Why directors should get out of the job of assessing risk and into the business of assessing risk intelligence.
Imagine you are a member of the board of directors at a diversified equipment manufacturer and you get the following surprise at 5:30 on a Friday afternoon: Two private-equity firms have joined forces to acquire the company. At first, that may sound like good news, since the firms are offering a 30-percent premium to the manufacturer’s market value. The trouble is that their press announcement criticizes the company’s corporate governance approach and promises investors that the buyers will build value by “paying more attention to core competencies and avoiding costly distractions in solutions consulting.”
Let’s suppose a move into consulting services—where the company advises customers on systems using its equipment— was one of the board’s biggest themes over the past few years. Unfortunately, not only have profit projections for the consulting business proven too optimistic, but the margins of the core manufacturing operations that motivated the move have continued to deteriorate
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