The term ‘non-financial risk’ (NFR) should be banned
James Frost makes some excellent points in ‘The rise and rise of the risk officers’, that CROs are responsible for a vast range of risks and that CROs need a much wider and diverse set of skills.
There are, however, two main areas where I disagree and both are caused by the damaging term, ‘non-financial risk’.
- Risk is not divided into two main categories, financial and non-financial. The AICD provides at least three main types of risk: financial, operational and strategic.
- Nor is non-financial risk just operational risk. The article lists many other risks such as operational, cyber, reputational and project, to name a few.
I know I will upset a lot of very influential people, the vast majority of whom are in the financial professions, but the term ‘non-financial risk’ (NFR) is loathsome, demeaning, belittling and breathtaking in its arrogance.
Firstly, the term ‘NFR’ institutionalises framing, perceptual and selective bias in the boardroom. All the colours in the rainbow are not described as blue and non-blue; nor are the C-suite described as Chief Financial Officers and Chief Non-Financial Officers. Risk comes in many colours and shades: financial, strategic and operational. Operational risk encompasses multiple shades of risk, including WHS, product safety, food safety, supply chain risk and so on. Directors and board papers must refer to risks categories correctly to minimise bias. [i]
Secondly, it dehumanises the real-life consequences of so-called non-financial risk. Failures in operational risk cause death and injuries. Look at the Dreamworld disaster where four people lost their lives in 2016 due to maintenance failure. Then there’s the Grenfell Tower block fire in the UK in 2017, a property and product failure that caused preventable 72 deaths. The list goes on – food poisoning (food safety failure), worker death and injury statistics (WHS policy and procedure failures) etc.
Thirdly, by describing all risks as financial and non-financial, it incorrectly prioritises the importance of financial risks and their consequences. The ASIC report into corporate governance of non-financial risk headlined that the reality is that non-financial risks have very real financial implications. By framing risks in financial terms, it missed the point and only strengthened the institutional bias.
A recent article by the Guardian shows why NFR is such an appalling term. It refers to the recent report “What price a life?” issued by the PIRC in the UK into the link between executive pay and loss of life which calls for the link between bonuses and health and safety to be broken, saying that keeping employees alive should be a basic requirement rather than something that merited an extra pat on the back and accused the firms of being guilty of a dispassionate approach to the tragic deaths of their workers, adding that they appear to have quantified or put a value or a price on the life of an employee.
Conor Constable, the PIRC researcher behind the report, added that if workers died on the job, the discussion should not be about the chief executive’s bonus but about fundamental changes to the business, its leadership and its governance.
Boardrooms must eliminate this dangerous term so all risks can be framed correctly without bias. Operational risks are legislated because the purpose of the law or regulation is to save lives and minimise injuries. The focus of operational risk is maximising safety, not minimisation of financial consequences.
The worst example of this bias is when directors or executives say something similar to ‘all risks ultimately have financial consequences‘. This completely misses the point.
- Would they be willing to tell the families of the people who died at Dreamworld that their families have been destroyed because of a non-financial risk but that ultimately the consequences for them will be financial?
- When they get food poisoning will they think, as they groan in pain, “Not to worry. This is just a non-financial risk and the ultimate consequences will be financial”?
- Should they be able to look anyone in the eye who has been bullied at work or sexually harassed, and point out that as all risks ultimately have financial consequences, their bullying or sexual assault simply has financial consequences?
‘NFR ‘is a dangerous and loathsome term. It dehumanises very real, physical and mental risks, forces everything to be framed in financial terms, and displays a total lack of empathy. It is, frankly, unethical.
The term ‘non-financial risk’ needs to be banned.
[i] Corporate Governance Taskforce – Director and officer oversight on non-financial risk report, ASIC, Oct 2019
Nigel Dalton-Brown, GAICD, AMIIA, MBA
Managing Director, Chair, Speaker, Lecturer, Author
Nigel is the Founder of Strytex and has been presenting and writing on Goverence, Obligational Awarenss, Risk Management and Compliance administration (GORC) since 2010.