The Tribune

Volatility appears to be further increasing in an already-shaky environment. Risks and threats can be precursors to crisis situations for companies and non-profit organisations. The importance of understanding and preparing for these obstacles will intensify and cannot be overstated. From my conversations with senior executives, and risk and compliance professionals, the following is an overview of what business leaders and Boards can expect in 2023.

Conflicts of Interest management

Generally, in the context of Boards of Directors, a conflict of interest occurs when a member has multiple interests that can influence their actions or votes. Conflicts of interest must be managed carefully by directors. A mishandling of these personal conflicts can often cause directors to breach their fiduciary duties to a company, its shareholders and employees. For example, it is common for directors to make the mistake of withholding material information from their fellow directors due to a misunderstanding that a duty of confidentiality to a third party excuses them from disclosure responsibilities. When directors owe duties simultaneously to an investor or commercial partner of the company, as a result of their other relationships, navigating these ties can be particularly challenging (especially for sponsor designees serving on portfolio company boards). It is important to note that directors are not entitled to exculpation or indemnification for breaches of their duty of loyalty. During distress, personal liability for violations of the burden of loyalty is exceptionally high.

Risk oversight

Challenging environments may prompt specialised Board committees and minutes that reflect the nuances of the company. In critical operational areas, directors are expected to set up customised control systems that will allow them to detect and respond to red flags as quickly as possible. It is essential that the Board creates specialised committees to monitor discrete risks, or ensures that the review of these risks falls within the purview of the existing committees. It is also essential to require management-level teams to report these risks to the Board periodically, and to engage outside experts to conduct risk audits to determine if mission-critical areas are being identified and appropriately addressed.

A Harvard Business Review article, entitled ‘2023 annual letter to Boards’, explained: “Cursory recording of the business transacted at Board meetings, or simply attaching decks to sparse minutes, will be given little weight in a Board’s defence of claims that it failed to fulfill its duty of oversight, particularly in connection with any motion to dismiss a complaint.” Meeting minutes should include the circumstances and analysis considered in reaching a decision, and a list of follow-up requests by management. The minutes of subsequent meetings should reflect whether management has followed up with the Board, and whether the Board is satisfied with the response, or if additional follow-up is necessary. Furthermore, director interactions between formal meetings, especially if they relate to significant Board issues, should be recorded in the minutes (through addenda and introductory paragraphs).

Pressures relating to privacy and regulation

According to Gartner Inc, by the end of 2023, “65 percent of the world’s population will have their data protected by modern privacy regulations”. Over 250 pieces of legislation dealing with cyber security were introduced or considered in 2022 in nearly 40 US states.

Conclusion

In short, as a result of these market dynamics, successful companies will need to prepare carefully, take a focused approach and take decisive action while still being agile enough to meet the challenges that will come their way.

• NB: About Derek Smith Jr

Derek Smith Jr. has been a governance, risk and compliance professional for more than 20 years. He has held positions at a TerraLex member law firm, a Wolfsburg Group member bank and a ‘big four’ accounting firm. Mr Smith is a certified anti-money laundering specialist (CAMS), and the compliance officer and money laundering reporting officer (MLRO) for CG Atlantic’s family of companies (member of Coralisle Group) for The Bahamas and Turks & Caicos.