BOARD PERCEPTION OF ERM: "WE HAVE TO CHANGE THE WAY WE RUN THE BUSINESS, BECAUSE LACK OF ERM CREATES INEFFICIENT MANAGEMENT"
In program and project management terms, ERM is, in fact, change management or an organizational change project or program. So the board, ideally, should be the first catalyst for change, instead of any lower level of management. Our experience shows that an attempt by middle-level managers to convince board members about ERM is not effective and can create, to some extent, a misunderstanding, as we show next. The critical thing here is to see who the messenger is. It should be the CEO who raises the need, or it could be the board of directors, or the audit committee in a supervisory board representing the interests of owners or key stakeholders. As for any conviction, this may happen first informally in terms of bilateral talks between one board member and an "n -1" manager ("n" means board level). Then if there is trust and proper understanding by the board member, the senior executive may be able to explain ERM to the board member and have him or her promote the idea at the board level. A misperception of ERM by boards in Poland, especially in highly regulated industries such as energy, mining, or telecommunications, can be summed up in one simple sentence: "I won't sign anywhere formally that I know about any risks and that I continue managing the company, or a functional area, despite the identified risk."
Let us examine examples of how ERM concepts might be communicated and how the board may misunderstand what is intended:
• Telling the board how it should manage risk, as, of course, it is highly probable that such a message will be rejected. The board believes that it is already hired to oversee the management of the organization, including its risks, and to achieve appropriate results. If there is a better system than what is applied now, we have to be ready to show how much the financial results will change by using it.
• Saying to the board that the current motivational system should be changed to include rewards not only for performance but also for risk treatment methods that should lead to better performance.
• Saying to the board that management should identify which of the top management staff are the primary risk owners for each major risk. The directors already feel that they are responsible for the results or performance, so the nomination of a risk owner is perceived to some extent as a redundant activity. If responsibility has already been assigned for performance, what else needs to be done?
• Saying to the board that the current decision-making process could be better if risk assessment techniques were used to support decision making. This could be interpreted as saying, "I could tell you, as an ERM follower, how to make better decisions." This could be risky.
• Saying that current coordination processes of various parts of company are not optimal (e.g., that higher costs are being incurred from having separate insurance for individual areas of the organization), and that some solutions optimize costs but generate other risks.
• Saying that the current strategy execution could be better and also the budgeting process (including capital allocation).
• Saying that one risk champion will overview what other top management staff are doing.
• Telling the board that they have to commit to what they are already obliged to do by signing off on the policy of risk management.
• Telling the board to change the managerial information and reporting to include risk profiles and risk assessments.
• Telling the board to change the culture, or even the corporate identity, in order to allow mistakes and failures and thereby to learn from the past, and to openly speak about risks. Would this mean the board should tolerate staff making mistakes twice or tolerate incompetence among the staff?
These examples of the challenges of communicating with boards when seeking to implement ERM are based on what we have experienced in practice. If someone presenting ERM concepts communicates them in the wrong way to the board, such as: "I know better," "You manage inefficiently," "You could do it better," "I would like to criticize how you manage the company," or "You are not competent," thus giving the message that the board is managing the company poorly because it does not have ERM in place, this is highly risky. Therefore, good preparation and use of properly worded arguments are critical to avoid such perceptions, regardless of whether the messenger is a consultant or an “n -1" director or manager. When anyone who is suggesting using ERM is on a lower level than the executive board, all of the foregoing questions arise and can be mental blocks. Let us see now in more detail who in Poland is usually getting management to buy in.