How to Identify and Mitigate Asymmetric Information Risk
The Presence of Information Gaps that Lead to Information Risk
The realities of the relationship that exists between the board of directors and the C-suite can cause a gap in the information process. Asymmetric information system risk defines the informational gap in which information is susceptible to diminish in detail as it is passed on.
At every company, both the board of directors and the senior-level executives play a vital role in providing strategic oversight of management and operations. Due to the variances in the length of the roles that are played, the knowledge about the organization’s operations and risks are much more extensive for the C-suite relative to the knowledge possessed by boards. This imbalance creates a natural tension between the board and the C-suite. A recent article published by the National Association of Corporate Directors suggests that significant risk lies in the qualitative and quantitative characteristics of the information that is presented to the board.
The value that lies within the board’s foundation is in its outlook of the larger picture of the company. However, it critical information is withheld from the board’s view, how can they be effective? Clear and open lines of communication must exist between the board and the C-suite in order to prevent damaging information gaps.
Warning Signs of Information Risk
The vitality of the information exchanged between the board and management lies in the channels of communication. To avoid information risk, gaps in the information process must not grow too large.
The article which is authored by NACD and McGladrey highlights several factors that signify warnings of the presence of information risk. These factors include:
- Significantly Increased Time Commitment Required to Digest Information Received
- Information Overload Due the Infinite Capacity of Board Portals
- Management’s Perception of The Board
- Poor Culture
- Lack of Necessary Expertise On The Board
- Poor Relationship Between CEO and Chair (Or Leader of Independent Directors)
These factors address the following issues: the aspects of part-time basis versus full-time basis, the removal of the implementation of board portals, the natural and healthy tensions between the board and the C-suite, a culture based around trust, the ability to effectively interpret data, and the establishment of open lines of communication.
If these signs are addressed in the beginning stages, the ability to prevent the consequences of larger information gaps can avert risk in boardroom operations and prevent corporate crisis.
The environment and culture within an organization ultimately affects the atmosphere of information sharing. This culture must be based on trust. The establishment of trust in the company’s culture will help to mitigate information gaps in the exchanging of data between the directors and management. This area of influence is based on qualitative information. The article highlights three points of focus that, if addressed, can go a long way to reducing opportunities for information risk. They relate to the following:
- Board Composition
- Board Processes
Board Composition is an essential aspect of the mitigating process. The board must consist of individuals who have a developed level of knowledge and expertise. A sharp, skilled board will establish a variety of experiences and perspectives that will create questions at hand that can ultimately lead to the avoidance of missteps. Through tenure, recruitment, and evaluations, the board will then attain a position in which it is fully competent and successful.
The tone is always set from the top. The leader of the independent directors plays a critical role in the communication channels between the board and the C-suite. Trust must be established in order for an effective information flow to exist.
The board processes that are set in place must be adequately provided in order to enable directors to get the information needed for effective oversight. The article provides several options that directors can employ in order to ensure that the full picture of the company is established. These options include:
- Executive Decisions
- Committee Meetings
- Strategic Deep Dives
- Access to Management and Off-Site Visits
It is vital that these processes enable directors to receive the information that is need for effective oversight of the company’s interrelations and procedures.
Striving to Address Information Risk
Breakdown in communication of information lies at the core of most corporate crises. Information gaps must be defined to identify asymmetric information risk. Warning signs should be of concern and ultimately addressed to establish or restore an atmosphere of trust throughout the informational atmosphere of the company. Informational roadblocks can be overcome. Sustainable growth can be achieved once information sharing is properly addressed. It is important that these risks are sought out and resolved in order to disband any information sharing gaps that could ultimately lead to demise in the company’s growth. The solution to overcome asymmetric information risk lies within the process that defines the interworking of the information sharing.
Click here to download article.
Read ERM articles as soon as we post them
Keep up-to-date with current developments in ERM. Subscribe to the ERM Newsletter.