Risk Management Skills Lacking in Fortune 500
- August 31, 2016
When you turn on the news today, you see: election uncertainty in the U.S., the ongoing effects of Brexit, fallouts from oil pricing instability, regular cybersecurity threats, and the list goes on. As a result, corporate directors must focus on risk management and planning as a key tenet of their responsibilities to shareholders. In fact, in PwC’s recent survey of directors, 76% say they have examined long-term, economic, geopolitical and environmental macro-trends, presumably as they relate to corporate strategy and risk.
Investors and directors alike prioritize risk management as a key skill for corporate directors. What qualifications give a director risk management experience? There are some obvious answers: experience in an auditing function, a leadership role in enterprise risk management, or other positions where individuals assess and evaluate global corporate risks. Yet, surprisingly few directors actually list risk-based skills in company proxy disclosures.
In a recent study of Fortune 500 company boards, our research team leveraged our proprietary natural language processing (NLP) technology to review the biographies of more than 5,000 directors who sit on the board of these prestigious companies. What we found was an astonishingly low number of directors who specifically disclose skills related to enterprise risk management. In fact, almost 80% of Fortune 500 directors do not have a dedicated risk expert on their board.
Based on our analysis, one company clearly demonstrated their dedicated expertise in risk management: C.H. Robinson Worldwide, a third party logistics and transportation company. Approximately 25% of their board has direct experience in enterprise risk management, much of which derived from directors’ roles as experienced auditors. Another company in the Fortune 500, a Chicago-based distributor, LKQ Corp., was also a leader in risk management expertise in the boardroom. In addition to being a leader in risk management expertise among the Fortune 500, LKQ Corp., also demonstrated skill strength across several categories in our analysis including leadership and technology expertise. Both companies operate on a global scale, serving a range of industries/customers, which perhaps explains why they distinctly note the collective risk management experience of their boards.
As with any type of public company research, the precision of this assessment depends on the quality and depth of the information companies disclose. Enlight’s proprietary algorithm calculates board skills based information that issuers publicly disclose about, or on behalf of, board members.
Many assume that risk management is a skill derived from leadership experience; though this may be true, proxy disclosures are no place for such assumptions. Considering increasing scrutiny—and engagement—from shareholders around governance issues, directors and proxy advisors should consider the implications of simply implying director expertise.
Communication methods, technology, terrorism, even the global climate are evolving on a daily basis. Shouldn’t directors’ skills clearly address the changing demands of their companies, and the customers they serve?