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Board-Level Risk Oversight Deserves Renewed Attention

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Board-Level Risk Oversight Deserves Renewed Attention

By Gardner Davis & Danielle Whitley

Board oversight of significant company risk areas and legal compliance deserves renewed attention, as the Delaware Supreme Court recently ruled that monitoring practices that have previously been considered acceptable may constitute a breach of fiduciary duty which could expose directors to personal liability. Directors of both public and private companies are well advised to re-examine the primary risks facing their companies and adopt specific board-level procedures to identify, monitor and mitigate the risks, including legal compliance.

Corporate law requires the board to exercise good faith judgment that the company’s information and reporting system is adequate to assure that appropriate information will come to the director’s attention in a timely manner as a matter of ordinary operations, so that the board may satisfy its oversight responsibility. The approaches the boards take to monitor the company’s affairs will vary because of the different risks and circumstances that face each business.

Historically, claims against directors for breach of the duty to monitor, known among corporate lawyers as Caremark claims, were believed to be among the most difficult legal theories upon which a shareholder plaintiff might hope to win a judgment. Where the shareholder’s claim of director liability for corporate loss is predicated upon ignorance of liability creating activities within the organization, only a sustained or systemic failure of the board to exercise oversight was believed sufficient for the suit to proceed to trial.

Directors of General Motors, Citigroup, Duke Energy, UPS, Capital One and DuPont have all successfully defended Caremark claims in recent years.

However, in Marchand v. Barnhill, the Delaware Supreme Court recently imposed substantially more burdensome procedural expectations on corporate directors related to their duty of oversight. As a result, directors face an increased risk from shareholder lawsuits whenever the company suffers damages from a violation of law or other material risk area, unless the board had an active committee charged with continually monitoring these risks or the full board regularly devoted a specific portion of its meetings to risk oversight.

Marchand involved a shareholder suit against the board of Blue Bell Creameries, a Texas based ice cream maker, for failure to provide adequate oversight of food safety and legal compliance.  The case arose from a listeria outbreak in 2015, which forced Blue Bell to shut down its plants and recall all products. Three consumers died from eating the contaminated ice cream.

The Blue Bell board met on a monthly basis and received briefings from management on business and operational issues as well as financial performance. A reasonable businessperson might assume that Blue Bell management would alert the directors about increasing food safety problems at the company’s ice cream plants. However, the minutes from the meetings reflect that the board knew nothing about the growing risk of listeria contamination.

Under prior Caremark case law, the defendant, Blue Bell directors, should have prevailed because the company had implemented food safety compliance processes and procedures at an operational level, yet the listeria outbreak resulted from a failure of these procedures. Management essentially missed the red flags that should have alerted them to the problem and resulted in corrective action. The trial court dismissed the complaint in Marchand for failure to state a claim.

However, the Delaware Supreme Court reversed, holding the complaint alleged sufficient particularized facts to conclude the Blue Bell board failed to implement any system to monitor food safety risk. The Delaware Supreme Court stated that the board’s “utter failure to attempt to assure a reasonable information and reporting system exists is an act of bad faith in breach of duty of loyalty.”

Manchand stands for the proposition that it may no longer be enough for the board to wait passively for senior management to advise them of potential legal compliance problems or other material threats to the business. Instead, the directors may be required to proactively seek out risk related information and affirmatively require management and others within the company to periodically report regarding legal compliance and the company’s performance on other risk related indicators.

In light of Marchand, boards should re-examine the corporate information and reporting systems and whether they are reasonably designed to provide the board with timely, accurate information sufficient to allow the board to reach informed judgments concerning the corporation’s compliance with law and business performance.

Boards should specifically examine the company’s primary risk areas and the measures in place to oversee and monitor the corporation’s risk management.  For example, in Manchand, Blue Bell could only thrive if its consumers believed its products were safe to eat. Therefore, food safety was one of Blue Bell’s central risk areas.

Directors are well advised to adopt specific board-level procedures to identify, monitor and mitigate significant risks to the company, including legal compliance. Two board-level procedural safeguards noted with approval by the Delaware Supreme Court in Manchand are appointing a committee to regularly monitor these risks and establishing a regular schedule, such as quarterly or bi-annually, for the full board to examine and discuss these risk areas.

In Manchand, the Delaware Supreme Court suggested that the Blue Bell directors should have required that either the entire board or a committee receive the results of all government health inspections at its plants and all written reports from Blue Bell’s outside food safety monitoring firm and that these reports be the topic for regularly scheduled discussion with management.

Manchand also admonishes boards to implement formal protocols requiring senior management to promptly advise the directors regarding indications of potential problems, so-called red flags, related to areas of substantial risk.

The board agendas and minutes should clearly document and describe the board’s risk management and legal compliance oversight efforts in order to defend in the event of shareholder claims of failure to monitor.

Corporate directors must understand that the legal liability landscape has changed substantially and directors face increased risk from shareholder lawsuits whenever the company suffers damage from a violation of the law or other material risk area.  Boards are well advised to make corporate oversight and monitor a new, higher priority.

Business

How to use data to protect and power your business

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How to use data to protect and power your business 1

By Dave Parker, Group Head of Data Governance, Arrow Global

Employees need to access data to do their jobs. But as data governance professionals, it’s our job to protect it. Therefore, we must perform a fine balancing act to weigh robust data protection against the productivity of workers who need the data to maintain business-as-usual working processes.

Data grows exponentially, and most organisations will admit that they simply don’t know what data they have, where it is, and the controls that exist around it. This creates 2 challenges:

  1. Burgeoning amounts of unstructured data makes the business increasingly vulnerable from external attackers or internal data breaches.
  2. Because data is the key to understanding a customer’s wants and needs, if the business can’t identify its data and unlock its value, it’s at a competitive disadvantage.

As a European investor and alternative asset manager, here at Arrow Global we take care of £50bn of assets and own a data estate exceeding 160TB. How we manage our data is key to our success. We understand the difficulties involved in opening up environments to allow people to work productively, while at the same time locking them down to protect our organisation.

When it comes to analytics, I believe that Arrow is highly proficient because we employ a talented team of data scientists. But even for us, the sheer volume of raw and processed data, that resides in both our structured systems and unstructured data repositories, has the potential to put our business at risk.

We know there’s always more that can be done to strengthen our security posture and ensure regulatory and contractual compliance, while at the same time using our data to drive the business forward.

Data protection isn’t just about compliance

For many organisations, data protection has centred on demonstrating compliance with the GDPR. At Arrow, our efforts have gone one step further to include our contractual exposure.

Being a more mature data organisation, we had previously tried to develop an application in-house to manage our data estate. However, with 160TB across the company in production data alone, we simply couldn’t achieve the scale we needed to handle the sheer volume of data. Of course, the volume is just the start – once you know what data you have, you then need to be able to categorise the data and put it into a structure, so the business can analyse it for a specific use case.

We knew we needed to go to market to find an industrial-strength data discovery product to replace our in-house application. By aligning our choice of product to our overall IT and change strategy, meant that ultimately, we ended up with a far better outcome than we’d anticipated.

Position data as both a risk and an asset

Data touches every part of an organisation, so when it came to building a business case for buying-in a data discovery software platform, we approached it in a way that would speak to different people at the same time. We did this by posing the question:

“What do we want to do with data in a way that is GDPR-compliant, contractually-compliant and enables us to better service our clients?”

These are the black and white tests of data governance – to recognise the importance of securing and protecting data. They’re applied in a way that enables us to commoditise data and use it to drive the business forward, by forcing us to consider how we would use the data – for example, creating value-based pricing for our clients.

In aligning the business case to initiatives that were already priorities within the boardroom, we knew that we’d gain the attention of the senior leadership team and it would be easier to get the buy-in and budget we needed. And in the end, everyone wins – we get what we need to protect the data, and the business gets to distil the data’s value to better meet our customers’ expectations.

Dave Parker

Dave Parker

Get visibility of data at scale

For us, things got really exciting once we were able to see all of our data at scale. We chose Exonar because it allowed us to discover our data in ways that other products couldn’t. And the interface between the user and Exonar meant that everyone – both technical and non-technical users – could understand the technology and the findings it revealed.

When we saw exactly what data was in the estate, where it was and who had access to it, data security became much easier and the risk of data being compromised was dramatically reduced. We can see exactly where the vulnerabilities are and restructure how our data is stored to strengthen security. Then over time, we can use search, workflow and analysis to optimise the infrastructure and continually identify new areas to improve.

Commercialise the data

From a wider-business perspective, once people can see the data, they can start asking “What if…” to query it and distil its value. But it’s more than just the data itself. It’s not uncommon for data relating to the same thing to exist in unconnected systems across the business. For example, customer interactions and incidents or events.

Exonar is capable of joining the dots in disparate data sets. By stitching these data sets together, we can get a better overall view of our customers and use the outcomes to think of new, different or better ways of serving them through enhancing or adapting our offerings.

Why other financial services businesses should also take a smarter approach to data

  1. By changing the way you approach data, you can use it to protect and power your business and the people you serve.
  2. By positioning data as both a risk and an asset, you elevate its position to give it priority in the boardroom. Ultimately, it’s data that helps the business make informed strategic decisions about how to strengthen its competitive advantage.
  3. By gaining visibility of data at scale, you can see exactly what data you have and where it is. This gives the business confidence about the actions needed to ensure it is secured in both a regulatory and contractually compliant way, and that people are doing the right thing with data at all times.
  4. And joining different data sets provides you with a single view of ‘X’ within your data, no matter where it is. Helping to support your wider-business strategy and priorities, it gives you the information you need to secure a business advantage and generate value.
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How business leaders can find the right balance between human and bot when investing in AI

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How business leaders can find the right balance between human and bot when investing in AI 2

By Andrew White is the ANZ Country Manager of business transformation solutions provider, Signavio

The digital world moves quickly. From keeping up with consumer behaviour patterns, to regulation and compliance, the most successful organisations are always on the cutting-edge of technological developments.

However, when it comes to investing in artificial intelligence (AI), a hard and fast strategy does not guarantee a top spot amongst the league of tech greats. Instead, it pays to take a considered approach to balancing reliance on automated processes with a human touch. Why? Because creative and strategic thinkers are the true propellers of innovation; automation is simply the enabler.

The International Monetary Fund (IMF) developed the ‘Routine Task Intensity’ (RTI) index as a measure of which processes are likely to benefit most from automation. According to this metric, jobs requiring analytical, strategic, communicational and technical skills score low on the RTI index, while simple, repetitive tasks scored highly.

The lesson for business leaders here is simple; your digital investments are just as important as your stake in talent. When deciding which processes to automate, start simple, and remember to value the skills and potential of your people.

Keep customer-centricity at your core

Customer-centricity means that every business decision, dollar spent and new hire is centred on one question: how does this benefit my customer? Investments in AI are no different. To be truly successful, they must have a customer-focused outcome.

Where companies get this wrong is by implementing cost-saving measures or ‘copy and paste’ software that fails to improve the customer experience – often having the adverse effect.

Take the virtual chat-bot, for example; if implemented poorly, it can send your customers into a frustrating and seemingly infinite cycle of dead-ends. The modern consumer is far too digitally savvy for this shortcut, and will quickly move onto the next merchant offering a more seamless customer service experience.

To guarantee your investments are delighting rather than infuriating your customers, it helps to take an outside-in perspective of your business processes, aided by Customer Journey Mapping (CJM).

Before you commit to digital investments, CJM can trace and map each customer touchpoint, signalling pain points or conversion rates throughout their journey. These data-driven insights lead you to the areas that would benefit the most from automation, instead of implementing a broad band-aid solution.

Avoid the ‘set and forget’ method 

When investing in enterprise-wide AI, the ‘set and forget’ method rarely works. Real transformation requires an ongoing dedication to refining and improving AI-driven processes, as well as adapting them to the evolving needs of your customers. This is the best way to achieve customer loyalty, by proving that your organisation listens to, and understands its users.

A human perspective is invaluable here, paired with process mining – a method that thrives on finding process inefficiencies – to create a consistent feedback loop of improvement.

During periods of uncertainty, customer loyalty is everything, so aim to protect it at all costs.

The power of your people

The rise of automation can be linked to the corporate world’s obsession with speed and efficiency. However, the psychology behind this goes deeper than being the biggest and fastest producer; it’s also about reallocating resources into attracting and retaining the brilliant minds that drive companies into the future.

When communicating digital change, it’s critical to highlight the valuable impact AI has on augmenting jobs; removing the burden of mundane, repetitive tasks and allowing for more strategic skill-sets to shine through. For lower-skilled workers, invest in upskilling or re-education where possible.

Successfully rolling-out digital transformation plans means that every employee across all tiers of your company understands the value of AI. The starting point here is education to achieve buy-in. Change communications must be accessible, constructive and value-focused, supported by key culture influencers who champion automation within teams.

Enterprise-wide buy-in is an important element of refining and improving digital processes, as cross-functional collaboration can offer valuable insights into common pain points or inefficiencies ripe for automation. Supported by process mining, collaboration provides a holistic view of how each investment will impact other processes. There is no point investing in automation that streamlines one process and makes another more people-centric, so be sure to take a balanced approach to your investments.

Remember, AI is not about creating an army of robot workers; it’s about increasing efficiency and productivity so that an organisation, and its people, can work smarter.

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Are you a fighter or a freezer? The 4 “F’s” of Surviving Danger

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Are you a fighter or a freezer? The 4 “F’s” of Surviving Danger 3

By Dr.Roger Firestien, Author of Create In a Flash.

The fight, flight, freeze survival response – or FFF for short – is designed to mobilize our brain and body to fight an enemy, run from a tidal wave or freeze to hide from a predator.

FFF is how humans react when they encounter a dangerous situation. It is a primal response that happens instinctively even before we are able to think about the situation we are confronting.

The FFF alarm causes our brain to focus on negative memories, probably to scan them to avoid repeating dangerous situations and negative outcomes.  We get tunnel vision as our pupils dilate to increase our focus and long-range vision, but as a result we lose our peripheral vision.   

Humans use the FFF response and so do organizations.

When organizations encounter dangerous situations, like, say, trying to survive a global pandemic, they can respond by either fighting the situation, fleeing from the situation, or freezing and waiting for the situation to pass.

I would like to propose a fourth strategy for organizations to deal with a danger like the pandemic. It is the fourth “F.”  The farm response. More on that later.

What kind of organization is yours?

The fighter organizations were the ones that fought the idea of a global pandemic or pushed back against the research that reported how serious the virus was.  Think of the meat processing plants that didn’t provide proper protective gear or the religious organizations that refused to take a break from large services.

The results were catastrophic for the organizations and deadly to the employees and worshippers.

It is pretty easy to identify the fleeing organizations.  You don’t see them anymore.  Unfortunately, this is the organization that just doesn’t have the resources or the energy to fight.  You will recognize them by the “For Rent” signs in the windows of the buildings they used to occupy.

The organizations that freeze  are a little more difficult to identify.  They are still around but are frozen by fear. They are the organizations that, although they are in a position to move forward, are too frightened to take a risk or even look at the periphery of their business. Their tunnel vision blinds them to opportunity.  The freezers hide and wait for the danger to pass.  They are the ones who miss out on possibilities.

For example, if you are in the business of supplying concessions to sporting events, airports and national parks, your business is in deep trouble now. So, what are some ways to keep people buying food and drinks with so many venues closed?

Dr.Roger Firestien

Dr.Roger Firestien

Many national parks are now open and visitors need to eat.  How can you sell food while supporting social distancing? Answer: Sell picnic meals to your patrons.  And, sell a blanket that commemorates the park that diners can spread out and have lunch while social distancing with their families. Then, they’ll keep the blanket that reminds them of their visit to the park.

Sound like a good idea? It sure does. You can keep your park concession business, allow people to social distance and add to your product line with that commemorative blanket. Did the company implement the idea? Unfortunately, they did not. They froze and missed the opportunity.

However, businesses are finding ways to optimize their organization and capture opportunities. They are the farmers. The farmer organizations study the situation, just like farmers study the weather and the land. They look at the resources available to them and get to work.

Farmer organizations pivot and get creative.

Distillers, who before the pandemic, were making vodka, whiskey, gin and other spirits quickly changed their operation from distilling booze to distilling sanitizer.

Telemedicine, which had limited acceptance before the pandemic, almost immediately became the accepted way to deliver care.  Now, the doctor comes to you.

Fitness trainers are conducting their sessions via Zoom or in person outside on sidewalks in front of their gyms so they can social distance.

My favorite ranch, SK Herefords, sells their beef at local farmer’s markets in the Western New York area. This spring when the large packing houses shut down and grocery stores were limiting the amount of beef customers were able to buy, my farmer friends were there at the markets with locally produced farm-raised beef.  Sales soared and demand skyrocketed.

Why? The farmers were ready.  They used their resources and were not afraid to optimize them in a rapidly changing and volatile environment. Farmers live with constantly changing weather conditions and market prices and are accustomed to rapid change.

To operate with constant change, all of us, like farmers, need to be constantly creative.  Phil Keppler, my philosopher farmer friend from SK Herefords says, “Creativity helps you to not look at things as a problem. It’s trying to find the solution – and that’s the exciting thing about it. Things aren’t problems anymore. It’s just difficult situations and you’re trying to find a solution to that situation.”

A good mindset for what our world is experiencing now… it’s a difficult situation and we are creating solutions daily.

Fight, flight, freeze or farm. What kind of organization is yours? And, what can you learn from “the farmers?”

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