risk shmisk

Accenture recently conducted a risk management survey of 260 CFOs from large companies in 21 nations that has (didn't think this was possible) increased my disappointment in corporations around the world. 85% of those surveyed said they are ineffective at considering risk, return and capital issues when making decisions. The same number said there is a lack of alignment between their company's strategy and appetite for risk, and 93% said it was really hard (whine, whimper) to align strategy to effective risk management.

C-Sense

How can you be a C-level officer, leading your corporation and yet be unable to effectively factor risk into decision-making? In good times, risk failures were compensated for by strong earnings, but now that either or both revenue and margins are shrinking, it's more difficult to hide or write off errors in judgment.

Theoretically, an executive achieves C-level status by being smarter than the average bear, having more foresight, vision and leadership skills than his or her peers, and the ability to skate to where the puck will be, and not where it is. If true, they should have recognized the following:

1. Good times creates bad habits
2. We're in the midst of a communication revolution
3. Tough times require focused investment

#1 - In good times, mistakes are forgiven/ignored because things are going so well that bad judgment is overlooked. But most critically, organizations forsake discipline in favor of expediency. Then when things change, the bad habits of the organization, which were compensated for with excess spending and often excess hiring, now surface unhidden, result in severe changes or layoffs, and are harder to fix because they're well, habits.

#2 - The stress caused by #1 creates internal and external disaffection/disloyalty, which makes people much more inclined to blog/Twitter/whatever their views and experiences. Malfeasance becomes very rapidly visible to the public, giving the company little or no time to sense, develop a strategy, and respond. In can we talk?, I wrote about transparency and immediacy being the offshoots of the communication revolution. This is either a huge risk or opportunity for most companies - the C-level "risk" executive leadership must account for this. Most don't.

#3 - If you have the means, the best time to invest is when times are tough. Whether that's acquisitions, new investments, or increased staffing, you are sure to get good (if not great) value for money, and be much more primed for growth when the market does turn. Choosing the best place to invest requires clarity of purpose - if the company's strategy is not clear, it's ability to evaluate and mitigate risk not solid, and it's leadership not focused, the resulting investments will likely accelerate poor performance and lead the company down.

C-Accountability

Chief X Officers (whether X = Executive, Financial, Marketing, Operations, etc.) get paid really well, this is because the expectations are commensurately high, and performance is expected and required. In addition to being a great sales tool for their services, the Accenture survey above is a confession by these C-levels that they don't know how to cope with change, or how to lead in these changing times.

At this level, they must own their actions, take responsibility for both their failures and those of everyone who works for them (the whole company). Shouldn't the 85% who said they didn't know what they were doing resign, so those who do can lead?

C-Response

From my can we talk? post: The industrial revolution created mechanical speed, the information revolution changed space (specifically, the distance between points in space), and the communication revolution changed time (sense and response time).

Thriving in this world requires discipline. If all C-executives in a company can't clearly (so that a 12-year-old can understand it) and consistently state:

1. Why they are in business
2. What makes their company special or unique
3. How they succeed
4. Where the company is heading

Then how likely is it that their employees are being guided properly? How likely is it that any management discipline exists, that the company's behavior and performance are predictable?

Ensuring this is step one for the CEO. Step two is to establish a discipline of two-way information flow so that all levels of the company know; and step three is to ensure that decisions get made, and are executed predictably and with accountability. Seems like management 101?

Think of Apple during Steve Jobs' current tenure. They don't always build the best product, not all of their products succeed, not all their customers are loyal and happy. But in the main, their business runs brilliantly; most customers are rabidly loyal; every employee has (from the outside anyway) a clear, consistent view of the all that is Apple; and you'd be hard-pressed to find an organization that had a better grasp of where the puck will be than Apple - both economically and product-wise.

If you took the 221 (of 260) companies representing the 85% of executives who admitted their inability to manage risk and created a fund that shorted their stocks, I wonder how it might do in the next 12-24 months vs. say Apple?