Directors: Why your conduct should go to the top of your Risk Register

Conduct risk is now a familiar term in the financial services sector, not by choice, but because the Regulator has regulated conduct heavily since the Global Financial Crash. Not that regulation seems to have made a huge difference.

At least the Regulator has put the term “conduct” on the business road map albeit the effect is like a speed camera which slows us down in high risk areas but after those tell tale markings on the road, we all put the boot down.

However, the regulators of the conduct of those in the financial services sector do not own exclusive intellectual property rights to the term nor would they want to claim such rights. You are free to use it in your business and especially on your board without fear (save that some on your board may fear it).

This raises an issue regarding a related term that has achieved widespread currency in all sectors and that is behaviour or, rant alert, “behaviours”.

My rant is not about semantics, although there is a grammatical point to be made here: behaviour is a mass noun with no plural. The more important reason the accurate use of the word matters is because: how someone behaves is unique to them. This means how we behave as a group, for example a board, is also unique. It is why we should resist the seemingly “codifying” trend of using the word “behaviours” as if they can be policed like a charge sheet from afar.

The word behaviour reflects the complexity of human nature. “Behaviours”, on the other hand, suggests uniformity. For example, the precise nature of Mr Trump’s bullying behaviour is different that of Kim Jong-un’s although you might rightly argue that both could result in a nuclear holocaust.

But what is the difference between conduct and behaviour? It depends on the context. Conduct refers to the result of continual observation as in “Lucy received a Good Conduct Award last year” or “The conduct of all parties in the election campaign was shocking” or “The conduct of the Banks has improved/not improved since the crash”. Delete to taste.

Behaviour is about immediate interactions as in “Billy’s behaviour in school yesterday was unacceptable” or “The CEO’s behaviour when challenged at the last board meeting was outrageously bullying, to say the least” or “The Chairman was quick to call out unacceptable behaviour by some directors at the AGM”.

If a company’s Risk Register is a list of top and emerging business, legal and reputation risks which could affect outcomes, it follows that conduct by directors should go right to the top of that list because most risks and opportunities are forged in the crucible of boardroom relationships.

So what language might directors use to describe these risks? I feel just one entry at the top of the Risk Register would capture most issues:

Conduct Risk: The risk of systemic weaknesses in board decision making and governance due to the failure of each director to change their worst behaviour and exploit their best.

And how can this risk be mitigated, realistically? It’s simple: each director should trade a change in their behaviour for a change in another’s.

The problem with traditional change programmes is that they lack the right soft incentives to attract directors who value only hard returns.

The feeling that the person who winds you up most on your board might change their behaviour if you change yours is often enough.

This approach might have prevented defeat software being included in cars; false accounts being created in banks or a myriad mis-selling scandals avoided.

But these are the big stories. What about the thousands of board meetings going on up and down the country today where poor conduct prevails because of unchecked behaviour? And what of the cost: real and opportunity cost?

These are the stories which lead to creating that great Yorkshire understatement: “trouble at t’mill”.

And how stressful, and damaging and awful to the individual director a troubled board can be. And worst are those who say: “That’s not us”. When I say, “How do you know?”

I propose every board appoints one director as official “Devil’s Advocate” at the beginning of every board meeting. Each director would get a turn. Their job at that board meeting with the agreement and full mandate of their colleagues would be to challenge everything, bar nothing.

This step would help reduce conduct risk and might even surface some opportunities which otherwise would have remained buried.

There’s nothing more positively cathartic on a board than the removal of fear.