The old saying ‘if it ain’t broke, don’t fix it’ seems like reasonably sage advice, yet in terms of governance, a board resting on its laurels is risky business.
If things are going well, there’s a temptation to think there’s no need to worry about looking under the hood to check how things are working.
In the case of the Commonwealth Bank, everything certainly seemed to be going well – as Australia’s most financially successful bank, turning profits in the multiple billions of dollars, when it came to the bottom line, the institution was most certainly successful.
We now know via the recent Australian Prudential Regulation Authority (APRA) report though that there were significant issues needing attention within the organisation – significant gaps in culture, risk management, and governance uncovered after complaints and allegations of poor financial advice and non-compliance to anti–money laundering and counter-terrorism laws.
In the final report, APRA found “CBA’s continued financial success dulled the senses of the institution” – that there was widespread complacency, a reactive stance in dealing with risks, that they were insular and not learning from experiences and mistakes, and that there was an overly collegial and collaborative working environment, which all added up to produce an environment which reduced the opportunity for constructive criticism or challenge.
It’s a rather loud warning bell for all boards and executives, but especially those of financially-successful operations where the risk of success-driven complacency is higher.
Guarding against complacency and staying out in front
For directors on boards of successful organisations, the risk of complacency is not insignificant.
It’s easy to ask tough questions and do some investigation when there is obvious work to be done. When all the news flowing into the boardroom is good news – or the status quo – the risk of over-confidence is high, as is that of group-think.
The director who asks ‘what are we missing?’ stands to be seen as a dissenting voice rather than a team player.
It could be argued though that successful companies have more to lose and so the need for more rigorous questioning from, and of, the board is necessary.
A performance-focused board will challenge itself and management to look for where there might be gaps they’re not aware of.
You don’t know what you don’t know, so those gaps are a risk themselves.
APRA found that at CBA, there was “inadequate challenge” by the board of emerging non-financial risks and one of the recommendations from the inquiry was more rigorous board and executive committee-level governance of those risks.
In the case of CBA, three separate audit reports indicated issues that needed addressing, all three of which went unactioned.
So there had been some forewarning of evident gaps which had they been addressed, could have resulted in a very different outcome for the organisation.
Corporate regulator ASIC has seized on the APRA report and is already moving to take the lessons from CBA and use them as a yardstick to measure all boards, with higher expectations that directors will be more informed of non-financial risks and be able to demonstrate as much or face consequences.
Commentators believe directors need to prepare themselves for a future where they will be required to ask more questions and seek information on a wide range of operational issues that challenge an organisation on non-financial fronts.
Regular governance audits, which include examining information flow between the C-Suite and boardroom, can help directors guard against the risk of complacency and overconfidence.
Your organisation might be performing well, but are you asking: ‘Where are our blind spots?’
Seeking external reviews and views at both the board and executive levels is not an indication of weakness or lack of confidence, but should be seen as a sign of a strong organisation seeking peak-performance and standards.
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