Managing Fraud Risk: A Practical Guide for Directors and Managers

Competency and Behaviour – The Key Drivers of Board Performance

Corporate scandals short-circuit very quickly to the actions and decisions taken by those at the top. The way in which directors conduct themselves (in terms of their behaviours) and the skills that they bring to the role (in terms of their competencies) are crucial to how an organisation performs. Shortcomings in either area will lead to problems: competency issues are generally associated with poor performance, whilst poor behaviours are generally thought to lead to integrity failings, including fraud. The two are not mutually exclusive however and we examine some of the main issues of both below in terms of their impact on fraud risk.

1. The Competency of Directors

Introduction

An effective board selection process is a critical prerequisite of success. Directors should be appointed only after a thorough selection process, which makes use of outside agencies (head-hunters, recruitment consultants etc.) to access the best available candidates. The aim should be to move away from the old-fashioned passive or “country-club” type of situation where the Chairman and CEO would nominate friends and associates to be the non-executive directors. We saw something similar to this when looking at the Enron case. The Code stipulates that the selection of new directors onto the board should be as a result of “a formal, rigorous and transparent” procedure. Listed companies will usually make use of a Nominations Committee (or equivalent) ...