Risk mania has taken over the corporate governance discussion today but defining risk and figuring out how to deal with it can be dizzying for boards.
Dinesh Paliwal, the chief executive officer of Harman, a wholly owned subsidiary of Samsung Electronics Co., who serves on the boards of Bristol-Myers Squibb, Nestle and Raytheon Company, has a simple definition that guides his work. Risk, he says, comes down to two core considerations--"performance and reputation."
And at the top of the list of risk factors is environmental, social and governance issues (ESC), he stresses.
"The imperative to embrace high ESC standards and practices across a business is a shift that I wholeheartedly support and one that I think modern boards must keep in mind while making each and every decision," he says. "Failing to do so could present the largest corporate risk of all."
The following is a Q&A with Paliwal, in which he discusses risk from the perspectives of both a chief executive and director.
How would you define risk today, and what do you see as the biggest risk factor boards need to monitor?
There are multiple layers to corporate risk, all of which relate back to two core considerations: performance and reputation. In order to insulate risk when it comes to performance, companies must determine the material factors that have the greatest potential to impact their bottom line and guard against potential threats. Those risks might concern supply chain, operations, regulation or safety, just to name a few.
It's easy to see how risks related to performance also have the ability to impact a company's reputation amongst various stakeholders, including customers and employees, and vice versa. I saw a recent study from Axios, which laid out a framework to evaluate the overall reputation of an organization, and it resonated with me. It concluded that, in order to win over modern customers, executives must uphold three primary guideposts: character, affinity and trajectory.To build an organization that stakeholders can rally behind, leaders must communicate a clear vision, deliver consistent growth and constantly innovate--all initiatives that often begin in the boardroom.
How important is board governance and structure in evaluating risk?
I believe the greatest risk to any board is having too little expertise in the boardroom. Board composition is an incredibly important part of this equation. Diverse boards comprised of individuals with varied industry experience and unique personal perspectives excel at anticipating and addressing issues before they arise.
For instance, I bring my tech experience and engineering background to the boards of three large international companies--Nestle, Bristol-Myers Squibb and Raytheon. While most people don't think of tech when they hear the names Nestle and Bristol-Myers Squibb, my place on these boards demonstrates the modern reality that technology impacts all industries--whether through 5G, artificial intelligence and machine learning, data science, cybersecurity, automation or other tech developments that are on the cusp of transformation. Further, my own experiences, in living and working in six countries on four continents, required a broadening of my perspectives by actively seeking out and listening to the opinions of others who have different skill sets and backgrounds from my own.
The skills that are most crucial for any board change over time and should be constantly evaluated. When I took on the role of Harman CEO in 2007, for example, I knew that we needed to refresh the perspectives on the board, immediately and continuously. Before I joined, the board was composed of many friends and family of the former chairman. I knew that to effectively grow Harman, more global-minded and experienced board members would be needed to help guide Harman through a multi-year transformation from a hardware and components supplier to a software...