‘Crisis accumulates for years’ – a fascinating insight into the roots of risk

Stefan Stern assesses a new book on how institutional weaknesses let corporate risk wreak havoc.

If you found the events of 2016 unsettling you may wish to look away now. For the foreseeable future. Brexit means Brexit, apparently, but no-one seems able to provide much more detail than that as yet. A new US president unlike any most of us have ever seen is starting a four-year term in the White House. World War Three could break out at any moment, on Twitter.

Who on earth would want to be responsible for a corporate risk register at a time like this? Well, it is a tough job, but somebody has to do it. And after 2007-08, when elaborate and sophisticated risk registers anticipated all sorts of potential upheavals except one, the global financial crisis, which was to turn some businesses upside down, risk management has a bit of work to do on its own reputation as a discipline.

It can be hard to think clearly about the risks your organisation faces. For one thing, we may all feel just a bit too optimistic about our prospects. A bit like the person tumbling from a tall building who is asked, after falling a few storeys, how it is going, we might reply: ‘Ok so far.’ And then there is that other unspoken question about flagging up risks: will this be a career-limiting move? No-one likes a misery-guts who dares to suggest that all might not be well. But all might not be well. And sometimes it will be your responsibility to say so.

We know what can happen to messengers who bring bad news. In uncertain times like these businesses and organisations need to reconsider their approach to risk. Luckily a new book will help them do so. It is called Rethinking Reputational Risk – How to Manage the Risks That Can Ruin Your Business, Your Reputation and You, and it is written by two experts in this field, Anthony Fitzsimmons and Derek Atkins.

Typically a crisis has multiple root causes, often systemic, that remain unrecognised and unmanaged.

Taking account of the findings of psychologists, behavioural economists and sociologists, the authors argue that people’s sometimes less-than-rational choices can lead to disaster. But these problems, embedded in a flawed culture, can take a long time to emerge, so that crises develop over years rather than days and weeks.

‘Typically a crisis has multiple root causes, often systemic, that remain unrecognised and unmanaged but gradually accumulated over the years to make the organisation vulnerable to crises generally; and when a trigger materialised, to… one in particular,’ they write.

Trouble can start at the top. Is the board lacking in diversity and prone to groupthink? Is bad news banned? Are senior managers able to admit when things are going wrong? Not all boards (and all chairs) can deal with the negative stuff. But this makes them part of the problem. And ‘recognising the board as a source of risk may be a step they find too difficult to contemplate’, as Fitzsimmons and Atkins observe.

The antidote? Make sure information flows freely and rapidly to those who need to grasp it. Recognise that you may be suffering from ‘optimism bias’. Test assumptions. Then test them again. And do so in an open and constructive manner. ‘Good communication is the smoke detector for incubating crises,’ the authors assert.

No matter how good a lawyer you may be, your advice may not be well received. The former attorney general, Dominic Grieve, tried to explain to the former prime minister, David Cameron, that his plan to leave the European Convention on Human Rights was fraught with difficulty. The two of them seemed to have a good relationship on the surface. ‘I had no reason to think specifically that there were any grounds that the prime minister would want to part company with me,’ Grieve told The Guardian a couple of years ago.

But Grieve was sacked. The messenger was shot. The advice was not heeded. And Mr Cameron? Well, having rejected his lawyer’s advice and replaced him with a different one, he marched full steam ahead into his EU referendum of June last year…

Stefan Stern is a management writer, columnist for The Financial Times and a visiting professor at Cass Business School.