The number of shocking corporate scandals that have damaged major corporations reads like part of a top 10 list of news events from the past decade — Toshiba’s accounting debacle, Volkswagen’s dieselgate, Wells Fargo’s fake accounts, Carillion’s collapse, Nissan’s CEO salary fiasco.

All proponents of good governance — from investors to regulators to compliance and risk managers to providers of independent assurance — should be deeply troubled by these high-profile scandals. What’s worse, these examples of governance failures have a common and troubling subplot: In every case, the boards of these mature and highly sophisticated corporations were largely in the dark about the extent of significant risk management flaws that eroded shareholder value.

Any analysis of this leads to the obvious question: Where was the board? The IIA’s recently published risk report, OnRisk 2020: A Guide to Understanding, Aligning, and Optimizing Risk, offers some valuable insights that could help answer the question.

Key findings in the report, which is the first to offer a view of alignment among three key risk management players — the board, executive management, and internal audit — point to boards having an unrealistic view of risk management:

For every key risk [of 11 addressed in the report], board members rated their organizations’ capability for managing the risk higher than executive management did. This finding suggests boards may be failing to critically question information brought to them by executive management due to either receiving insufficient information or from limitations in their own competencies to understand and evaluate risks. The finding also suggests executive management may not be fully transparent with the board about risks and their own reservations about their organizations’ ability to manage them.

There are at least three possible reasons behind that misguided and overly optimistic view of risk management. Let’s examine each.

Board Members Have Their “Heads in the Sand.”The modern board member’s job is becoming increasingly complex and time consuming as risk landscapes become more dynamic, technology-driven, and fast-paced. The era of boards focusing primarily on financials is no more. This new reality is driving calls for changes to the typical board profile to make its members more diverse, tech savvy, and younger.

But diversity of experience and youthful perspectives alone cannot address a more basic problem alluded to in OnRisk 2020. Boards that fail to critically question information brought to them by executive management may never get a complete and accurate picture of risk and risk management. Too often, board members fail to bring a healthy dose of professional skepticism to their jobs.

A significant contributor to that shortcoming is the way many — if not most — executives end up on boards. They are either hand-picked by the chairman/CEO or have some other preexisting connection to the organization, CEO, or fellow board member. For too long, the path to the boardroom has been less about what you know than who you know. That cozy arrangement makes for board members who may feel beholden to management and are, therefore, less likely to ask probing questions.

The C-suite Practices “Don’t Ask — Don’t Tell. “A second finding in OnRisk 2020 looked at how boards, executive management, and internal audit rated 11 key risks in terms of risk management maturity. Again, boards viewed their organization’s ability to manage risk more optimistically than the C-suite.

That is quite telling. When the board consistently rates risk management capabilities at a higher level than those working in the trenches, so to speak, it suggests that management isn’t being fully transparent. 

That is understandable, if not excusable. Executives who have limited face time with boards that gather two or four times a year must cover a great deal of information at those meetings. It is not surprising that some risks may not be covered as thoroughly as they should be. But frankly, I believe it is more likely that executive management takes these limited opportunities to put its best foot forward and downplay the negatives.

The CAE Doesn’t Speak Up.One explanation not addressed in OnRisk 2020 is internal audit’s role in this skewed view of risk management. As the lone voice of independent assurance on risk management, internal audit has an obligation to speak up when boards are not getting a complete, timely, and accurate picture. 

That is easier said than done. Often, internal audit is not in a position to evaluate information going to the board. Indeed, the 2019 North American Pulse of Internal Audit found that 23% of CAEs never address with the board and management the completeness and timeliness of information going to the board, and another 34% say that such discussions happen only in unusual situations. Internal audit must do a better job of positioning itself to provide independent assurance on information going to the board.

The above exercise demonstrates two things clearly. First, the question we should be asking is not, “Where was the board?” It should be, “Who is at fault for the board’s skewed view on risk management?” The answer is clear: The board, executive management, and internal audit each has some culpability.

The solution should be equally clear, and that in my view is the most valuable insight provided by the OnRisk 2020 report: Accountability and transparency about the organization’s risk management efforts is vital for proper understanding and alignment among the board, executive management, and internal audit. Anything less is an unacceptable threat to good governance.  

As always, I look forward to your comments.