When a corporate scandal hits the headlines, news of a senior executive departure is never far behind. However, apportioning blame ex-post for failures of oversight has in the past been challenging.
Boards and regulators are increasingly looking to minimise ambiguity around who is responsible for shortfalls and to strengthen individual accountability. Individual senior managers are therefore under increasing pressure as stakeholders scrutinise their efforts to prevent control failures in their areas.
This shift has occurred across different industries and geographies. In the U.S., following the emissions scandal which hit the automotive industry in 2015 (and a host of other high-profile corporate failings), the Department of Justice issued the Yates Memorandum to reduce protections for executives who preside over corporate misconduct. Meanwhile, in the U.K., the 2016 introduction of the Senior Managers and Certification Regime (‘SM&CR’) by the Financial Conduct Authority (‘FCA’) and Prudential Regulation Authority (‘PRA’) forced senior professionals in the financial services industry to meet a statutory duty of responsibility, or risk incurring the ire of regulators.
It is not just regulators and boards that senior managers must prove themselves to, though. Following the wave of corporate scandals which have recently hit the headlines, investors, employees and consumers are increasingly demanding reassurance that senior managers are taking appropriate measures to ensure that risks are properly controlled.
Whilst many senior managers accept the task of exercising increased oversight, demonstrating that they are doing so and that their efforts are effective is a different challenge altogether. SM&CR, for example, demands that senior managers take ‘reasonable steps’ to prevent control failures in their business areas – an ambiguous requirement leaving scope for different interpretations. So, how can individuals under the microscope demonstrate that they are discharging their responsibilities adequately? This article explores three, interrelated ways of achieving this.