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Balance Risk Management and Ethics to Avoid Corporate Meltdown
by Agatha Gilmore
If there's one thing the turmoil on Wall Street and resulting financial crisis have taught us, it's that disaster strikes when companies fail to keep recklessness and greed in check.
While it's true that a fair amount of risk taking is healthy to innovate, perform and create wealth across an enterprise, a company can't continue to prosper indefinitely if its culture - especially at the management level - doesn't live and breathe ethical standards. It's all about balance, said Ben Heineman, a corporate management expert and author of the new book High Performance With High Integrity.
"The key dimensions of capitalism, the foundational goals, are high performance with high integrity," Heineman said. "A critical part of high performance is balancing risk management and risk taking. What is so critical for management to think about these days is, 'How do we find that [place] in our governance processes that ensure the balance between risk management and risk taking, and the fusion of performance with integrity?'"
To avoid similar corporate meltdowns in the future, Heineman outlined several key ways organizations can manage risk effectively while instilling a health, ethical culture.
Create CEO Specs
Heineman said the boards of directors at financial institutions failed their companies in three ways. The first was by neglecting to outline the right "CEO spec."
"The quintessential job of the board is to basically define the job of the CEO and choose the right person," he said. That means boards must strive to select CEOs who exhibit cautious risk management and high integrity. Heineman defines this concept as "the robust adherence to the spirit and letter of the rules" and "the critical core values which every employee should exemplify: honesty, candor, fairness, reliability and trustworthiness."
Talent managers also should ensure there are development and succession planning processes at the management level so the company can produce this kind of person internally.
Align Compensation With Performance
The second way corporate boards failed their institutions was by relying on faulty compensation plans, Heineman said.
"Pay for the right kind of performance. It's not just performance by making the numbers; it's performance that has the right balance at the core of the company," he said. "The compensation systems didn't do that, didn't look at the longer term, didn't look at other values than just making numbers and share prices. [They] basically paid people inordinate amounts of money for churning paper. That led to a lot of very bad behavior."
Talent managers must strive to align compensation to other, perhaps softer performance metrics at every operational leadership level.
Manage the Risk
The third way corporate boards failed prior to the financial crisis was by not understanding or mitigating the risks their companies were taking, Heineman said.
"One of [the] primary goals [of the board] is to understand the critical risks and opportunities facing the company," he said. "You can't understand every risk; you can't understand every opportunity. [But] you certainly can understand the top five risks and the top five opportunities, where the capital is going, how it's being deployed and whether it makes any sense."
Talent managers should do what they can to facilitate communication in plain English.
Implement Global Warning Systems
Not to be confused with risk management, early global warning systems address "where the world is going in terms of law, regulation, ethics, attitudes and culture so the company can stay ahead of the curve," Heineman said.
"An example would be [asking yourself], 'What kind of learning standards are appropriate in the subprime areas?' Look around the world at what the best companies are doing, what regulators are doing, what the debates are in academia, and at least consider not just the buck but what is the right thing to do given this population?"
[About the Author: Agatha Gilmore is a senior editor for Talent Management magazine.]
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