Attributes of Unsuccessful Companies

from Mike Cohen

(whether they have gone out of business or have underperformed)

1) Goals (most importantly financial) have not been clearly identified or calibrated, with a number of damaging consequences:

• It is not clear whether strategies being pursued will lead to the company achieving desired results
• Companies may not be able to quantify and qualify the potential impact of the risks they are taking relative to the goals they are trying to accomplish (Many firms!)
• The goals may not be realistic, and the company could be stretching beyond its capabilities and risk tolerance to attempt to achieve those goals (possibly becoming desperate)

2) Company does not have the necessary expertise or reputation to operate successfully in its chosen lines, for various reasons:

• Leading competitors have set standards that are not attainable by the company (Many firms, for example those pursuing the ‘Financial services supermarket’ model)
• Smaller companies seeking to compete ‘toe-to-toe’ with larger companies as opposed to executing niche strategies in segments the larger firms are not interested in
• Core competencies aren’t sufficiently robust (Many firms!)
• Competitive advantages are overstated (Many firms!)

3) Not accurately understanding the customer (product pushers are particularly susceptible)

• Being out of touch with current trends, needs, wants, attitudes, demographics
• Customers may not know what they want, exacerbating the problem (Steve Jobs’ theory, executed extremely successfully at Apple!). Following on this thought, can focus groups provide accurate, actionable input? The quip about ‘quality’ also comes to mind: “I can’t define quality, but I’ll know it when I see it”

4) Product performance is materially poorer than projected

• Pricing assumptions are missed, leading to lower margins or necessitating reserve strengthening
• Product features cause benefits to be paid that are much greater than anticipated (Variable annuities)
• Product guarantees are not effectively hedged (Again, variable annuities)

5) Risk management practices do not adequately address the company’s most important potential exposures, leading to:

• Taking risks that do not have commensurate returns
• Pursuing strategies or entering into transactions that have not been exhaustively vetted
• Inaccurately calibrating the potential adverse impact of risks taken (General American – Funding Agreements, AIG – Credit Default Swaps)
• Overestimating the company’s tolerance for risk, and underestimating stakeholders’ reactions to outsized risk exposures
• Weakened capital
• Suppressed earnings
• Asset-related issues: Erosion of principal, poor returns, constrained liquidity

6) Decision making culture and processes producing poor choices

• Inwardly focused decision making, placing greater value on what has been created internally than on what others (externally) have done, either individually or collectively, potentially missing out on higher-order thinking generated by groups and on critical perspectives of others
• Not recognizing dislocations, changed paradigms and fundamentals; slow and cautious reactions to new information
• Getting bad advice (including faulty research) or no advice (not realizing when they are at an information disadvantage), and not differentiating between helpful and harmful experts ahead of time
• Defensive attitude: Arrogance, cowardice, lack of openness to other ideas
• Ineffective problem solving
• Working only on problems that seemingly can be solved and avoiding those that appear difficult to solve
• Not admitting mistakes or misassumptions, tending to blame others for poor results as opposed to studying the causes for their own mistakes and fixing them.
• Not making corrections decisively, or overreacting
• Penalizing (punishing) associates for raising troublesome issues (Many companies!)

• Following the herd

Conclusion

• There probably isn’t a single attribute leading to company underperformance that couldn’t be successfully addressed if the company was so inclined.
• It is instructive to note that the causes leading to underperformance are not the ‘opposites’ of the attributes of successful companies. Every company strives to be successful, but unfortunately many haven’t realized their aspirations.

Michael A. Cohen, Principal of Cohen Strategic Consulting

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Risk Culture gets the Blame

Poor Risk Culture has been often blamed for some of the headline corporate failures of the past several years.  Regulators and rating agencies have spoken out about what they would suggest as important elements of a strong risk culture and the following 10 elements all show up on more than one of those lists:

1.      Risk Governance – involvement of the board in risk management

2.      Risk Appetite – clear statement of the risk that the organization would be willing to accept

3.      Compensation – incentive compensation does not conflict with goals of risk management

4.      Tone at the Top – board and top management are publically vocal in support of risk management

5.      Accountability – Individuals are held accountable for violations of risk limits

6.      Challenge – it is acceptable to publically disagree with risk assessments

7.      Risk Organization – individuals are assigned specific roles to facilitate the risk management program, including a lead risk officer

8.      Broad communication /participation in RM – risk management is everyone’s job and everyone knows what is happening

9.      RM Linked to strategy – risk management program is consistent with company strategy and planning considers risk information

10.    Separate Measurement and Management of risk – no one assesses their own performance regarding risk and risk management

Those are all good things for a firm to do to make it more likely for their risk management to succeed, but this list hardly makes up a Risk Culture.

The latest WillisWire post in the ERM Practices series talks about Risk Culture from the perspective of the fundamental beliefs of the people in the organization about risk.

And RISKVIEWS has made over 50 posts about various aspects of risk culture.

Risk Culture Posts in RISKVIEWS

What if there are no clocks?

RISKVIEWS recently told someone that the idea of a Risk Control Cycle was quite simple.  In fact, it is just as simple as making an appointment and keeping it.

But what if you are in a culture that has no clocks?

Imagine how difficult the conversation might be about an appointment for 9:25 tomorrow morning.

That is the situation for companies who want to learn about adopting a risk control cycle who have no tradition of measuring risk.

The companies who have dutifully followed a regulatory imperative to install a capital model may think that they have a risk measurement system.  But that system is like a clock that they only look at once per month.  Not very helpful for making and keeping appointments.

Risk control needs to be done with risk measures that are available frequently.  That probably will mean that the risk measure that is most useful for risk control might not be as spectacularly accurate as a capital model.  The risk control process needs a quick measure of risk that can be available every week or at least every month.  Information at the speed of your business decision making process.

But none of us are really in a culture where there are no clocks.  Instead, we are in cultures where we choose not to put any clocks up on the walls.  We choose not to set times for our appointments.

I found that if you have a goal, that you might not reach it. But if you don’t have one, then you are never disappointed. And I gotta tell ya… it feels phenomenal.

from the movie Dodgeball

Are you Hungry for More Risk?

Best risk management practice is that you declare your hunger before you taste the food.  You can look at the menu and you can see the food, but you need to declare your appetite in advance of eating.  Not necessarily in advance of ordering.

Setting you appetite in advance and sticking to it will prevent you from gorging on too much risk that tastes good but will likely make you sick.

This week, WillisWire blog features an essay about Risk Appetite:

Guide to ERM: Risk Appetite and Tolerance

RISKVIEWS has featured several posts on Risk Appetite:

https://riskviews.wordpress.com/category/risk-appetite/

And here are a couple of published articles:

Help Wanted: Risk Tolerance

Not Such Foreign Concepts