Seeing risk before it becomes a crisis: Three questions for boards

Executive Summary

• Trust drives significant enterprise value, but boards often rely on positive measures such as reputation and NPS that highlight success while missing emerging risks.
• Directors should complement traditional metrics with direct measures of distrust, dissatisfaction and customer rejection to identify warning signs before they become crises.
• Because distrust spreads quickly and recovers slowly, boards need an early-warning system focused on risk trends, root causes and changing stakeholder sentiment over time.

Trust is one of the largest assets a company holds, and it rarely appears on the balance sheet. When he led Unilever, Paul Polman noted that of the company's market capitalisation of roughly €130 billion (approximately A$215 billion), only about €30 billion was tied to physical assets; the rest was trust. Deloitte finds that trusted companies outperform their less-trusted peers by two-and-a-half times. However, if trust builds enterprise value on that scale, distrust can destroy it – and distrust is exactly what most boardroom metrics ignore.

Most corporate measures are built almost entirely from positive metrics: reputation, Net Promoter Score (NPS), customer satisfaction, consumer confidence. Each is useful. But not one of them was designed to detect risk. And more dangerously, they actively conceal it. They record how well the company is regarded – not the warning signs forming beneath the comforting surface.

As the sociologist Zygmunt Bauman observed, “large organisations lose sight of consequences when responsibility is spread thinly across hierarchies”. He called it moral blindness. In a company, it seldom looks like deliberate wrongdoing. More often it is built into the management system: if warning signs are not measured, or reported, and not rewarded when someone acts on them, they simply disappear from view. What no one can see, no one manages.

And ‘looking away’ is itself a moral choice. When the Australian cricket team was caught using sandpaper on the ball, the fault lay not only with the players but with a captain who chose to look the other way. Boards do the same without intending harm – not by acting wrongly, but by maintaining a measurement system that fails to register the problem and looks the other way.

The banks exposed by the Hayne Royal Commission did not lack data. They lacked instruments pointed at the right questions. The warning signs were forming where their measuring instruments were not looking.

How can boards tackle this blind spot? Here are three questions directors should ask management to uncover risks before they become crises.

1. Is our measurement built to deliver bad news early – or only to confirm good news?

You get the behaviour you reward. When executive pay is tied to lifting trust, satisfaction, or NPS, those become the only numbers anyone watches.

Reputation is the clearest example. It tells you whether you are admired and respected; it does not tell you whether you are becoming a danger to yourself.

And it is an average, so a serious problem in one cohort is swamped by positive sentiment elsewhere, and the headline provides comfort.

Reputation is a buffer, not a sensor. AMP was a 170-year-old icon until the Royal Commission stimulated public distrust and roughly four-fifths of its market value vanished. Medibank's standing was strong until a data breach exposed millions of customers and erased $1.6 billion. Volkswagen held one of the world's great engineering reputations until its emissions cheating surfaced.

In each case, reputation was not wrong; it was late. Tellingly, Roy Morgan data reveals that only nine per cent of Australians credit reputation as the reason they trust a brand.