Archive for the ‘People Risk’ category

Attributes of Unsuccessful Companies

March 26, 2014

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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Collective Approaches to Risk in Business: An Introduction to Plural Rationality Theory

December 18, 2013

New Paper Published by the NAAJ
http://www.tandfonline.com/doi/abs/10.1080/10920277.2013.847781#preview

This article initiates a discussion regarding Plural Rationality Theory, which began to be used as a tool for understanding risk 40 years ago in the field of social anthropology. This theory is now widely applied and can provide a powerful paradigm to understand group behaviors. The theory has only recently been utilized in business and finance, where it provides insights into perceptions of risk and the dynamics of firms and markets. Plural Rationality Theory highlights four competing views of risk with corresponding strategies applied in four distinct risk environments. We explain how these rival perspectives are evident on all levels, from roles within organizations to macro level economics. The theory is introduced and the concepts are applied with business terms and examples such as company strategy, where the theory has a particularly strong impact on risk management patterns. The principles are also shown to have been evident in the run up to—and the reactions after—the 2008 financial crisis. Traditional “risk management” is shown to align with only one of these four views of risk, and the consequences of that singular view are discussed. Additional changes needed to make risk management more comprehensive, widely acceptable, and successful are introduced.

Co-Author is Elijah Bush, author of German Muslim Converts: Exploring Patterns of Islamic Integration.

Ingram Looks into ERM – Eight short articles.

December 17, 2013

The magazine of the Society of Actuaries published eight short essays on a variety of ERM topics.

Making Risk Models Collaborative   With our risk models, we make the contribution of managers to the risk management of the company disappear into the mist of probabilities. And then we wonder why so many managers are opposed to “letting a model run the company.”

We Must Legitimize Uncertainty   In a post to the Harvard Business Review blog, “American CEO’s should Stop Complaining about Uncertainty,” Jonathan Berman points out that while African companies are able to cope with their uncertain environment, American CEOs mostly just complain.  Americans must legitimize the Uncertain environment and study how mest to cope.

Finding a Safe Place New ERM and Old School goals for risk management all seek to keep the company safe.

ERM and the Hierarchy of Corporate Needs  The reason that ERM is not given the degree of priority that its proponents desire is that its proponents want is that it is at best third in the hierarchy of corporate needs.

Help Wanted: Risk Tolerance  It is a rare company that can create a risk appetite statement if they do not already have years of experience with the measure of risk that will be used.

What should you do at a Yellow Light?  Companies need to plan in advance what should be happening when their risk reports indicates that they are entering into risky territory.

Are you Sure about that?  Frequently, we ignore the fact that our risk models do NOT produce infomation about our risks that are all consistently reliable.  Yet we still add those numbers to gether as if they were on the exact same basis. 

Creating a Risk Management Culture – Risk Management needs to be embedded into the corporate culture, just as expense management was embedded thirty years ago. 

 

Code of Conduct… for Baseball Players

November 29, 2013

1.   I will always play the game to the best of my ability.

2.   I will always play to win, but if I lose, I will not look for an excuse to detract from my opponent’s victory.

3. I will never take an unfair advantage in order to win.

4. I will always abide by the rules of the game—on the diamond as well as in my daily life.

5.   I will always conduct myself as a true sportsman—on and off the playing field.

6. I will always strive for the good of the entire team rather than for my own glory.

7.   I will never gloat in victory or pity myself in defeat.

8. I will do my utmost to keep myself clean—physically, mentally, and morally.

9.   I will always judge a teammate or an opponent as an individual and never on the basis of race or religion.

Connie Mack 1916

How does your company’s Code of Conduct compare to this?

Back in 1916, baseball players where not yet superstars who could write their own ticket.  Do your superstars (rather than management) set the conduct norms at your company?

Businesses all need a real code of conduct that is held by management to be just as important as the bottom line.  This code of conduct needs to become embedded in the corporate culture, if it isn’t already.

This is needed because the business that is run entirely on the principle of “shareholder value” will be inherently amoral.  Guided by the belief that if they do not do it, someone else will.  And this approach is excused because “the invisible hand” makes sure that when everyone operates in this manner, that the collective outcome will be the best.

But that invisible hand idea was written by the person who also authored “The Theory of Moral Sentiments”, a book that opened with the sentence:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.  A Smith 1759

 

Does your Risk Management Program have a Personality?

December 19, 2012

Many people are familiar with the Myers-Briggs Personality Type Indicator.  It is widely used by businesses.  What a shocker to read in the Washington Post last week that psychologists are not particularly fond of it.

The Myers-Briggs Personality types were developed directly from the work of Carl Jung, who is not highly regarded by modern psychologists according to the Washington Post story.

Psychologists have their own personality types.  The chart below is from The Personal Growth Library, and is called the Five Factor Model.

Personality

You may be able to find options here that would allign with your ERM program. 

Stability – You may seek Resilience, and settle for Responsiveness. 

Originality – You may want to be an Explorer, but much more likely, your ERM program is a Preserver.

Accommodation – Your goal is to be a Challenger, you end up a Negotiator. 

Consolidation – You should be able to achieve a Focused ERM program, but pressures of business and the never ending crises force you to be Flexible much too often. 

That seems to provide some valuable introspection. 

Next you need to look at the overall enterprise personality.  Many successful companies will have a personality that is very different from the choices that you want to steer towards as the risk manager for your program.  You should check it out and see.

If there is an actual allignment between your overall organization’s personality and the personality that you aspire to for your ERM program, then you will be running downhill to get that development accomplished. 

What does that mean when the personality that you want for your ERM program is almost totally different from the personality of your organization?  It means that you will be pulled constantly towards the corporate personallity and away from what you believe to be the most effective ERM personality.  You then have to choose whether to run your ERM program as a bunch of outsiders.  You then will need to form a tight knit support group for your outsiders.  And make sure that you watch the movie Seven Samuri or The Magnificant Seven. 

Or you can rethink the idea you have of ERM.  Think of a version of ERM that will fit with the personality of your company.  Take a look at The Fabric of ERM for some ideas.  Along with the rest of the Plural Rationality materials.

Rounding Up to Reduce Drift into Failure and Maintain Risk Karma

July 31, 2012

So what to do about Drift into Failure?

Think of DIF in simple math terms.  At every turn in the calculation, you are rounding down or truncating the values that you calculate.  With that process, your result will always be low.  Not always noticeably low but with a bias to be below the value that you would have calculated with carrying forward the value with all of the decimal points.

With a Risk Management or Safety system, it is the same thing.  If checking ten times will give a .9999 guaranty of safety, then nine times should be good enough.  If lubricating weekly produces no failures, how about lubricating every 9 days.  And so on.  If a hedge that is 98% effective works out fine most days, how about a hedge that is 96% effective.  A $5 million retention works, why not move it to $5.5 million.

In every case, the company rounds down.

So the practice that is needed to reduce DIF is to occasionally round up.  One year, try rounding up on half the risk systems.  Make the standards just a tiny bit tighter a few times.  Balance things that way.  Think of your firm as accumulating bad karma by allowing the shortcuts, the rounding down on the risk management and safety systems.  Protect the karma, by going the other way in the same sort of imperceptible small steps that are the evidence of the DIF.

Stop Drifting.   Join the Fight Against Bad Risk Karma Today.

The Risk of Paying too much Attention to your Experience

July 30, 2012

The Drift into Failure idea from the Safety Engineers is quite valuable.

One way that DIF occurs is when an organization listens too well to the feedback that they get from their safety system.

That is right, too much attention.  In the case of a remote risk, the feedback that you will get most days, most weeks, most months is NOTHING HAPPENS.

That is the feedback you are likely to get if you have a good loss prevention system or if you have none.

This ties to the DIF idea because organizations are always under pressure to do more with less.  To streamline and reduce costs.

So what happens?  In Safety and Risk Management, someone studies the risks of a situations and designs a risk mitigation system that reduces the frequency or severity of problem situations to an acceptable level.

Then, at some future time, the company management looks to reduce costs and/or staff.  This particular risk mitigation system looks like a prime candidate.  The company is spending time and money and there has never been a problem.  Doubtless, the same “nothing” could be achieved with less.  So the budget is cut, a position is elimated and they get by with less mitigation.

Then time pass and they collect the feedback, the experience with the reduced risk mitigation process.  And the experience tells them that they still have no problems.  The budget cutters are vindicated.  Things seem to be just fine with a less costly program.

If the risk here is highly remote, then this process might happen several times.

Which may eventually result in a very bad situation if the remote adverse event finally happens.  The company will be inadequately unprepared.  And no one made a clear decision to dilute the defense to an ineffective level.  They just kept making small decisions and eventually they drifted into failure.

And each step was validated by their experience.


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