Ignorance is not bliss: Why company directors need to take responsibility

Crown

It can’t just be assumed that corporate failures like those at Crown are failures in leadership. Source: Getty.

Should heads roll at board level when a business is mismanaged? Boards and individual directors are now very clearly in the crosshairs when their organisation is battered by an operational crisis or high-profile matter.

It used to seem sufficient to jettison the chief executive and a handful of executives as red meat for the media, investors and regulators. But recent cases — such as Crown and Rio Tinto — have highlighted the increasing personal risk to directors when things go wrong.

Back in 2019, after a television exposé of money laundering and links to organised crime at gambling giant Crown Resorts, the board — not the executive — took out full-page newspaper advertisements denying the allegations.

But the New South Wales casino inquiry late last year found the allegations of unlawful activity were substantially true, and declared Crown not suitable to hold a gambling licence. Some directors claimed ignorance, former chair John Alexander blamed senior staff for not raising concerns with the board, and there was a rush for the exit as directors tried to save their reputations.

The unseemly exodus left Helen Coonan to take the chair and she pledged to clean up the mess. However, she had been a director for nine years — throughout the prolonged period of governance failure — and there was immediate speculation she would remain in place only until a new chief executive and board could be appointed.

The litany of mismanagement at the top of Crown is likely to be a case study in boardrooms and textbooks for years, and it’s probably the most egregious recent example of directors failing to identify and manage admitted wrongdoing.

Yet, it also demonstrates the growing trend for blame to be sheeted home at board level and a growing expectation that individual directors need to publicly take responsibility.

Contrast the Crown fiasco with what happened at Rio Tinto after the destruction of 46,000-year-old Aboriginal caves in Western Australia’s Juukan Gorge in May 2020. Unsurprisingly, the chief executive and two senior executives immediately lost their jobs.

Earlier this month the mining company’s chair, Simon Thompson, said Rio Tinto’s achievements in 2020 were “overshadowed” by destruction of the sacred Aboriginal site and announced he would stand down.

“As chairman I am ultimately accountable for the failings that led to this tragic event,” he said.

Taking responsibility at the top should not be remarkable. Yet, at a time when politicians and leaders increasingly try to avoid doing the right thing, there is now a greater than ever demand for directors to take the fall.

While directors may complain they have to depend on the executive to report issues and update them on potential crises, the reality is that external directors are supposed to bring an outside perspective, and they have a responsibility to make themselves aware of potential risks.

Boards need to have their own issue management capability to act on matters which could jeopardise the organisation and the board. Measures might include:

  • Establishing a separate board-level issue identification and management process;
  • Scheduling formal interrogation of key items on the risk register;
  • Designating individual directors as “issue champions” to oversee and report on priority issues;
  • Professional training to manage the media and stakeholders;
  • Regular executive updates and active board review of current and emerging risks; and
  • Independent monitoring of relevant business trends and developments for potential impact.

Pleading ignorance and blaming management — as Crown and other directors have tried — is no longer good enough.

In the new world of social media instant opinions, more assertive regulators and increasingly litigious investors, company directors must understand expectations have changed, and it’s they who may face the guillotine.

COMMENTS

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments