Governance failure
Governance failure is an existential business risk
As organisation become bigger and more complex to meet the ever changing consumer, and societal demands, failures of governance are becoming increasingly common.
Recent examples of how companies have been impacted by governance failures include:
- The Board of a national construction firm failed to adequately manage the company’s principal risks by allowing it to take on high debts while trading on low margins leading to liquidation.
- A restaurant chain suspended trading after material misstatements in the company’s accounts were discovered, with a £20m difference in the reported and actual positions.
- The Board of a major UK fashion retailer was determined to have failed in its oversight duty for poor working conditions at its warehouses including paying less than minimum wage and punishing staff for taking water breaks and time off for illness.
Such incidents have the potential to cause severe financial, operational and reputational problems for an organisation, including high costs associated with investigating the failure, managing repercussions and effecting remediations.
Consumer reactions and regulatory responses to a governance failure can result in lost customer revenues and substantial reputational damage. News of the failure can spread extremely quickly on social media, and at the same time, regulators’ expectations are increasing. As a result, effective and rapid situational response and crisis management needs to be a strategic priority.
Extraordinary challenges
Rapidly and effectively responding to a significant governance failure can be challenging. Some of the common obstacles include:
- Lack of assigned responsibility and accountability regarding who owns different elements of the crisis response.
- Inability to execute an integrated, cross-functional response.
- Lack of experienced, knowledgeable and available experts who can immediately assist with the issue.
- Inability to rapidly ramp up teams to respond to the surge in potential inquiries from regulators, suppliers, customers or other stakeholders.
- Difficulty obtaining the data and information required to investigate and remediate the issue, or to respond to regulators and other stakeholders.
- Inability to accurately track and manage the costs or scope of the failure, due to systems and data challenges.
These challenges highlight the complexities in managing the rapid mobilisation of an effective remediation operation.
Four pillars of effective governance failure response
Taking definitive action within the first 48 hours is critical. Many companies spend this time scrambling to organise a response team and obtaining the necessary information for senior individuals to make decisions and prevent further disruption. The result is the issue continues to grow. Below, we identify the four pillars of a successful response to governance failure.
Build a holistic view of the situation, with a focus on understanding the sequence of events leading to the failure and reviewing the evidence that was used to support decisions made.
Establish the root cause and the point of failure in the governance structure and processes.
Companies should be able to:
- Assess the scope of a failure.
- Track and document remediation activity.
- Respond quickly and accurately to regulator or other external stakeholder requests for data.
- Track all remediation costs and KPIs.
This requires robust information and project management platforms and processes.
The response team needs to rapidly understand the policies and controls in place to establish whether the issue was a result of a gap in controls or a control failure.
This is key to understanding how to prevent the failure recurring and building resilience in the governance environment, enabling the organisation to emerge stronger.
Clear, coherent and consistent communication internally with employees and the board, and externally with customers, suppliers and investors, is an essential component of any remediation operation. The response team must determine what should be communicated, how, and when.
How PwC can help
- Crisis response
- Governance review and recommendations
- Establish a process for decision making and recording evidence
- Project management
- Review historic decision making
- Data capture
- Data analytics
- Dispute advisory
Crisis response
We can set up and run a crisis ‘war room’ to lead your response, or we can shore up your existing strategic and operational capacity when needed. We can help prepare or review your crisis response strategy, governance, crisis communications and stakeholder management plans. We can mobilise within hours to provide operational, regulatory and legal support, as well as technical analysis.
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