RISK, CRISIS, REPUTATION

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RISK, CRISIS, REPUTATION THE BOARD
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Some Historic Corporate Disasters

• Early 1980s BCCI
• Late 1980s - Mirror Group early
  1990s Guinness Polly
  Peck Lloyds of London
• 1994 Barings
• mid 1990s Pensions mis-selling
• 1996 Deutsche Morgan Grenfell
• 1997 Natwest Markets

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Some of Todays Corporate Disasters

• Equitable Life
• Railtrack
• Independent Insurance
• Marconi

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What are Todays Greatest Risk Issues?

• Financial Risk Fraud
• Health Safety Risk
• Regulatory Risk
• Reputation Risk

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Newtons First Law as Applied to Business

• Every action is followed by an equal and
  opposite reaction.
• In our business world we could define action as
  the things that go wrong and reaction as
• share price will fall
• shareholders, commentators, regulators will
  lay blame

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Responsibility - Who to Blame

• Always lies with the Board
• The directors represent the mind and will
  of the company (Common Law)
• All corporate power derives from the Board

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Why? No-one else has the Power

• Business to be Managed by the Directors
• The business and affairs of the Company shall be
  managed by the Directors who . . . may exercise
  all the power of the Company.

Delegation of Powers to Individual Directors The
Directors may entrust to, and confer upon, any
Director any of the powers, authorities and
discretions exercisable by them . . . and may
from time to time revoke, withdraw, alter or vary
all or any of such powers . . .
(Extracts from the Articles of Association of
the Independent Insurance Group plc)
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Investors may Sue

• The shareholders . . . are looking at the
  possibility of legal action against
  Independents directors including the
  non-executives.

(FT - 25 June 2001)
Equitable Life is to sue 15 former directors
for 3 billion
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Social Change

• Shareholder attitudes Hermes, NAPF, ABI,
  PIRC
• Governance Remuneration Performance
• Litigation, Court awards, Human Rights
• Intelligent organised crime

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Performance - Reputation

• Never before have directors been more exposed
  to criticism, pressure and the risks of civil
  or criminal action.
• BUT
• good and effective governance is increasingly
  recognised and valued

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Investor Opinion Survey

• Three-quarters of investors say board practices
  are at least as important to them as
  financial performance
• Over 80 of investors say they would pay more
  for the shares of a well-governed company
  than for those of a poorly-governed company
  with comparable financial performance
• The actual premium investors say they would be
  willing to pay for a well-governed company
  differs by country They would pay 18 more
  for the shares of a well- governed UK
  company...

(McKinsey and Company - June 2000)
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Measures that Matter

• Our findings supported the US perspective
  that non-financial performance drives at least
  35 of investors portfolio allocation
  decisions.

(Ernst Young - 2000)
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Post-Crisis Shareholder Value

• Recovery of shareholder value appears to be
  directly related to the perceived ability of
  the management team in dealing with the
  crisis.
• Recoverers find that shareholder value rises
  for some months or so following this event.
  Non-recoverers shareholder value continues
  to decline for many months and remains
  depressed.

(Dr. Deborah Pretty, Oxford Metrica 2001)
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How to Reduce the Risks of a Crisis

• Knowledge
• Understanding
• Control
• Preparation

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Knowledge

• A directors care and diligence will be judged
  on what the director knew or should have
  ascertained

(Insolvency Act 1986)
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Understanding

• To improve performance, you have to
  understand how better to manage risk

(Turnbull Committee Report September 1999)
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Control

• The maelstrom of mergers, restructuring,
  downsizing and business reorganisations within
  (the) industry has diluted management control
  and eroded employee loyalty.

(Dr Oonagh McDonald and Viv. Pyne The Competent
Company
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Preparation

• The boy scouts motto
• Be Prepared
• Define, develop and test a structure to manage
  any conceivable crisis.

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Communication

• Good corporate communications are a vital weapon
  in protecting a companys reputation
• -----------
• but they must be founded on an effective board

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An Effective Board

• Essential to Managing Risk Protecting
  Rewards
• There is no board or governing body in the
  world which, if the members think about it,
  cannot improve its effectiveness.

(IoD Standards for the Board)

• The questions to be asked are
• are we competent?
• are we knowledgeable and aware?
• are we learning?
• do we evaluate our own performance?

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Final Comment

• KPMG Survey
• More than two-thirds of 160 NEDs from
  FTSE 350 companies believed they would
  benefit from a formal appraisal. Fewer than
  25 received one.
• 70 did not receive guidance in areas such
  as crisis management . . .

(FT 5 November 2002)