Governance Deficits That Create Blind Spots in Board Oversight

Chanakya Kyatham August 20, 2021

In an age of intense regulatory environment and heightened employee, consumer, and stakeholder scrutiny, an organization’s reputation, and trust are premium.

Now more than ever, boards need to apply an accurate risk lens when setting the tone for the business and monitoring business controls.

Yet this is no small feat.

Many companies struggle with boards that can’t effectively forecast emerging risks, identify opportunities, or develop strategies in response to competitive pressure. Here are some governance deficits that create blind spots in board oversight:

1. Missing Trends and Opportunities

All over the world, there are sad stories of companies that became shadows of their former selves because they failed to appreciate and exploit emerging trends.

Kodak denied the digital photography revolution, Concorde failed to fine-tune their planes while Toys R Us didn’t think e-commerce would catch on. The list is long.

The ability to anticipate market trends and spot opportunities or threats are crucial to a business’s survival and success.

Today, these can be distilled by analyzing technological developments, social media trends, and competitors.

Top-level executives should create channels that ensure key market insights reach the directors timely.

This will minimize intelligence gaps that may lead to missed opportunities.

2. Introducing Unnecessary Risks

Alongside identifying opportunities, it’s the board’s mandate to avoid introducing unnecessary risks to the organizations.

Risks arise from different areas, including supply chain, compliance, cybersecurity, social, political, and economic factors.

Few board members consider cybersecurity an important aspect of operations yet cybercriminals pose a real threat to businesses.

With businesses digitizing, cybercriminals can access and release sensitive information or demand a percentage of your profits.

The board should ensure the executive team has a plan that details what should happen in the event of an attack.

These processes should be clear to the entire organization.

Similarly, businesses should conduct rigorous due diligence before engaging prospective partners or suppliers.

The checks should look into the target organization’s activities, public sentiments, and political affiliations.

It will help senior executives and board members make informed decisions on the risks of partnering with such companies.

3. Lack of Board Diversity

Historically, boards have been constituted of personal networks—people whose way of thinking is similar to those appointing them.

While this makes sense because you have a meeting of minds, it also means that your strengths and weaknesses are far too similar.

The board misses important perspectives that come with different backgrounds.

To combat this governance deficit, boards must look for board member candidates outside of their composition.

The candidates should be experienced, inquisitive, and can understand the risk landscape. They should also know their ethical and legal responsibilities to the board and company.

4. Information Overload with Little Insight

A key complaint among board members is poor risk reporting.

Most senior executives, legal teams, and corporate secretaries don’t have the tools to monitor, curate, and deliver relevant and contextualized information to the board.

Board members have to filter through tons of information to understand the risks faced by the organization and how they are managed.

Sometimes, members go through analysis paralysis because there is too much to look at.

Without timely and useful information, the board cannot make accurate decisions concerning the running of the company.

Which ties to missing opportunities or threats.

5. Overlooking Changes in Regulations

Changes in regulations can impact a business’s policies, operations, and liability. It is important to keep tabs on any announcements made by government or industry regulators.

While major announcements are hard to miss, companies need a process that monitors smaller industry-related regulations that can slip under the radar.

Besides monitoring, there should be a process for getting confirmation on the actions that need to be taken and by what date.

As the company complies with the new regulations, they should make internal and external announcements to staff and partners advising them on the changes.

6. Not Monitoring Competitor’s Development

Organizations spy on each other constantly.

Mostly, they look for gaps in the existing products or services the rivals offer, their modus operandi, and executive line-up.

Little attention is paid to the development of new business strategies or products.

Senior executives and boards should do their best to insulate themselves from falling flat on their faces when competitors launch something new.

Some ways to keep track of rival company’s development include monitoring new trademark or patent filings or watching third-party rating organizations.

Doing so can give you clues as to the direction your rival is taking.

7. Exposure to PR Liabilities

In a world where information spreads like wildfire, it’s easy for a corporate scandal to erupt and leak with the click of a button. Scandals have destroyed careers and relationships with partners and associates.

A company that doesn’t monitor news outlets and legal intelligence sources risk embarrassing its shareholders should a public relations crisis break out.

Over and above its fiduciary role, the board must take a keen interest in the company’s crisis management capability.

More specifically, in the executive team’s ability to respond where a fast and informed response can help mitigate a PR disaster and the company’s reputation.

Normally, the board plays a supportive internal role and not a public-facing one. It should, however, be ready to step up should the executive team is not acting in the interest of the shareholders.

Conclusion

With the rising of multiple unprecedented complexities, governance deficits are a glaring problem leading to board members’ oversight.

By bridging the gaps in governance intelligence, senior executives will ensure the board receives relevant data to help them make informed decisions.

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