inside the By david W. Anderson, MBA, PHD, ICD.
D
boardroom The Anderson Governance Group
Building Bolder Boards
In Canada:
Risk-Calibrated Strategy, Not More Risk
Management, Is Needed Most
C anadian boards are spending
relatively too much time on risk management
and not enough time on strategy. Innovation and
entrepreneurship – and the wealth they bring – may
be the casualties, as the current elevated concern for
risk magnifies the risk aversion inherent in Canadian
business culture. In my experience, a fear of failure if
left unchecked may threaten to dominate a board’s
mentality and constrain profitable business growth.
This tight focus by boards on risk management is
understandable, given the recent widespread and
unprecedented economic events, salient failures of
specific businesses, pressure from investors to protect
capital, and ubiquitous advice from advisors and
commentators to reduce risk. This has translated into
time-consuming activities (some compliance-related)
which, while necessary, do not directly build value.
Many boards have been spending considerable time
on tactical components of risk management such as
historical monitoring of operations and mitigation
efforts, based on a view of risk that considers only the
downside. Too much emphasis on risk avoidance comes
with its own cost, stifling bold, imaginative business
strategies and crushing the nascent risk-taking necessary
for innovation and growth.
This narrow focus on risk management omits the larger
and more abstract components of risk governance such
as risk appetite and foregoes the unique contribution
a board ought to make: partnering with management
to refine and choose those business strategies with risk
profiles consistent with that overall risk appetite.
In my work with boards, I see the difficult situations
they face, often receiving contradictory input from
shareholders. In the current climate, investors often
insist on low risk (capital preservation and low
volatility) while still expecting returns associated
with higher risk strategies. Risk is a function of the
strategy and both must be chosen in concert, given the
purpose the organization serves and the risk appetite
shareholders are prepared to accept for an expected
return. Accepting any amount of risk means accepting
the possibility of failure. Risk management is not risk
avoidance. Boards can and should decide what level
of expected failure they are willing to accept and how
much is at stake in a given strategic option.
Boards need greater confidence in their ability to
add value and the discipline to control their agenda
accordingly. Success or failure in the pursuit of an
organization’s mission is a probabilistic outcome
based on strategic choices, operational tactics, talent
and resources, and market factors – not all within
the control of the board. Good governance does
not guarantee business success much less corporate
survival, but it can make these more likely by working
with management to make the best risk-calibrated
strategic choices. When boards are too afraid to fail,
it corrodes their confidence to act. It forces smaller
thinking and less initiative and thus generates fewer
successes – validating a cycle of meagre ambition and
modest outcomes.
Reintegrating Strategy and Risk
The oversight of risk is a vital governance function. But
so much emphasis has been placed on risk management
that boards themselves are at risk of missing the
opportunity to add the type of value they are best suited
to provide: an integrative approach to value creation
and protection.
Issue 149 | April 2010 | 45
Inside the boardroom | building bolder boards
Strategy and risk have been artificially decoupled;
consequently, they are often addressed by boards
individually and thus out of appropriate context. In
approaching strategy and risk as two separate concepts,
each with its own processes, boards fail to realize
that, at the governance level, strategy and risk are
inseparable: every strategy has associated risks and every
risk profile is associated with a universe of strategies.
Strategy and risk are two sides of the same coin.
Boards need to achieve an alignment of perspective with
shareholders on organizational mission and the appetite
for risk (i.e., the acceptable trade-off between potential
upside and downside). Only when these contextual
parameters are understood can a board coherently and
meaningfully select among various strategies and their
associated risk profiles and know whether these accord
with the risk appetite chosen to govern such decisions.
The ultimate challenge is to strike the appropriate and
optimum risk/reward balance.
When boards contribute to management’s thinking
about strategy, encouraging bold aspirations, they must
also ensure corporate strategies are consistent with
the overall risk appetite approved by the board and
that robust risk management processes are in place to
monitor operational performance.
Thus, collaboration is needed between boards and
management teams to embrace strategic innovation
to build expected value, at acceptable and understood
levels of risk. The concepts of expected value and
acceptable risk are matters for the board to decide with
and on behalf of shareholders, in the best interests of
the corporation. Boards ought to provide risk-calibrated
strategic guidance to management, having established
an alignment with shareholders regarding expectations.
How Can Boards Foster Strategic Innovation?
Canadian boards need to become more entrepreneurial
in attitude and action, reweighting their focus toward
strategy and reversing the artificial dichotomization of
strategy and risk.
Boards ought to improve their mastery of risk-calibrated
strategic innovation by learning to integrate their efforts
to understand and to control the divergent forces
that determine value creation and value preservation.
To set their activities in context and strengthen these
governance skills, directors should:
46 | Institute of Corporate Directors
• Reaffirm organizational purpose and set ambitious
long-term goals with input from stakeholders:
• Reflect upon the reason the organization exists
before any major decision is made.
• Define the global risk appetite for the organization
with input from shareholders:
• Agree on what can be put at stake for what
potential outcomes and the risk management
philosophy that governs decisions.
• Create and work within a framework for dialogue on
strategy with management:
• Engage executives in substantive discussion on
the business and the range of strategic options
to achieve ambitious goals.
• Review with management the risk profile associated
with each strategic option:
• Understand the range of risk and reward
specific to each strategy that is likely to deliver
against performance goals.
• Choose a risk-calibrated strategy most likely to
achieve organizational goals while staying within the
global risk appetite:
• Test the viability of the strategy to deliver
expected value and the likely efficacy of
contingent responses to contain consequences
of failure.
• Institute risk-appropriate contingencies and controls:
• Monitor operational performance for variance
relative to the risk profile anticipated when the
strategy was chosen.
In summary, Canadian boards need to become more
confident and better able to partner with management
on strategy, exploring options for innovation and growth
and integrating strategy and risk in board discussions.
Canadian entrepreneurism can find inspiration in
the courage of Vancouver’s Olympic Games and the
Canadian athletes who chose bold strategies with clear
risks. Some succeeded and some failed in their specific
goals, but the aggregate result was a win. Directors
need to keep that bigger picture in mind as they ask
themselves not how to minimize risk, but how to
choose the risk-calibrated strategies to build long-term
value.
David Anderson is the President of The Anderson
Governance Group. He can be reached at
david.anderson@taggra.com and (416) 815-1212.
This article originally appeared in the Director Journal, a publication of the Institute of
Corporate Directors (ICD). Permission has been granted by the ICD to use this article
for non-commercial purposes including research, educational materials and online
resources. Other uses, such as selling or licensing copies, are prohibited.