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Transcript of Lessons from corporate catastrophes: The unrecognised ... Lessons from corporate catastrophes: The...

  • 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

    http://www.reputability.co.uk/ http://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.”

    http://en.wikipedia.org/wiki/File:Coca-Cola_logo.svg

  • © 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