Abstract
Accepted practice in corporate governance and risk management has traditionally been seeped in scientific and mechanistic management approaches. Compliance, regulation, risk and legislative frameworks are generally applied, analysed, audited and reported on to varying degrees of accuracy and certainty.
Unfortunately, all of these management mechanisms do not in themselves lead to effective governance, as evidenced by the multitude of corporate scandals and collapses, both pre and post GFC (think: Lehman Brothers, Storm Financial, HIH,Enron, Arthur Anderson, WorldCom etc, etc).
Overconfidence in the 'science' of risk management leads to faulty corporategovernance
Andrew Cornell (AFR BOSS, 11 March, 2010) warns about "the danger of certainty in economic analysis" and its contribution to the current convulsions in financial systems.
"Reassured with answers rather than probabilities, with [belief in] specific outcomes rather than [the reality of] a chaos of possibilities, markets acted with irrational certainty. And went catastrophically awry."
The current scientific approach to risk management is necessary but insufficient to mitigate intangible risks to business success. Cornell goes further to assert that there is now a shift in thinking and appreciation that the intangible qualities of 'culture' are critical to the issue of risk management and corporate governance.
"Corporate culture cannot bestow immunity, but where culture is strong, where governance standards are high, the dangersof rogue activity are lessened." he advises.
The rigour and robustness of the scientific approach also needs to be applied to the less tangible aspects of organisations to provide greater visibility and enable management ofthe unacceptable variation from the expected.
Compliance and regulation mechanisms used alone, without explicitly including the intangible aspects of ethics, psychology and political systems only serve to increase an organisation's systemic risk. This deficit in approach to appears to have been a major contributor to most of the recent corporate scandals and collapses. This approach to risk management and governance is more 'art' than science.
The 'art' of risk managementand corporate governance
The 'art' of risk management and governance is the capability of directors and executives to navigate and understand the highly complex and unpredictable set of human behaviours and interactions that is the modern organisation.
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