Managing a company is no longer about executive jets and a guaranteed lifetime membership at the country club. Corporate governance rules and regulations are playing a significant role in changing the way companies are managed. Possibly the primary outcome of this focus on good governance has been that corporate leaders are now being held accountable for their actions, or inaction.
In the past, the worst a CEO or chairperson could expect when the wheels came off was a golden handshake and a forced resignation. Today, however, failure to mitigate the many risks facing business can lead to criminal charges and jail time.
"It's not enough for today's CEO to appoint a team to handle organisational risk mitigation," says Amir Lubashevsky, director of Magix Integration. "The CEO needs to remain in control of the risk management effort in order to ensure it is comprehensively dealt with.
"To this end, transparency is a necessity if the CEO is to effectively mitigate risk. S/he firstly needs to be able to identify risks and their potential impact, and then allocate the appropriate resources to deal with it while monitoring the results."
Unfortunately, as leaders start to focus on risk mitigation, they find the scope of the task is growing. Reputational risk is another factor that needs to be dealt with. While operational catastrophes can normally be dealt with and overcome in a relatively short time, reputational factors can last for years with ongoing consequences.
When reputational risk is not mitigated, it can affect the company's investment risk profile. In the recent medical rebate scandal, the CEO of one company appeared on television and stated that the rebate system at his company would end.
This was the right thing to do from a business and an ethical perspective. However, the company's reputation has not been shielded because the CEO did not give any additional information to assuage customers or investors. For example, questions of how the rebate system started, how information of the system leaked to the press, why it was not mentioned on the balance sheet and what the impact on future earnings will be were not dealt with.
And although we know very little of the details, these unanswered questions might damage the company's reputation in the eyes of its customers and investors.
"By ensuring transparency and thereby enhancing the ability to identify and mitigate potential risks, CEOs would be in a better position to assure investors that their money is safe," adds Lubashevsky. "Moreover, any company that has its finger on the risks it potentially faces will also be able to provide accurate growth projections as there is unlikely to be a problem it is unable to handle.
"Not only does the CEO and the organisation benefit by being able to focus on core business issues when effective risk mitigation processes are in place, but employees will be more secure in their jobs. Investors will also benefit by having a greater level of certainty regarding the future performance of their investments and the knowledge that these companies are so well managed that the only surprises are likely to be better results than expected."