Risk management: survey reveals directors' lack of understanding on compliance

Commerce and industry lawyers are struggling to get support for their risk management strategies from the board, with directors disturbingly ignorant over compliance issues, it has been claimed.


A survey by the Practical Law Company's Law Department found that less than half of the 150 general counsel questioned thought their directors had a good understanding of corporate governance. Just less than a third said it was 'extremely difficult' or 'very difficult' to get the board's support for compliance programmes.


Almost 90% of respondents had policies in place covering a business code of conduct and ethics, while more than three-quarters had policies on insider trading and health and safety. Yet only half believed there was a clear understanding by management and others of the legal risks acceptable to the board.


Adrian Thurston, legal services manager at MFI, said: 'With legal issues generally, until there is a significant problem it can be difficult to raise the profile with the board. It is only as and when an issue arises that compliance will get the profile it deserves. Some boards do not think it is a "sexy" thing to discuss. But board members in general need to realise that it is far better to be proactive than reactive.


'It is also essential not just to have a policy but to understand what underpins it in terms of the risks.'


Christopher Morgan, company solicitor at Honda Motor Europe, said: 'It comes down to the quality of the information that the compliance programme is bringing to the senior management. At Honda, management is 120% behind our compliance programmes. Line managers identify areas of risk, the board has to comment on these, and then the company president has to assess each risk as high, medium or low. It gives management a focus.'


In-house counsel assumed sole or joint responsibility for advising the board on corporate governance in 83% of the companies surveyed. Some 15% relied on outside lawyers, while 14% used auditors. Non-executive directors were principal advisers in only 4% of companies.


Mr Thurston added: 'At MFI we have an internal audit department which has a direct line into the chief executive. An audit committee can be an essential route for in-house lawyers who do not have access to the board themselves.'


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