Companies need to recruit board members from a wide range of backgrounds who can question the status quo in organisations, according to a major new report into risk management.
Board members should also be encouraged to ask ‘dumb’ questions and challenge ‘over-confident’ executives.
The findings are included in Risk and the Strategic Role of Leadership, a study into how risk is managed at board level by companies across the UK, co-authored by GCU's Dr Patrick Ring.
Thirty directors, from FTSE 100 companies, small businesses, charities and social enterprises, were interviewed for the report, which was funded by the Association of Chartered Certified Accountants (ACCA).
Executive and non-executive directors from sectors including banking, financial services, IT, property, transport, and manufacturing, said there should be more open and constructive discussions about risk-taking at boardroom level.
Dr Ring, senior lecturer in financial services, said: “Non-executive directors have the ability to step back from day-to-day pressures and use their experience in other organisations to perform a ‘critical friend’ role, helping to restrain over-confident executives and encourage overly cautious ones.
“There is a need to create a risk ‘safe-zone’ atmosphere where all board members feel free to discuss risk issues in an open and constructive way.
“This may include encouraging non-executives to ask ‘dumb’ questions, challenging the status quo by playing devil’s advocate or considering extreme risk events or control failures.”
The study warns boards about becoming too conservative and risk-averse and overlooking the positive opportunities of entrepreneurial risk-taking. It also outlines how time constraints at board meetings and overly detailed risk reports can obscure the key risks to long-term strategies that boards should be focusing upon.
The research was commissioned in association with academics from Glasgow Caledonian University, the University of Nottingham and the University of Plymouth.
Jo Iwasaki, ACCA’s head of corporate governance, said: “It is so important for research to shed light on existing practices. It helps us find out how effective existing measures are in raising the awareness and quality of board engagement in risk management. We can then highlight emerging good practice to promote improvement at every level.
“This helps us have informed conversations with people in practice, but also those who are in the position to set the framework for good risk management.”