The Most Dangerous Idea
Enterprise Risk Management is about taking actions to enhance the sustainability of an organization.
No one would think seriously about building their company headquarters on the edge of an active volcano.
But what if one day you are hired to run an organization that is located in the expected path of the volcano lava flow? To reduce your risk and enhance your organization’s sustainability, you could decide to move. Sounds fairly sensible doesn’t it?
However, in many cases, the organization that expends its resources to move away from their volcanoes is seen to be LESS valuble than the organization that ignores its volcanoes!
That is the most dangerous idea.
The organization that moved away from their volcano is seen to be making a bet that the volcano will erupt. And if the volcano does not erupt, they are seen to be losing their bet. Management is seen to have poor judgment.
Meanwhile, their next door neighbor who did not move away from the volcano is seen to be managed by astute businessmen. They did not waste the organization’s resources. They can instead put the money to a share buy back.
Evaluation of organization’s value rarely takes anything into account except upside potential. There is an implicit assumption that the risk of all firms is similar. Mostly unfathomable acts of god. And you can’t blame management for missing those.
But that is mostly a problem with bad framing. Re-read the short discussion above. There is a huge framing problem here. Building on the lip of a volcano is seen to be massively over risky. No one would do it. But moving away from a volcano, which involves walking away from a sunk cost, is thought of completely differently. Almost totally opposite.
That mindset mainfests itself inside an organization as well. Invariably, anyone who has in the past not done anything about a risk finds that actually treating the risk is too expensive.
There is a conceptual issue about risk here. Some believe that not recognizing and not managing a risk is the “natural” state of operating and recognizing and managing a risk is unnatural, exceptional behavior.
That is the Most Dangerous Idea.