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Reader
Profile
You consult with clients on early warning signals for their businesses. But aren’t directors tracking these already? The natural inclination is to think that because of the amount of time that’s been spent on internal control reviews and with the adoption of enterprise wide risk management systems, early warning signals should naturally appear. There are a couple of problems with that. First: we won’t see the signals unless we’re actually looking for them. Second: some of the most important signals come from behavioral changes in the executive suite. These rarely show up on the list of enterprise risks. Most of the control systems that exist in businesses today focus on what we can identify and confirm. Early warning indicators may not yet be that clearly defined. Because board members are somewhat removed from the day-to-day operations they may spot things that management might miss. OK, but what sets organizations apart in terms of how they identify early warning signals? The most important thing is that the board be fully invested in the idea that they must remain watchful for early warning signals and be prepared to seek them out. We all recognize that board work differs from management work and that management and board information needs differ. Most boards realize that they are actually directly involved with the company less than 10% of the time that management is, yet their responsibility and liabilities last 365 days a year. The board can only operate when it’s legally constituted to do so. Any additional capacity that can be added to help board members better identify issues that may be of concern is likely to be time well spent. Boards that see value in using early warning indicators insist that management bring issues to their attention early, and they are confident they will do so. They also identify “trip wires” when approving major plans or projects to make sure that if things get off the rails they are picked up quickly In short, they put processes in place that will help insure that early warning signals are surfaced in time to do something about them. I’ve recommended to clients that they arrange to hold an annual “Early Warning Summit.” It allows the board and senior executive to set aside time to focus on early warning indicators. Setting this time aside gets the board active, and because of that, members remain engaged with their antennae up during the rest of the year. It’s also a great opportunity to bond with executive management and build a basis for more open discussion during the year. What should board members look for? Early warning signals are those that appear at the beginning of a process. Companies don’t become insolvent or chronic poor performers without warning. The company loses favor with its customers. It becomes less inefficient or begins to unravel in other ways. You can see those trends developing in the numbers if you know what to look for. Inventory turnover rates, extension of the sales cycle, highly forgiving sales terms, failed product launches, in fact any number of indicators can provide insight into an organization that’s getting into serious difficulty. As valuable as some of those signals may be, there are things to look for earlier in the process. They are difficult to see and hard to confirm. They are changes that begin to take place on the periphery of the competitive space or behavioral changes that begin to emerge within the organization itself. Clearly the CEO has got to be on top of changes that are occurring, but it’s the manner in which he or she responds to questions about emerging threats or new competitors that the board should take particular interest. As tough as some of the early warning indicators may be to see unfolding, these are generally the sorts of developments that a critic can look back on with the benefit of 20/20 hindsight and accuse the board of being negligent for not having seen them at the time. What should directors do if they see early warning indicators that concern them? Some early warning indicators are more clearly seen than others. There are times that something may not sit right with a director as a result of something they see or hear at a meeting. Sometimes a problem may occur to a director on the way to the airport after the meeting. Experienced directors can sense when things are not right, and they should trust their instincts. If you have concerns, it’s imperative that you raise them. If it’s not possible to get the matter put on the board agenda or discussed at an in-camera session, then at least speak to the chair about it. Often concerns can be cleared up fairly quickly, but there times when a concern on the part of one director will be shared with others. If directors feel they have a valid concern, there’s every possibility that they may have come across something that with the benefit of further discussion could reveal issues of serious concern. |
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| Doug
Enns is the president of Douglas J. Enns & Associates Ltd., a
Victoria, British Columbia-based consulting firm that advises clients
on early warning signals. He established his practice when he returned
to Canada after working in the U.S. and Europe in senior executive
capacities in the IT sector. He chairs the board of a large insurance company. His other board service has included the public and private sector. He is a Chartered Accountant and a recent graduate of the Director’s College where he received the designation, Chartered Director. Contact him at doug.enns@djenns.com. Copyright © 2005 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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