Risk comes from not knowing what you’re doing. ~ Warren Buffett
When global mega-banks like CitiGroup, JP Morgan Chase, Bank of America and Wells Fargo have to be bailed out to the tune of several trillion dollars of taxpayer money just to remain in business, nobody is immune from the growing risks of doing business in our fast changing, global economy.
Risk and Corporate Culture
A recent study conducted by professors of the Cass Business School of the City University of London shows clearly the significant risks that modern organizations now face, and also the role played by corporate culture.
Eighteen high profile corporate meltdowns over the past decade were studied (AIG, Arthur Andersen, BP, Cadbury Schweppes, Coca-Cola, EADS Airbus, Enron, Firestone, Maclaren, Northern Rock, Shell, Societe General). The total pre-crisis value of these companies was over $6 trillion. Seven of the 11 companies faced bankruptcy, of which three were “rescued” by Government. Eleven Chairmen and/or CEOs lost their job. Four senior executives went to prison. Most of the 18 companies suffered massive, uninsurable losses and extensive and long-term brand damage.
The study identified 7 key categories of risk that led to their subsequent corporate disasters:
- Inadequate board skills and inability of Non-Executive Directors to exercise control.
- Blindness to inherent risks, such as risks to the business model or reputation.
- Inadequate leadership of culture and values.
- Defective internal communication and information flow.
- Organizational complexity and difficulties with change.
- Inappropriate incentives, both implicit and explicit.
- Inability of Risk Management professionals inside the company to confront or point out risks emanating from the decisions and behaviour of top management.
It’s not hard to see the subtle yet powerful hand of corporate culture running through this list, particularly when the question of “what are the risks?” is replaced with “why were these critical risks allowed to happen in the first place?” Answer: the culture deemed them acceptable or ignored the risk evidence all together.
A portion of the Cass study concludes by saying that many of the above identified risks are inherent in every organization, but it is when these risks are unrecognized, or worse yet, not allowed to be talked about or challenged, that they pose a potentially lethal threat to the future success of a business. One of the biggest challenges of dealing effectively with corporate culture is that senior executives don’t often see their cultural biases (strengths and weaknesses) clearly and honestly, mainly because they have become “acculturated”.
Until I came to IBM, I probably would have told you that culture was just one among several important elements in any organization’s makeup and success—along with vision, strategy, marketing, financials, and the like. I came to see, in my time at IBM, that culture isn’t just one aspect of the game, it is the game. ~Lou Gerstner
Note: These ideas on culture, risk and performance are from my forthcoming new book – ADVANTAGE: The CEO’s Guide to Corporate Culture, due out the later part of 2013.
Tight Lines . . .
John R Childress
Tight Lines . . .