A cautionary message from our Chief Risk Officer.

The emerging Governance and Risk Context

Companies have never operated in such a volatile, uncertain and complex global, national, and local environment.

Soon, company Boards, individual company directors, CEOs and other organisational leaders are inevitably going to face the condemnation and judgment of those who will apply the unforgiving standard of “20/20 vision in hindsight.”?

Whether it be class actions by angry shareholders, militant institutional investors, investigations and prosecutions by regulators, harsh media exposure, or government and parliamentary inquiries, today's decision-makers will be more severely judged, and more exposed to personal liability, in terms of properly discharging their governance, strategic and risk management duties, than any generation of leaders before them.

Standards of accountability are only going in one direction.

The standards are getting higher, more complex, and tougher to comply with. Current governance and risk management systems aren’t even coping with today’s requirements let alone what’s next.?

The accountability goal posts are already moving, and the imposition of new and higher standards are inevitable.

A leading example is the EU Corporate Sustainability Due Diligence Directive (CSDDD) which was recently adopted as European law with a process for each member country to subsequently adopt it. The Directive aims to make companies that operate within (or do business with) the massive economy that is the EU more responsible for their supply chains, and their environmental, sustainability and human rights impacts.

To comply with the Directive companies will, among other things, need to:

1. Integrate due diligence into their corporate strategy, considering the climate and environmental consequences of their decisions.
2. Identify and assess adverse environmental impacts and prioritise these adverse impacts based on their severity and likelihood.
3. Prevent or mitigate impacts: Companies will be expected to implement measures to prevent potential adverse impacts or, where that is not possible, to mitigate impacts.
4. Identify and assess risks: The Directive expands the scope of operations covered by the due diligence requirements to include risk identification and assessment, with new provisions for a risk-based approach to due diligence.
5. Adopt and put into effect a climate transition plan: This should set targets and actions for a transition to a lower carbon economy, including reducing greenhouse gas emissions. ?

The CSDDD applies to all companies that want to do business in, or with, the EU, regardless of their size or sector.?Companies that don't comply with the Directive will face financial and legal sanctions.

(Extracted, with thanks, from Howard Kennedy LLP Insights article/ Mark Stephens, Partner: ‘The EU Corporate Sustainability Due Diligence Directive: The countdown to compliance has begun’ 25 /04/2024).

Given the inherent need for companies to model for potential adverse impacts, full compliance with these duties is simply not possible without the ability to dynamically model and simulate climate, environmental, industrial, supply chain and social systems – and their complex interactions and dynamics.

"full compliance with these duties is simply not possible..."

Failure to meet these Governance and Accountability challenges will be, first and last, a failure of Personal and Professional Leadership.

In their seminal book ‘It Starts with One’, (Pearson FT Press) the research of INSEAD management school professors Black and Gregerson identified two of the key barriers to effective change in leaders:

• Failure to see the need – The ‘It’s not broken’ syndrome.

No need to fix it. It’s worked for me so far. These leaders have mental map of what success looks like which has been deeply ingrained over years – this is the way I’ve always made decisions; I don’t see any need to change.

• Failure to risk change – Fear of risking vulnerability, embarrassment, shame.

“I’d rather be competent at something wrong than [being seen as] incompetent at the right thing”. It’s not about skills, it’s about lack of confidence, the failure of self-belief.?

It’s also ultimately a lack of courage to embrace the ‘new’ and the integrity to push forward out of our comfort zones - despite the fear of having to learn new ways to better understand the complexities and impacts surrounding far reaching decisions.

And having to confront the truth that the processes, tools and insights used for many pivotal past decisions were woefully inadequate.

As Cassie Kozyrkov, Google’s Chief Decision Scientist for nearly 10 years said in one of her presentations (when explaining the reluctance of leaders to embrace decision intelligence, machine learning and predictive AI): You don’t have to understand [technically] how a microwave oven works to use one. What you do know is that it does work.

Wharton School associate professor Prasanna Tambe notes (‘Can Baby Boomers Succeed in a Millennial World?’ Wharton Business Journal 2018) the friction between baby boomers and millennials [in embracing change]: The pace at which technological change is disrupting industries is as fast as it has ever been within the last century,” he says. “… That is the moment we are in, where organizations are struggling to respond to new and difficult questions about their [needs] that are being raised by the disruption of their traditional business models or by technologies like new internal communication tools or artificial intelligence systems.”

The price to be paid.

Company directors and CEO’s who have been too inflexible, too entrenched, or too insecure to embrace cutting-edge predictive AI for essential decision support will have little defence against future allegations of incompetence and negligence – because those are the only tools that will allow company directors and CEOs to effectively discharge todays, and tomorrows, governance, compliance, and risk management duties.

The allegations are likely to be that you could and should have:

• Understood that you were operating in a globally and multi-sector interdependent context, therefore you needed to leverage a broader and deeper pool of credible data and modelling to better inform your decisions;
• Understood the well-documented risks of using static paper-based data, static and untested assumptions, relying on lag indicators, and therefore severely limiting the scope of your decision-making in ways that blinded you to both the opportunities and the risks from the insights that would have been available to you;
• Known that you could test and model new major strategies before making large investments and exposing the company to substantial and avoidable losses and liabilties;
• Properly informed yourself of the regulatory accountability frameworks which demanded that your Board and management dynamically model and predict various future risk scenarios to identify the otherwise unexpected and unmanaged environmental, climate and supply chain impacts; and
• Known how to identify and avoid those risks, or plan and resource to mitigate those risks, if or when they occurred.

(And so on).

And there’s going to be little by way of defence when the evidence shows companies in your industry, including your competitors, were successfully using this enhanced decision-making functionality to avoid or mitigate risks, to comply with regulatory standards, to make better investments and to plan and model strategies before implementation. And, accordingly, they outperformed your company or organisation because they simply made smarter, more insightful, more timely decisions while avoiding or mitigating significant liabilities.

A final note.

In their book “The Smartest Guys in The Room - The Amazing Rise and Scandalous Fall of ENRON” (Portfolio Trade 2003) authors McLean and Elkind concluded that, amongst so many others, one of the headline learnings was:

‘Never, ever do the easy wrong instead of the harder right.’

Today’s Boards, directors and CEOs must abandon the comfort of the familiar traditional, static, analogue, linear and narrow approaches to data and decision-making and embrace the predictive AI and related tools that are available to them - now.

Failure to abandon the ‘easy wrong’ and pursue what’s right for their companies and their communities will be indefensible.?

Sentient Hubs has the unrivalled capability to meet these demands by the holistic modelling and simulation of climate, environmental, industrial, supply chain and social systems – and their complex interactions and dynamics. Sentient Hubs connect expert models within a secure cloud environment to bring unparalleled insights and decision support to Boardrooms and C-suites.

Nigel McBride is the Chief Risk Officer of Sentient Hubs. Formerly a Partner, Managing Partner and CEO in a top tier Australian law firm, Nigel is also a Fellow and Graduate of the Australian Institute of Company Directors (AICD). ?He has facilitated Strategy & Risk workshops for AICD as well as for major corporate, institutional, and professional services clients and The College of Law Australia. In addition to 7 years as CEO of the State’s peak Chamber of Commerce and leading business advocacy body, Nigel has had substantial board governance experience including Audit & Risk.