Testing for element reliability and the introduction of the departure from reality element

Further interviews 8 and 9

Further investigations and interviews were done to establish the comprehensiveness and inclusivity of the chosen elements for the repertory grid part of the interview process.

Details of interviewees 8 and 9 are:

8 Chief Risk Officer and COO – the world’s largest international medical insurer 9 Senior Partner – major accounting practice

Interviewee 8

Interviewee 8 was requested to state the major elements of risk their organisation faced, without having sight of the shortlist obtained in Table 4.5 above. The response received is set out below with the corresponding elements which have been selected in Table 4.5 above in bold italics:

The risks associated with operating in an adverse economic climate (Market risk) The risk associated with managing significant change (Strategic risk)

The risk that we do not maintain a good relationship with our insurance regulators in key markets (Regulatory risk)

The risk of changes in Government policy impacting the current healthcare models in our key markets (Political risk and Regulatory risk)

The risk of management overstretch (Resources risk and Operational risk – part of this risk is also addressed in 8.3 below)

Key person dependency (Resources risk)

The risk of damage to the company brand through clinical incidents or data loss (Operational risk and System risk)

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The risks associated with the implementation of Solvency II and required capital levels (Financial and Regulatory risk)

The risks associated with environmental issues (Operational risk)

The risks associated with political incidents impacting the business (Political risk) These elements match exactly with those set out in Table 4.5 above, with the exception of

“Risk of management overstretch”. This provides further confirmation that the choice of elements is reliable; but that consideration should be given to the inclusion of an additional element covering Board overstretch.

Interviewee 9

This interviewee is the senior partner of a major accounting practice. He has advised companies on risk management for over 30 years. He was asked to state the elements of risk he felt Boards faced. His list of risk elements matched the list set out in Table 4.5 with one very important addition. He stated that in his view additional major risks Boards faced were:

 losing touch with the key operational risks within the company;

 and not keeping sufficiently abreast with important market trends.

These risks arose as a result of long chains of command within large organisations resulting in Boards suffering from a “loss of reality” (sic).

This additional element of risk is similar to the “Management overstretch” risk advanced by interviewee 8.

Second interview with Interviewee 1 (CEO Hospital Group)

Interviewee 1 (CEO – large listed hospital group) was requested to comment on the validity of this extra “Management stretch” risk element within the context of their own

organisation. During the interview this was highlighted as a major concern on the part of

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the Board. The CEO agreed that this element should form part of the RepGrid interview. It is worthy of note that this particular element was not raised in the first interview, as it is not specifically covered in King III as an item of risk on which Boards are required to report.

Psychology of ‘remoteness from risk reality’ phenomenon

It is possible that when faced with highly complex issues Boards may resort to altering their perception of reality, in order to develop responses to risk which are perceived to be soluble with greater certainty and confidence Schwenk (1984).

Kahneman (2013) also describes the role of various cognitive biases in risk sensemaking, and states that “[t]he world in our heads is not a precise replica of reality” (p.138), and “the affect heuristic simplifies our world by creating a world that is much tidier than reality”

(p.140). These statements lead to the question whether businesses too, do not see the world as it really exists from a risk viewpoint, and whether they also suffer from the affect

heuristic. (The affect heuristic can be described as a form of cognitive bias in which humans make judgements - in this case about risk - based on their personal emotions and by implication in the absence of logic).

From the literature review chapter, Yazdipour, Constand (2010, pp. 96-97) argue that in the area of financial distress and failure it is not possible to focus purely on business operations to explain the reasons, but also to include human, managerial and decision making issues, to explain corporate failure. Their article highlights the systematic bias of Boards when faced with risk:

“... findings from the fields of cognitive psychology and neuroscience have

fundamentally changed the way we now look at how financial decisions are made. An entrepreneur may assign a low risk assessment to an otherwise high risk project and subsequently take on a riskier project than the potential return justifies.” (p.96).

It would appear important therefore to assess whether Boards are able to overcome this form of cognitive bias and whether indeed they are unaware of the reality of the risks they face.

Addition of an extra element of risk

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Having established the validity of this extra element of risk raised by interviewees 8 and 9, and from the second interview of 1, and from the literature quotations as discussed above, the number of elements will therefore be extended to include “Risk arising from remoteness of the Board from operational and market reality”.

Great care was taken in the selection of the elements for this study. After the final

interviews of the pilot study, further research was conducted into the work of Wright R.P.

(2006) in respect of RepGrid analysis, particularly with respect to the choice of elements.

This process was discussed more fully in Chapter 3. The following additional notes are relevant to the final choice of elements.

The final choice of elements to be used in the RepGrid analysis

To summarise, in RepGrid analysis an element is one of the basic examples of the particular topic which is being investigated. The research question is:

Why do South African Boards, in spite of strict corporate governance regulations governing the management of risk, exhibit varying degrees of effectiveness in developing strategies to deal with their enterprise risk management (ERM)?

Boards attempt to construe and make sense of their risk issues. The elements chosen were therefore all the individual sources of risk which together comprised the full spectrum of risk which faced the organization (Jankowicz, 2004). A detailed discussion on the process which led to the present selection of elements was dealt with in the preceding sections of the Pilot Study and in Section 3.6 above.

In this research the elements from the pilot study were used; an additional element was added; and the existing elements were converted into doing phrases as discussed in Section 3.7, as Table 4.7 below shows.