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Lessons from corporate catastrophes: The unrecognised risks of allowing
people to run companies Anthony Fitzsimmons and Professor Derek Atkins
© Reputability LLP 2013
www.reputability.co.uk
www.reputabilityblog.blogspot.com
• Specialist risk consultancy –Reputational risk –Behavioural risk –Organisational risk –Board risk
About Reputability
Mediaeval – Fire in wooden buildings
Industrial – MORE HAZARDS
WW II – MILITARY THINKING
SPREAD TO HIGH RISK INDUSTRIES
SPREAD TO OTHER INDUSTRIES
FINANCIAL RISKS + ERM
© Reputability LLP 2013
Two questions:
• Why wasn’t the banking crisis prevented?
• Why do ‘good’ organisations still regularly fail?
What is missing?
“We can afford to lose money. We can afford to lose a lot of money.
But we cannot afford to lose one shred of our reputation.”
“If I lost all of my factories and trucks but kept the name
Coca-Cola, I could rebuild my business.
If I lost my name, the business would collapse.”
© Reputability LLP 2013
• Reputation supports enterprise value • Is critical asset
– Licence to operate – Competitive power
• Key drivers of reputational damage are behavioural and organisational risks
• ‘People’ risks destroy shareholder value
© Reputability LLP 2013
THE RISK OF
FAILURE TO FULFILL THE
REASONABLE EXPECTATIONS OF
ALL YOUR STAKEHOLDERS IN TERMS OF
PERORMANCE AND BEHAVIOUR
Reputational risk
© Reputability LLP 2013
McKinsey “Seven S”
YOUR REPUTATION IS LOST WHEN YOUR STAKEHOLDERS
COME TO BELIEVE THAT
YOU AREN’T AS “GOOD” AS THEY THOUGHT YOU WERE
© Reputability LLP 2013
How are reputations destroyed?
Pre-event reputation – trigger event
Reported – focus of interest
Corporate veil dissolves
New information – more spotlight
Changed perception
results What happens in
a crisis?
© Reputability LLP 2013
Set risk appetite
Identify risks
Evaluate risks Risk control
Risk monitoring and audit
But classic risk management is not designed around critical aspects
of reputational risk
© Reputability LLP 2013
Risk management framework typically recognises reputational risk
But fails to recognise the key drivers of reputational risk
These drivers are behavioural and organisational risks
© Reputability LLP 2013
The research
Cass Business School report for Airmic 18 case studies, >$6tn assets pre-crisis
• Unrecognised risks tipped crises into reputational catastrophes
• The same risks also caused crises • The missing risks are ‘behavioural’ and ‘organisational’
risks • They aren’t on typical risk maps Unmanaged, these risks remain unnecessarily dangerous
‘Roads to Ruin’
Inadequate board skills
Inability of NED members to exercise
control
Defective internal communication and information flow
Board blindness to inherent risks, such as
risks to the business model or reputation
Inadequate leadership on ethos and culture
Organisational complexity and change
Inappropriate incentives, both implicit and explicit
‘Glass Ceiling’ effects
Groupthink
Inadequate crisis strategy and planning
DECONSTRUCTING FAILURE
Insights for Boards
Reputability report 41 case studies - ~$20tn assets pre-crisis • Confirmed ‘Roads to Ruin’ • People risks are ubiquitous • Root cause risks emanated from the board itself • Analysed patterns in failure • BOFIs slightly different pattern from non-BOFIs
‘Deconstructing Failure Insights for Boards’
© Reputability LLP 2013
1. Inadequate board skills and the inability of NED members to exercise control 88%
Skill The board should have the appropriate balance of skills, experience, and knowledge of the company Challenge Non-executive directors should constructively challenge the management and scrutinise their performance Control The board should assess risks, specify its risk appetite and establish systems and controls (UK Code of Corporate Governance)
This is what both Private and Public Sector Boards are expected to do by their regulators
…Comply or Explain © Reputability LLP 2013
2. Board blindness to inherent risks, such as risks to the business model or reputation 85%
Boards need to satisfy the reasonable expectations of all the stakeholders in respect of performance and behaviour
(Reputational Risk: A Question of Trust)
‘O wad some Power the giftie gie us To see oursels as ithers see us! It wad frae mony a blunder free us’ (Burns)
Many Boards have little idea of how their actions appear to the public
© Reputability LLP 2013
3. Inadequate leadership on ethos and culture 59%
To avoid ethical failure and the attending potential disastrous consequences for the company and its directors: The Board should determine clearly articulated ethical standards, and ensure that the company takes measures to achieve adherence to these in all aspects of the business, thus facilitating a sustainable ethical corporate culture within the company (Deloitte)
An ethical corporate culture does not arise spontaneously … it must be led from above
© Reputability LLP 2013
4. Defective internal communication and information flow 59%
Information needs to flow upwards, downwards and across the firm But there is often ‘communication ditch’ just below the board where unpleasant information tumbles in. It results in the board having a distorted picture of reality within and outside the firm. (British Inst Management 1963)
Some managers are scared to deliver bad news… and some boards refuse to listen
© Reputability LLP 2013
5. Organisational complexity and change 49%
Increased complexity of a company’s systems — products, processes, technologies, organizational structures, legal contracts and so on — can create dangerous vulnerabilities (Eric Bonabeau, Understanding and Managing Complexity Risk)
…… and you may not be able to avoid responsibility for risk by outsourcing
© Reputability LLP 2013
6.Inappropriate incentives, both implicit and explicit 39% An incentive may produce an adverse consequence due to the actions undertaken to receive the incentive (The Business Dictionary)
The Vietnamese government paid a bounty for each rat tail handed in. It led to a rat farming industry (M G Vann)
Many incentive schemes are ‘gamed’ by the recipients
© Reputability LLP 2013
7. Dominant, Charismatic Leader 32%
Alpha male CEOs Ambitious, self-confident, competitive and opinionated. Often brilliant, but some potentially disastrous liabilities: • Isolating themselves from useful critical feedback • Prone to extreme attention deficit disorder • Bending the facts to get their ideas accepted (Kate Lorenz , CareerBuilder.com)
Charismatics have the personality to get to the top but may cause problems when they get there. © Reputability LLP 2013
....and when a catastrophe does occur
• Have a crisis plan in place • Use only media trained spokesmen • Act quickly and decisively • Lead the agenda, don’t be driven by events • Fix the fundamentals ... This is not PR • Speak the truth, the whole truth and nothing
but the truth When you are in a hole – stop digging!
© Reputability LLP 2013
But these risks aren’t
on typical risk maps
Nor are the other risks in ‘Roads to Ruin’
Risk analysis and
‘Three lines of defence’ have a Hole where
People risks should be
Why are these risks not recognised?
• Classical risk analysis hasn’t evolved far enough to include them
• Too few leaders are trained in ‘soft’ skills • So neither boards nor current risk managers have
skills to find them • Personally dangerous even for CROs • ‘Board Performance Evaluation’ not designed to find
them • Cognitive biases make self-assessment dangerously
unreliable • Consequence is ‘Unknown knowns’
Hidden risks
© Reputability LLP 2013
Risks from human behaviour: – Top to bottom – Destroy reputations and companies – Only systematised recently - so unfamiliar – Hard to see/find from inside (hidden, cognitive
biases, dangerous to discuss etc.) – Potentially uncomfortable for leaders – Beyond skills of risk teams
The Problem
© Reputability LLP 2013
• Put behavioural risks on Boards’ agendas • Make safe to investigate
– Chairman or Regulator as source of authority
Shape of Solution
‘Roads to Ruin’ the Cass business Report for Airmic and ‘ Deconstructing failure – Insights for boards’ are both available through: http://www.reputability.co.uk/publications
Resources
Thank you! ajef@reputability.co.uk www.reputability.co.uk
www.reputabilityblog.blogspot.com
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