation stands will help you figure out the reality.

Strategic Check

Strategic failure and blind spots can also pose serious problems for boards. For example, Kodak was the inventor of

digital photography in 1975, but was unable to find a way to adapt its business model to take advantage of the

opportunity. Kodak went bankrupt in 2012.

As major shifts happen, strategies need to be revisited. Holding on to past strategies does not make sense. But

developing new strategies, or adjusting passively to the markets, is not much better. While strategic thinking is

complex, and the building of strategies requires much work, from client and competitor awareness to abilities to

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build on one’s core distinctiveness, there are ways to test overall strategic choices for their pertinence. And, thus,

the question we ask is simple: Is your strategy shift a smart move?

A. Typical strategies: There are a limited number of typical strategies. Using Paul Strebel’s “Smart Big Moves”

framework, all big moves can be classified into five categories:

1. Going for growth, which happens when you roll out a product for example.

2. Restoring profitability, as when a company needs restructuring.

3. Finding a new game, when a company attempts to reinvent oneself

4. Relaunching growth, when a company levers its distinctiveness to differentiate itself from

competitors or substitutes

5. Realignment, when a company realigns its value proposition to its customers through a revised value

chain, with capability development, for example with process efficiency.

B. Smart or stupid? Once the move is well identified (and this can be done for clients and suppliers as well),

one needs to question it. Is the strategy smart? Overall, smart moves will:

1. Lever the company’s distinctiveness, i.e. its objectives, values, culture and capabilities, in terms of

skills and resources, and its resources, in terms of assets, clients and partners.

2. Not fall into psychological traps: such as we can beat the competition no matter what we do, we

know what the customer needs or we never admit defeat; we always move forward.

3. Address significant market opportunities.

First, assess the strategy and the move considered. Then confront to competitors’ moves, customers’ needs and

value chain opportunities). Then use change management techniques together with quality leadership, align the

organisation towards the newly defined goal and consistently drive success. Of course, even smart strategies can fail:

the environment can change, competitors can move unexpectedly, etc. Then comes the need to possibly align again,

revisiting all previous risks. High quality leaders will recognise this. But, of course, mistakes can also be made at the

leadership level. This takes us to our next and last level of risk, governance.

First, assess the strategy and the move considered. Then confront to competitors’ moves, customers’ needs and

value chain opportunities). Then use change management techniques together with quality leadership, align the

organisation towards the newly defined goal and consistently drive success. Of course, even smart strategies can fail:

the environment can change, competitors can move unexpectedly, etc. Then comes the need to possibly align again,

revisiting all previous risks. High quality leaders will recognise this. But, of course, mistakes can also be made at the

leadership level. This takes us to our next and last level of risk, governance.

Governance Check

Leaders fail. It happens. It is not the worst problem by itself. Leaders are human and while the selection process may

be rigorous, good leaders in some circumstances may prove to be bad leaders in others. The problem comes when a

failing leader is in place for too long. This is where governance risk happens. In order to control for that risk,

governance rules need to apply. Not to constrain but simply as a matter of fact, to make sure that leadership failure,

when it happens, does not become too costly to the organisation.

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There are some well-known governance risk factors that can be self-checked in any organisation. In particular, classic

risk factors include:

1. A poorly defined role of the board

2. A domineering CEO (or chairman)

3. An inefficient board: size, independence, personalities, the role of outsiders, the structure of the

board committees, all matter

4. Conflicts of interest at the board or senior management level

5. Compensation schemes that have strong side effects

6. A board that is not well aligned to its mission (whether supervisory, strategic, connecting or hands-

on).

7. A poor governance culture (values, understanding and dynamics)

Good governance should be maintained even when things go well. Actually, the best time to make improvements is

when things are going well because it is usually not as hectic as when things are not going well. Once the structures

are in place for continued corporate awareness, good governance is ensured.

II. TODAY’S RISKS: DISRUPTION IS THE WORD

Today’s world is going through a stage of social transformation. Chief among the buzzwords heard in the boardroom

are terms like “disruption”, “disruptive”, “disruptor”. Organisations are coming to terms with the notion that

expecting the future to bring more of the same, and extrapolating directly from the past when shaping and

preparing for the future, may be the riskiest behaviour of all. They are also aware that disruption, innovative

challenge and creative destruction are rarely initiated or necessitated by the centre or “the core”. Nearly always,

these changes come from what they have traditionally regarded as the periphery of their universe.

On the socioeconomic front, young people are the ones who have internalised to an unprecedented degree the

logic, necessity and value of disruptive change. In a stark departure from the past, theirs is a generation that is no

longer virtually guaranteed a rise in living standards, let alone one that is achievable by seeking the security that

once came with a lifetime spent in a corporate job. Therefore it is not sur- prising that the millennials have been on

the vanguard of blurring many familiar lines in consumer habits, services provisioning, content creation and

consumption, and organisational behaviour.

The inevitable question, and one that has become pressing for many boards, is: how to reconcile this unstoppable

process of breaking old rules and paradigms with the expectation, heightened in the aftermath of the 2008 crisis, of

companies subjecting themselves to tighter governance and more stringent regulatory standards? And furthermore,

how to make boardroom diversity – of generations but also perspectives and attitudes – a truly strategic, as opposed

to general, principle of board composition?

Drawing on his experience in successfully transitioning from a CXO role with a global multinational corporation to

heading a start-up company, Erich Hunziker voiced his encouragement for companies to reinvent themselves on a

daily basis, almost as if they didn’t possess a past at all. Illustrating how a board can harness the creative energy and

imagination of the company’s young executives, he recommended assembling a task force of high-potential workers

aged 35 and below; encouraging them to visualise the market in which the company will operate in five or ten years’

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time; articulating what type of an organisation, in their view, is likely to be a winner in this newly-evolved market

landscape; comparing this projection with where the company stands today; and analysing and discussing the gap.

“It is simple: if we just wait,

the future will arrive and

brush us aside.”

Erich Hunziker, Chairman, BB Biotech AG

Although it may be tempting to outsource this exercise

to a team of external consultants, this would very likely

defeat its purpose. Granted, a CEO may be nervous

initially about the outcomes and the broader

ramifications. But evidence shows that most CEOs will

eventually not only support the initiative but in fact

actively use it to generate new ideas for boosting the

firm’s competitiveness and long-term business

prospects.

Boards’ guidance is also essential in designing the best framework for experimenting with and materialising

disruptive innovation. Audience members concurred that in highly-regulated industries where an organisation’s

conduct is closely scrutinised by regulators, it can be difficult tread on grey areas – no matter how noble the spirit of

intrapreneurship and of anticipating disruptions. Discussion pointed out that useful as it is to embrace new ways of

thinking, at the end of the day it may often be more practical to incubate outside the organisation. But this should

not stop companies, including large enterprises operating in strategic sectors, from finding ways to plant modest

amounts of seed money, ideally at some remove from the corporate centre. That may be a great way of eliciting new

thought and perspectives on trends that are soon bound to become critical for the organisation’s profitability and

well-being, such as overcoming long-standing barriers and bringing innovative products and services across

international borders. In addition, securing the presence of a board member in these sessions can be a good way of

exerting pressure, albeit subtly and indirectly, on the board itself.

Is governance killing entrepreneurship?

The competing objectives of regulation and entrepreneurship may be a source of tension in the boardroom. This is

something that quality boards must accept. The dominant discourse over the past decade may have shifted to

regulation, compliance and risk aversion, but entrepreneurship never ceased to require passion, dedication – and

indeed, a lot of risk. Against this background what this means is that a board member’s ideal mindset can be

described as that of an “optimistic paranoiac” – steadfast in furthering the company’s aspirations yet constantly

preparing for new threats.

There are many facets of a board member’s previous

experience that will stand him or her in good stead when

approaching the new dynamics of today’s boardroom.

Teo Swee Lian related her journey as a former industry

regulator joining the board of a private company in her

new capacity as independent director. She believed that

her years in a regulatory role had equipped her with

quite a few of the ‘softer’ attributes that are necessary

to maintain a diplomatic but constructive relationship

with management; to know how and when to ask

probing questions, and to persevere, with a healthy dose

of scepticism, in the probing, especially when decisions

and situations are presented as containing no risk or low

“I haven’t seen a board that was

highly successful in the absence

of dissent. There must be

creative tension and rumblings

on dissent surrounding major

board decisions.”

Didier Cossin, Professor, IMD

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risk.

One of the lessons which was served up by the recent crisis, and which has direct repercussions for how boards

recruit directors, has to do with the purportedly rational and quantifiable nature of markets. As Tan Suee Chieh

observed, numbers clearly aren’t everything. As immensely useful as quantitative and mathematical models are,

particularly for an industry player that has traditionally been active in the insurance space, many of the qualities and

attributes a director should display will by definition transcend the bounds of statistics and of mathematical

understanding. In the post-crisis business environment, these are precisely the qualities that have come to the fore:

Caring, wisdom, all-round knowledge, the ability to penetrate the exterior and go to the heart of a matter.

In order to nurture creative, entrepreneurial and at times disruptive thinking, board committees must likewise learn

to anticipate, rather than stick to old and established formal roles as sign-off bodies. Similarly, the board chairman

has a role to play in structuring the various committees and making sure that individuals feel comfortable voicing

their ideas and observations without undue self-censorship or running the risk of being branded as rabble-rousers.

Of course, and partly reflecting cultural traits and sensitivities rooted in specific national as well as organisational

contexts, many companies currently do not address the chairman’s performance as directly as they should. The

possibility of rotating the chairman more often should not be seen as taboo; in fact, in specific sets of circumstances,

chairman evaluation should expressly allow for chairman removal.

Business and society: business in society

The dual imperatives of strengthening governance and embracing disruptive change have raised fundamental

questions about the role of business in society, and exposed the limitations of some of the 20th century’s most

influential management theories. Yesterday’s business mantras like “maximising the return to shareholders” have

come to be seen as embodying a focus on the short term, and a limited view of the many and complex stakeholders

who are affected by business activity. For too many market players in the pre-crisis world, the key motivation

became to manipulate the market in order to scoop up the rewards. At present, in keeping with the prevalent spirit

of soul searching and going “back to basics”, simple words such as “good” have been bandied about more than ever

in before in modern-day executives’ memory: Building on good foundations; starting with good intentions; pursuing

the common good, etc.

The back-to-basics approach has also inspired a number

of leading organisations to revisit, re-examine and

reinterpret their historical roots in pursuit of new

relevance. The story of NTUC, for instance, has been

largely synonymous with the story of modern

independent Singapore – both dating their origin back to

the 1960s. Neither the phenomenal growth in the

nation’s wealth over the past five decades nor the

country’s transformation into one of the world’s most

advanced economies have dampened NTUC’s tireless

quest for relevance. Staying true to its ethos of social

enterprise has been the main principle to guide the

organisation and the 62 affiliated unions under its

umbrella, even as the landscape of social services

delivery evolves and new competitors continue to

emerge.

“As an independent, you have a

view of things you can draw on

when making decisions. You bring

a perspective; you add value. In

many situations, this gives you

the ability to connect the dots for

management.”

Teo Swee Lian, Independent Director, Singapore

Telecommunications Limited

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At first glance, the social need in 2016 may have different characteristics compared with 1969, when the impetus

was on maintaining fair prices and providing insurance to workers who would not be eligible under conventional

insurance terms. Nonetheless, going back, continually and creatively, to the spirit and the values of the

organisation’s founding fathers in the 1960s has proven a rich source of ideas and solutions. These speak to the

fabric of Singapore’s 21st-century social infrastructure and its attendant issues such as health, aging and income

inequality.

Increasingly, achieving social impact means borrowing from social science disciplines such as philosophy and

psychology. To be a true partner to one’s stakeholders means to understand the underlying motivations and

collective aspirations involved. There is growing recognition, especially among the business communities in

emerging markets that many of the western leadership models were built on facts and numbers. As a result, they

turned out to be under-socialised. The search is on, in Asia possibly more so than elsewhere, for locally relevant,

historically sensitive and culturally appropriate models of genuine leadership and organisational stewardship. The

experience of the region’s well-stewarded companies like Matsushita, Tata, Hai’er and many others shows that once

business leaders tweak their thought paradigms, “profit” can be defined, and measured, in radically new ways,

including through investing in people, utilising social capital and making a contribution to society.

Testing the limits of governance

As with all rule-based undertakings, governance is not devoid of the dangers of formalism – in other words, of going

through the motions, creating ever more layers of bureaucracy and upholding the letter but not necessarily the spirit

of the originally-agreed purpose. The stakes are high, especially given that the large-scale value destruction that

occurred during and in the aftermath of the global financial crisis has been shown to stem from insufficient

regulation. But many board members agree today that the pendulum may have swung too far in the opposite

direction, continuing to pile up new rules on businesses in a measure that may be starting to border on counter-

productive. Where rules could be complied with through simplicity of action and honesty of conduct, an attitude is

beginning to prevail which could be described as “if it is in writing, it must be true.” In consequence, companies’

annual reports have ballooned from 50 pages to 300 and more pages. Once a governance code – meant to be a tool

for guidance has stipulated, for example, that annual reports should be fair, balanced and easy to understand,

almost inevitably a flurry of written guidelines and

definitions crops up, offering detailed definitions of just

what exactly is meant by fair, balanced and easy to

understand. Companies that have never in their history

crossed paths with instances of child labour can become

overnight darlings of good governance by adding this

particular criterion to their checklist. In this governance

“game”, the sense of absurdity is palpable.

Panellists and audience members agreed that no

stakeholders’ interests are meaningfully served by board

members and executives getting bogged down in “ticking

boxes”.

“Our existential question is: how

to protect and enhance our legacy

for the next generation while

consistently creating social

impact?”

Tan Suee Chieh, Group CEO, NTUC Enterprise Co-

operative Limited

As Erich Hunziker commented, if a company was to strive to please everyone, it would be doomed to perish. There is

no denying that at particular points in time, a company will do well to preoccupy itself with making money before it

can afford to think about giving back to society. This is not to say that small companies are unable to contribute. The

EU’s refugee crisis, to refer to a current topic, has mobilised many SMEs across Western Europe to create

employment and absorb more migrant workers.

Boards at Risk 13


Know your customer

The old dictum of understanding one’s customer still rings true in the post-crisis world. According to Teo Swee Lian,

putting the customer first and acting consistently for the customer’s benefit has in too many companies given way to

an operation revolving around profit centres and of pushing products onto customers who may or may not have use

for them. Customer focus must permeate right across the organisation.

This includes the board, whose members should have

intimate knowledge of the issues the company’s

customers are tackling, as well as of what levers and

mechanisms and internal culture the company has put

forward to reinforce this focus. How much board

members actually know about the customers and about

their own company’s organisational culture can be a

good litmus test and a powerful indicator of the

company’s preparedness for future risks.

“One of the biggest risks facing

the corporate sector is not to be

integrated with society – or

worse, to be marginalised in

society.”

Didier Cossin, Professor, IMD

As participants noted in some of the concluding comments, personal integrity of the chairman and the CEO are of

utmost importance amidst the dramatically changing business and corporate realities. Stress testing can be another

source of great strength in watershed moments. In this context, we must pay attention to the way successful

organisations build scenarios and beyond that, create compelling narratives about their organisations.

Conclusions

When companies have done their physical check, their mental check, when they have smart strategies in place and

when their structures ensure good governance, there is a sound basis for success even during difficult times. Difficult

times then suddenly become times of reincubation, times when a company’s distinctiveness can be deepened and

new opportunities fuel success. For successful companies at handling their risks, these are the times now. It is key to

rethink governance versus entrepreneurship and whether governance is killing the latter. No business will prosper in

changing times without a healthy amount of entrepreneurship and many a board has had nefarious impact there. As

boards evolve from protecting companies from the worse to being a competitive asset towards success, new types

of diversity can be encouraged, that will include social understanding and government abilities. They will test the

limits of governance for the better and will regenerate their board’s activities in a distinctive ways, thus not only

assessing and managing risks but also creating new opportunities for the organisation in a complex landscape.

Boards at Risk 14


TMS Academy

TMS Academy is the integrated leadership development arm of Temasek

Management Services (TMS), a fully-owned subsidiary of Temasek Holdings. We are

dedicated to the mission of developing Asian business leaders and supporting the

building of organisational capabilities to develop senior-level talent. We offer a wide

range of high-impact, practice-oriented open programmes and customised solutions

in partnership with some of the finest institutions and critical insights for executives.

Temasek Management Services Pte Ltd

A member of the Temasek Holdings Group

60B Orchard Road #06-18 Tower 2 The Atrium@Orchard Singapore 238891 www.temasekmanagementservices.com.sg

For enquiries, please contact:

KNOWLEDGE CENTRE CO-ORDINATOR

[email protected]

The IMD Global Board Center

The IMD Global Board Center is committed to supporting your company’s long-term

success through its board performance. Our unique combination of open and

customised board education programs aims to develop your board’s competitive

advantage and realise its full potential. These programs bring together world-class

thought leadership, our own cutting- edge governance research and inspiration from

best board practices of leading organisations in Asia, Europe, the Americas and the

Middle East.

IMD Global Board Center Chemin de bellerive 23

P.O BOX 915

CH-1001 lausanne | switzerland www.imd.org/boardcenter

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