Managing Risk for Reward

Managing Risk for Reward

Risk, like a coin, is two-sided.  On one side it is source of businesses growth: overcoming a challenge in a time-cost-quality manner or at least being able to charge a premium to mitigate it. On the other side if not properly managed it can have catastrophic consequences and generate enormous economic costs. Yet there is a fundamental aspect with Risk that needs to be addressed and is often ignored – the human element; the coin needs to be made and then tossed.

It has become apparent that the current set of risk management tools, techniques, process and systems are inadequate to manage unintended consequences. Risk is caused by deviations from the expected norm – in large part caused by intentional human actions.

For example: most plane crashes are due to human error (59%); most bank failures are embedded in poor credit decisions for real estate (assessment and provisioning) – made by people; indebtedness is often self-induced, made by people; most complaints in the health service are centred around treatment or planning failures – doctors (29%) and their administrators (35%); corporate failures are invariably associated with insufficient governance and managerial oversight of inadequate systems (e.g. BP Deepwater Horizon). The risks associated with behavioural ethics in high-stakes positions (ie pilots, doctors, lawyers, government ministers, etc) is poorly understood.

This growing realization in academic research is that ethically aware people act immorally – for reasons of self-interest. The field of “behavioral ethics” is one of the fastest growing in academia.

The work of Professor Francesca Gino and her colleagues at Harvard Business School focuses on an observed pattern of behaviour of self –serving justifications. People consciously ‘do wrong’ within a framework of morality. This behaviour of following intentional unethical acts is motivated to serve own and group interests. An essentially quality is pre-event justification in numerous forms. In addition, research by Professor Cecilia Moore of London Business School and colleagues have focused on why corporate executives and employees engage in costly unethical behaviours: such as the LIBOR rigging scandal or obviously risk filled credit approvals for mortgages. They have developed a framework of:  “Approach, Ability and Aftermath” to assess the psychological process that affect behaviour at work.

Raktas’ work with financial institutions, particularly the failure of risk and credit assessment processes, which led to the resulting management of bank resolution programmes and legacy assets, demonstrates the importance of this insight to behavioural ethics. The management of legacy assets in Spain is a case in point.

An examination of the financial industry reveals the dynamics and costs of poor risk management. Banking is essentially a regulated utility that has been allowed to garner excess profits, prospering on the abuse of “moral hazard”. Inadequate risk management facilitated the debt/sovereign crisis. To date the ongoing rescue of British banks has cost at least £30,000 per citizen (more than the average annual UK salary). The post-crisis regulatory response of more legislation seems inadequate. The appropriateness and efficacy of Basle III is questioned by many, also the Bank of England has estimated that it will require the creation of 70,000 new jobs in Europe. These are curative attempts, of questionable utility, to manage risk. In the credit/sovereign crisis this failure of risk management was exacerbated by a combination of factors in the form of: greed; managerial failures; inept governance, ineffective regulatory oversight and political indifference – despite sufficient policies, laws and regulations being in place.

At an extreme level, Greece misled the Eurozone authorities in 2001 with regard to its adoption of the Euro, leading today’s crisis situation and €317 billion sovereign debt that the country is incapable of servicing.

Many banks and companies are well run; there are a dozen states that have never defaulted – but that is the flip side of the coin. There are important cross-overs between financial services, health care, utilities, and government services. The internet with the digital or crypto aspects and the use of Big Data fall into similar category – except here speed, access and transparency raise issues with regard to privacy and trust with their impact on risk management

Unless these dynamics are understood those managers responsible for risk will see their efforts compromised and be reactive at best. It is too easy for behaviour based risk systems to get caught in nebulous catechisms of ‘do good’. There are a number of practical aspects to consider that will help existing frameworks and tools. Some expert-practitioners cite the following steps as being useful.

  • Transparent and frequent discussion to develop an awareness and sensitivity to the challenges.
  • Clear, timely and commensurate linkage between reward, desired behaviours and sanction unacceptable ones.
  • Organizational context that fosters discussion and diversity.
  • Emphasis on personal health and balance work/home life.
  • Physical interventions (such as stage managing settings – mirrors, group dynamics, placing one’s name on documents, public explanations, etc.).

Therefore risk management starts with the individuals involved (the customer as well as provider), then work its way through process, in the organization monitored by regulator and society.

Raktas stands ready to assist decision-makers and their organisations manage risk to secure value.

 

About Raktas

Raktas provides solutions for growth and restructuring. There is always a solution, even in complex and resource constrained situations. We work with decision-makers and their teams to realize their goals using IQ, EQ and PI. We offer the capability and support to make positive, value–adding changes for professionals and enterprises. Be it as a: consultant, interim manager, senior advisor or angel investor.  Expertise is combined with analytics, creativity, teamwork and energy. Our experience is derived from years of successful implementation across the full spectrum of industries in over 60 countries world-wide, as well as an excellent employment record and academic pedigree. Solutions start with asking the right question – call us. Feel free to read other entries here at raktas.ee or at justinjenk.com

©justinjenk

_____________________________________________________________

Justin Jenk is the founder and Managing Partner of Raktas – we offer solutions where decision-makers face complex issues with regard to capturing value from growth and restructuring opportunities. Justin is a business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or justinjenk.se

div#stuning-header .dfd-stuning-header-bg-container {background-image: url(http://nativewptheme.net/thirty_fifth/wp-content/uploads/2017/04/slider.jpg);background-size: initial;background-position: top center;background-attachment: initial;background-repeat: no-repeat;}#stuning-header div.page-title-inner {min-height: 650px;}