Driving instructors (another dying breed as we go to driverless cars!) tell their pupils that “objects in the rear view mirror may appear larger than they are”. An HBR article on managing business risk that was published last week reminded me of this. It was mainly about the financial services industry, but the lessons are universal.
The first was the rear view mirror effect. We tend to look backwards rather than forwards at risk and often the things we look backwards at appear to be more threatening than they did at the time. It’s a very human response; we worry about the things that have caused us problems in the past, which is why there is so much regulation to prevent the last financial crisis happening again. In addition we worry about things that look a bit like the things that have happened in the past. So you can find all sorts of articles speculating where the next financial crisis will come from.
What we do not do is to look for risks that look different, risks that we may not understand. And as the HBR article points out, we have very short memories. Leaders are now worrying that risk management is slowing growth and damaging profitability. So gradually the reins are relaxed and we go after growth again.
HBR quotes new research from CEB where 60% of corporate strategy executives said that their decision making process is too slow because of an excessive focus on risk. They said that risk managers and auditors were spending more than half their time on financial reporting, legal and compliance risks, even though the big losses in market value are due to strategic risks.
Now, the banking crisis was all about financial risk surely? Or was it? Was it not more a crisis of management and therefore a strategic risk? Things were happening that the managers in the businesses either did not understand, did understand but chose to ignore, or were complicit. The same things were true at Enron, at Worldcom and at all of the other business scandals.
The death of companies is due to strategic risk not to a “few bad apples” who gamble on the financial system. Kodak might still be alive today if its board had taken a broader view of risk and seen the threat that digital technology posed – so might a lot of banks. The problem for the Kodak board was that they did not know what they did not know. In the rear view mirror it all looks so obvious. When you are looking ahead its much less obvious and more comforting to worry about what happened in the past rather than in the future.
In my last blog I outlined what I think boards can do to mitigate the risk by getting help with knowing what they cannot know. That means carving out time in a busy board schedule to think and learn about the future.
Three things can help a board do this:
1. Look at the board’s annual schedule of work (if you don’t have one then develop one fast). Analyse how much of that work is about preventing mistakes of the past and how much about the future of the company
2. Most boards have an annual strategy day/half day. What normally happens is that the day is spent on next year’s plan and budget and not on strategy at all. Change what you do – really think about the future instead of the incremental work of the next 12 months
3. Create a team of people within the company with a ‘licence to dream’ about the future – and listen to them.
Any more ideas would be welcome!