Risk and the World of the CEO . . .

financial-risk

Risk comes from not knowing what you’re doing.  ~ Warren Buffet

I was having lunch the other day at one of my favourite business restaurants in London with a colleague. At one point the conversation turned to the “world of the CEO”; that is, what those in charge of large groups of people and organizations have to deal with and what really “keeps them up a night”.

At one point in the conversation my colleague put our whole discussion into sharp focus with these words:

“There are three risks that keep CEOs up at night: financial risk, market risk, and reputational risk!”

The first two, financial risk and market risk are easy to understand. Overspending to get a product to market poses a financial risk since there is no guarantee adequate sales will materialise.  Opening new facilities in emerging markets in order to capture early entry advantage is an example market risk since emerging markets are notorious for not growing as predicted.

These two risks, while potentially huge, are the most studied and analysed. Every newly minted MBA spends hours devoted to lectures and case studies on them.  CEOs surround themselves with risk experts of all sorts to assess and analyse financial and market risks. The probability of making a giant mistake in either of these areas is becoming less and less as we learn more and more about the world through the use of new technologies such as Big Data, market intelligence and sophisticated analytics.

Reputational risk is less well understood.

Imagine that the company has an account similar to a bank account. Every time the company does something good its reputational capital account goes up; every time the company does something bad, or is accused of doing something bad, the account goes down. What’s interesting about a reputational risk account is that it can be filled or depleted with either actual actions, or perceived actions. And the consequences of reputational risk can be enormous.

For example, look at the current state of global banking. As a result of excessive profit seeking individual traders and others in the banking world have crossed the bounds of ethical activities, such as the LIBOR rate fixing scandal and  pension mis-selling activities, causing fines in the billions from regulatory authorities and others. To date, the financial services industry, and mainly banking, has been fined more than $100 billion.

2013-edelman-trust-barometer-global-financial-services-industry-13-638As a result of poor behaviour at all levels and an unwillingness on the part of banks to really address rogue and unethical behaviour, the reputation of big banks is at an all time low.  Basically the financial services industry, even 6 years after the global financial crisis of 2008, remains the least trusted of all industries (Edelman 2014 Trust Survey).

“The most remarkable finding is that risk professionals – on the whole a highly analytical, data rational group – believe the banking crisis was caused not so much by technical failures as by failures in organisational culture and ethics.”  ~ UK Institute of Risk Management

An additional example is the poor media handling by BP and its former CEO, Tony Haywood of the Deepwater Horizon oil spill in the Gulf of Mexico in 2010. The cost alone to BP has been upwards of $40 billion, but the reputation and trust in BP took a giant hit in the eyes of the public, and its share price has yet to fully recover.

Corporate Culture at the Heart of Reputational Risk

Risk is not knowing what your culture is doing!

Our conversation then turned to ideas on how CEOs can more effectively deal with reputational risk.  Since reputations are usually damaged by behaviours that are out of alignment with company values and/or consumer values and regulation, and since corporate culture is the habitual behaviours used by employees at work to solve problems, deal with colleagues, customers and stakeholders, then a greater understanding and management of culture can be an effective way to mitigate reputational risk.

The problem is, most CEOs and senior executives don’t know what their culture is, and most importantly, don’t realise that their corporate culture is not one unified element, but actually is a collection of subcultures.

Subcultures are formed when employees trust and respect informal leaders (trusted colleagues) more than management (Edelman). As a result, they take their clues on how to behave not from Company Values Statements or CEO speeches, but from peer and subgroup pressure to “fit in” and “be a part of the team”.  And all the regulation and corporate training cannot overcome the power of peer pressure in determining how people behave at work.

subcultures

When subcultures are aligned with the overall company strategy and values, culture can be a significant business asset.  But when subcultures are out of alignment, corporate culture becomes a significant business (and reputational) risk.

Who is advising you on culture and reputational risk?

 Thanks for joining the conversation.

John R Childress
Senior Advisor on Corporate Culture, Leadership and Strategy Execution
Author of LEVERAGE: The CEO’s Guide to Corporate Culture
Visting Professor, IE Business School, Madrid

email: john@johnrchildress.com

About johnrchildress

John Childress is currently Visiting Professor in Strategy and Culture at IE Business School in Madrid and a pioneer in the field of strategy execution, culture change, executive leadership and organization effectiveness, author of several books and numerous articles on leadership, an effective public speaker and workshop facilitator for Boards and senior executive teams. In 1978 John co-founded The Senn-Delaney Leadership Consulting Group, the first international consulting firm to focus exclusively on culture change, leadership development and senior team alignment. Between 1978 and 2000 he served as its President and CEO and guided the international expansion of the company. His work with senior leadership teams has included companies in crisis (GPU Nuclear – owner of the Three Mile Island Nuclear Plants following the accident), deregulated industries (natural gas pipelines, telecommunications and the breakup of The Bell Telephone Companies), mergers and acquisitions and classic business turnaround scenarios with global organizations from the Fortune 500 and FTSE 250 ranks. He has designed and conducted consulting engagements in the US, UK, Europe, Middle East, Africa, China and Asia. Currently John is an independent advisor to CEO’s, Boards, management teams and organisations on strategy execution, corporate culture, leadership team effectiveness, business performance and executive development. John was born in the Cascade Mountains of Oregon and eventually moved to Carmel Highlands, California during most of his business career. John is a Phi Beta Kappa scholar with a BA degree (Magna cum Laude) from the University of California, a Masters Degree from Harvard University and was a PhD candidate at the University of Hawaii before deciding on a career as a business entrepreneur in the mid-70s. In 1968-69 he attended the American University of Beirut and it was there that his interest in cultures, leadership and group dynamics began to take shape. John Childress resides in London and the south of France with his family and is an avid flyfisherman, with recent trips to Alaska, the Amazon River, Tierra del Fuego, and Kamchatka in the far east of Russia. He is a trustee for Young Virtuosi, a foundation to support talented young musicians. You can reach John at john@johnrchildress.com or john.childress@theprincipiagroup.com
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