If capitalism in the 21st century is to deliver long term sustainabie value it must achieve a healthy balance between offense and defense. This will require a notable correction to the current imbalance in order to create a natural harmony between these two antagonistic yet complimentary principles.

Problem

To gain an understanding of what modern capitalism represents one must observe corporate behaviour which represents the essence of capitalism. A commonly held view of economic theory is that the western capitalist model is primarily driven by the motivating factors of greed and fear, the former is the motivation to extend ourselves in search of even greater rewards, while the latter is the motivation to protect that which has already been achieved lest it should be taken from us. Progress no doubt requires both, while prudence and common sense would suggest that long term sustainability requires a healthy blending of the two. This search for a middle path has been the subject of much debate down through the centuries. The recent financial crisis and the resulting global economic downturn has highlighted the unhealthy nature of greed when left unchecked, resulting in the prevailing capitalist paradigm and the blinkered focus on short term financial rewards. This in turn has given rise to a growing belief that "Capitalism" if it is to survive in the 21st century, will need to adapt and evolve in order to satisfy the imperative to deliver long term sustainable value.

An old sporting aphorism states that "offense wins games, defense wins championships". The financial crisis clearly highlighted the imbalance which currently exists between "offense and defense" in the corporate mindset. This imbalance is reflected in the unequal focus on bringing the dollar in through the front door (offense) and the focus on preventing the dollar from leaving through the back door (defense). Recent events indicate that short term capitalism tends to focus disproportionately on the former often neglecting the latter. Such a mindset has resulted in excessive risk taking in search of short term rewards at the expense of longer term sustainability.

There are many reasons for the financial crisis however the following strategic, tactical, and operational issues have strongly contributed to the unhealthy imbalance referred to above:

On overly narrow focus on pure financial metrics while ignoring important non financial issues
A focus on short term interests at the expense of broader long term stakeholder interests
The lack of Board level appreciation of the necessity of having a formal systematic corporate defense program in place within their organization to help ensure that their stakeholder interests are adequately safeguarded
The lack of a seat at the C-Suite table for a "defense" champion to challenge, scrutinize and add a degree of balance to the formulation of corporate strategy and policies
The resulting lack of transparency and responsibility for corporate defense, where accountability is fragmented and diluted at the executive management level
The lack of coherent co-ordination of defense related activities at a functional level leading to the development of silo type structures which means that they are not in alignment with one another but rather operate in isolation resulting in both ineffectiveness and inefficiency

Solution

The challenge facing capitalism is wide-ranging however restoring a natural equilibrium between offense and defense in the corporate mindset will go a long way towards improving the situation going forward. This can perhaps be best achieved by a degree of tweaking and joining of the existing dots rather than a complete overhaul of the entire system.

Correction of this current imbalance requires a broader stakeholder (shareholders, clients, staff, business partners, local communities, and society) focus and a more holistic view of how best to safeguard these stakeholder interests in the long term. Ensuring that there is sufficient focus on long term sustainablility (survival) will however require a subtle shift in corporate consciousness. Such a shift will necessitate a change of attitude in relation to the fundamentals of corporate health and a clear appreciation of corporate health requirements in the short, medium, and long term. This will involve further educating the corporate world so that defensive behaviour is now seen in a positive light, necessary for the achievement of long term sustainability, rather than being seen as a necessary evil. Corporate strategy must therefore incorporate a balance between offense and defense in order to arrive at a natural equilibrium. This will require a subtle blending of both of these antagonistic yet complimentary principles, which are inherently intertwined and mutually interdependent within a dynamic system. In essense the principles of offense and defense represent two sides of the same coin and therefore cannot and should not be addressed in isolation of one another.

Corporate defense in its broadest sense represents an organization's collective program (formal or otherwise) for self-defense. It represents the measures taken by an organization to defend itself and the interests of its stakeholders, from a multitude of potential hazards (risks, threats, and vulnerabilities), the occurrence of which could be detrimental to the achievement of the organization's objectives. Successful corporate defense requires manageing all of the organization's defense related activities in a co-ordinated and integrated manner.

Corporate Defense Management (CDM) represents a multi-dimensional framework aimed at better safeguarding stakeholder interests. It involves incorporating an extended "five lines of defense" model (beyond the traditional "three lines of defense" model) to help provide appropriate oversight to address organizational challenges relating to responsibilities, accountabilities and transparency.

Five Lines of Defense

The Board: As the fifth line of defense are responsible for overseeing the activities of the organization, and are accountable to the shareholders for the organization's strategy and performance. This includes overseeing the activities of its standing committees and executive management.

Executive Management: As the fourth line of defense provides assurance to the Board that the objectives of the organization are being achieved by providing adequate oversight of those they manage and by ensuring that the organization's activities are consistent with business strategy and policies approved by the Board.

Independent Internal Assurance: As the third line of defense provides the Board with a level of independent assurance in relation to the effectiveness of the activities of the first and second lines of defense.

Tactical Oversight Functions: As the second line of defense monitor, facilitate and coordinate the consistent, competent, adequate and effective operation of defense activities established by the first line of defense. Examples include the compliance or risk management functions etc.

Operational Line Management: As the first line of defense has responsibility for overseeing the daily operations of staff, services, practices, mechanisms, processes and systems.

CDM also incorporates a comprehensive umbrella type approach to the inter-disciplinary management and integration of all of the critical components of a corporate defense program. Each of these individual critical components has an important role to play in helping an organization to achieve long term sustainability.

Critical Components of Corporate Defense

Governance: How the organization is directed and controlled, all the way from the boardroom to the shop-floor.

Risk: How the organization identifies, measures, and manages the risks it is exposed to.

Compliance: How the organization ensures that its activities are in conformance with all relevant mandatory and voluntary requirements.

Intelligence: How the organization ensures that it gets the right information, in the right format, to the right person, in the right place, at the right time.

Security: How the organization ensures it protects its critical assets (tangible and intangible) from threats and danger. Examples of critical assets include people, information, technology and facilities etc.

Resilience: How the organization ensures that it has the capacity to withstand, rebound or recover from the direct and indirect consequence of a shock, disturbance or disruption.

Controls: How the organization ensures that it has taken appropriate actions in order to address risk and to help ensure the achievement of its objectives.

Assurance: How the organization provides a degree of confidence or level of comfort to its stakeholders that it is operating in a satisfactory manner.

A holistic CDM program is designed to help ensure that the organization's defense related activities are in alignment with and actually reinforce corporate strategy, in order to maximize their added value. In the process it provides an appropriate system of "checks and balances" at strategic, tactical, and operational levels to help ensure that corporate defense activities are strategically aligned, tactically integrated, and operating in unison towards common objectives. The introduction of such a formal systematic corporate defense program can help an organization to arrive at balanced informed decisions and help support the achievement of business objectives while also providing the organization with both defense-in-depth and defense-in-breadth in the process.

The CDM framework will help ensure that appropriate consideration is afforded to safeguarding the interests of an organization's multiple stakeholders. Such a holistic approach will not only help create a more robust organization (thereby better protecting the organization and safeguarding stakeholders interests) but will help to optimize return on investment in corporate defense activities by enhancing effectiveness through improved performance and increased productivity, and help create efficiencies through eliminating duplications, reducing overheads, and minimizing unnecessary redundancy.

In order to visualize and gain a more detailed understanding of the workings of this CDM multi-dimensional framework please view the short video (approx 8 mins) below.

Practical Impact

The practical impact of implementing the CDM framework includes:

Helping to positively change the prevailing capitalist paradigm which encourages the pursuit of short term goals at the expense of long term sustainability.
Helping to make it easier for external parties (e.g. regulators, rating agencies, external auditors etc) to review and assess whether an organization has taken all reasonable steps to adequately safeguard its stakeholder interests.
Helping to make the Board and Executive Management more responsible and accountable for their oversight duties in relation to safeguarding stakeholder interests, by ensuring corporate defense has a more prominent role in corporate strategy.
Helping to ensure that defense activities are operating appropriately from the boardroom to the shop-floor via formal systematic corporate defense programs.
Helping to create a more comprehensive and robust corporate defense infrasructure that better safeguards stakeholder interests.
Helping to optimize stakeholder value by increasing effectiveness through improved performance, and increasing efficiency through higher productivity and reduced costs.
Helping to increase stakeholder comfort that their interests are being adequately safeguarded.

First Steps

In an ideal world all of the following steps should occur:

External to the organization:

The broader stakeholder community to demand formal corporate defense programs in order to adequately safeguard their interests
Regulators to declare a formal corporate defense program as a mandatory compliance requirement
The following entities to incorporate an organization's level of corporate defense maturity into their assessment and evaluation of the organization

Regulators
Market Analysts and Rating Agencies
Entities planning a merger or acquisition (M&A)
Shareholders
Investors and Venture Capitalists
Banks and other Lending Institutions
Insurance Providers
External Auditors

Business schools to offer courses in corporate defense and to include corporate defense as a module within their MBA programs
Corporate defense related professional bodies to collaborate and co-operate to help facilitate this inter-disciplinary integration

Internal to the organization:

The Board to accept the requirement for corporate defense as a necessary component of corporate strategy and to approve the requirement for a formal corporate defense program
Executive Management to establish the corporate defense framework and a seat at the C-suite table to be allocated to a corporate defense champion (not unlike the US Defense Secretary)
The corporate defense program needs to be rolled out at strategic, tactical, and operational levels, and corporate defense responsibilities and accountabilities to be incorporated into the performance review (and bonus calculation) process on an enterprise-wide basis
CEO succession planning to require a placement within corporate defense to help ensure a more well rounded understanding of the workings of the organization
The concept of corporate defense to be viewed as a positive aspect of the organization's corporate culture so that corporate defense fundamentals become embedded into day to day activities at all levels within the organization until it forms part of the organization's DNA

Credits

Author: Sean Lyons

Documents

corporate_oversight_and_stakeholder_lines_of_defense.pdf

optimized_corporate_defense_programs.pdf

corporate_defense_insights.pdf

Images

Videos

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March 28, 2013 at 2:58pm

Linda Bolliger

Better balancing competing interests between short term earnings and long term sustainability at the board level makes perfect sense and is a barometer of corporate citizenship status. Sadly, the lack of balance in American corporate boardrooms remains too skewed in favor of those entrenched in protecting interests extraneous to the nuts and bolts involved in corporate sustainability. While conceptualization of this problem is gaining recognition on Main Street, leadership in terms of directly addressing remediation is sorely lacking at a time when it is most needed to spur economic recovery from the excessive focus on short rather than long term and fair stewardship of (and between) multiple interests.