Assessing Business Venture Risk

Scenario CEO Martin Clayton has a problem. As head of the $500 million Community National Bank, he wants to encourage growth, and yet ever since Enron, the Sarbanes-Oxley Act, and the subsequent new listing exchange requirements, his board has been spooked and is reluctant to take any risk in the way of new ventures or acquisitions.

The board’s current approach is to analyze these strategic issues for so long that they eventually find the door of opportunity has closed. This situation creates frustrated and disgruntled managers; they have been mired down and feel their time could have been better spent. Clayton realizes the current process is a drain on both management and the board, and it isn’t helping the bank move forward strategically. He is debating what kind of approach to take at the next meeting.

What advice would you give Clayton on how to broach this subject at the next board meeting?

“Clayton needs to do some formalized planning with the board and senior management. All parties need to agree on which strategic initiatives are worth pursuing. Also, risk analysis needs to be performed and risk mitigation techniques need to be agreed upon. What does the bank’s mission statement say, and are all decision makers, as well as influencers, on the same page?

A strong planning process with detailed tactical plans presented as a recommendation to the board, asking for their input and ideas, and seeking their final approval, might be a strategy that could move things forward. Risk mitigation strategies and profit enhancement strategies need not be mutually exclusive.”

Steve Goodenow
CEO
Bank Midwest
Okoboji, Iowa

“I would urge the board to create an executive committee to study new venture/acquisition opportunities. This would expedite the process and make it less burdensome and time consuming for management and the board. It may also alleviate Sarbanes-Oxley fears, since committee recommendations would be a result of analysis by fellow board members.”

Joseph W. Hollis
Director
Premier Community Bankshares
Winchester, Virginia

“Prior to the next board meeting, Mr. Clayton should consider meeting with his board chairperson or lead director for a candid discussion about the missed opportunities. Concern should be expressed about the time-drain on both the board and management team, and he should ask for the cause of the board’s unwillingness to make a strategic decision. Analysis paralysis is often caused by the fear that a decision will be wrong, resulting in increased organizational or personal risk, or by the lack of complete information to make an informed decision. Although it is implied that the board has made similar strategic decisions in the past, Mr. Clayton might ask:

• Were the potential new ventures/acquisitions in accordance with the bank’s strategic plan?
• Has the management team been properly focused?
• Is the board satisfied with the implementation and integration of prior ventures and acquisitions?
• Does the board wish to revise the strategic plan in light of new priorities?
• What critical information was missing from the management team analysis?
• Have all issues affecting director liability been adequately addressed?
• What is needed to make an informed decision before the door closes on a future opportunity?

  The chairperson or lead director may already know the answers. If not, Mr. Clayton might ask him or her to explore the issue with other directors. Alternatively, an outside consultant or legal counsel could be retained to facilitate discussions with the other directors. Armed with the interview findings, the chairperson/ lead director and Mr. Clayton can identify possible action plans (i.e., education on the Sarbanes-Oxley Act and director liability). Then place the topic on the agenda for discussion with the full board and request the adoption of an action plan.”

Samuel Ramsey
Board Vice Chairman
First National Bank
Lenoir City, Tennessee