The role of directors in corporate governance: product design risk management

Company directors are obliged to ensure effective operational risk management governance to protect shareholder wealth. Product recalls are a risk to profitability (Davidson and Worrell 1992). This study adopts a broad conceptualisation of product recall, involving the return of products due to fault/ defects. “Product recall” may include formal recalls enforced and recorded by regulatory bodies, informal recalls that may be initiated by a company but not recorded as such and/ or return of products by customers due to defects. Not all risk can be foreseen, which is aptly referred to as unknown-unknown risks (Dombret 2012). Design methods impact product reliability and safety. Some methods, such as tolerance analysis (Singh, Jain and Jain 2003), may comply with company standards as defined by management, but still create unreliable product. Thus, the research problem pertains to the ubiquitous presence of unknown-unknown risks of product recall due to unknowingly inadequate product design processes, reporting structures and potentially incompatible organisational climate that creates an impediment to directors in the fulfilment of their legal obligations to ensure effective operational risk governance. By evaluating a typical case, this study will adopt a holistic approach starting with directors and their evaluation of their company’s risk management structures, methods, internal controls and risk management climate. Agency theory, whistle blowing, bounded rationality, and other theories will underpin the investigation. This facilitates an exploration of directors’ understanding of product recall risks and how they ensure their company employs suitable operational risk governance and product design methods in mitigating unknown-unknown risks.