The Role of Leadership in Managing Risk
by Carol Stephenson, O.C.
From the Dean |
Email Share on Twitter Post to Facebook Share on LinkedIn Save to Delicious Save to Instapaper

“… You can’t control people through policies, procedures and policing.  You can only do it through a strong risk management culture and absolute integrity in all leaders.”

Leadership on Trial, A Manifesto for Leadership Development*
(P. 39 – Comment recorded in Montreal)

 

This observation is one of the thousands shared by the 300 C-suite executives, who participated in a series of candid discussions spearheaded by a group of Ivey faculty over the past year. Our basic purpose in bringing together these executives was to find out if better leadership could have made a difference in preventing the financial meltdown that led to the recent global economic crisis.

We found out that good leadership could have and certainly did make a difference, especially with respect to risk management.  Many of the business and public sector organizations which emerged unscathed from the meltdown did see the dangers looming on the horizon.  It was apparent that their people understood the potential impact and wider implications of these problems and took immediate steps to circumvent them. Essentially, these organizations had cultures attuned to potential risks with the ability to manage the dynamics effectively.

By contrast, those who suffered the most during the crisis did not seem to anticipate the risks or problems ahead, especially those that could reverberate across markets and borders.   For instance, when people speak about the banks, brokerage firms and investment companies which fared so poorly during the crisis, some of the biggest questions revolve around risk. How could they not have known the risks?  And if they did know, why didn’t they do something sooner?  Were they too timid to tackle the problems, hoping they would just go away?  Why didn’t they understand the ramifications of their actions?  Could they not foresee how their decisions would inevitably ripple across companies and countries to affect others?  Did they even care that investors could lose money?

Based on my experience, as a former CEO and as educator of business leaders, the executives leading these organizations should have known about the risks.  They should have acted and acted quickly.  And they should have felt compelled to act, basically because it was both the right and the smart thing to do.  As the business leader from Montreal quoted above believes, policies and procedures are not enough.  It is the leader’s responsibility to manage risk effectively.

How do business leaders achieve effective risk management?  Fundamentally, I believe they do three simple things well.  First, they ask the right questions.  Clearly, some very complicated investment products were developed at the height of this bubble.  Many executives and board directors admitted that they did not understand the mathematics or the economics behind many of these products.  But as we found during our research, the effective leaders probed the experts about how these products were designed.  Consequently, they learned that the underlying assumptions supporting these products were wrong. Or if they did not understand them, they chose not to offer them.

For other leaders, asking the right or the difficult questions was just too much work.  They did not want to rock the boat, especially when market was going up and up.  These leaders neglected the often difficult and uncomfortable role of a leader.  Sometimes you have to shake up the status quo.  As our research revealed, the leaders who did ask the hard questions discovered soon enough that if something seems too good to be true, it usually is.

Second, the best leaders consult with a mix of people, with different perspectives, backgrounds and knowledge to predict, assess and manage risk.  They consult with others not only within their own immediate spheres of influence but in other industries and sectors.  By contrast, some of the firms that fared so badly during the crisis seemed to breed exclusive clubs for like-minded people.  The people in these isolated groups were getting very rich, very fast.  They got caught up in the success of the moment. Worse still, they believed they would never lose.  They also came to believe that they were much smarter than everyone else, both inside and outside their firms.  Consequently, they did not listen to people who brought different points of view to the discussion.

Unfortunately, the leaders in these companies perpetuated this thinking, setting the wrong example for everyone else in the firm. Employees with a contrarian thought, new evidence or a question that disputed the contentions of the “club”, soon learned to shut up and put up.  As a result, there was no critical testing of ideas or assumptions and their potential consequences.

This very same situation arose at the height of the telecom bubble.  Some people recognized that there was a bandwidth glut.  They realized that some companies were developing products and services for a market that didn’t exist.  But in the midst of absurdly high corporate valuations, some leaders and their people chose to ignore the facts.

By contrast, good leaders welcome different opinions and points of views. Because of this, they are aware of potential risks and have the ability to make more informed and inevitably wiser decisions. Our research about the global financial meltdown showed that receptiveness to diverse viewpoints and opinions often defined the cultures of companies that survived the crisis and continue to thrive.

Third, the most effective leaders during the global financial meltdown were people of good character.  They had integrity, courage and compassion. They were careful, prudent and aware of their limitations.  As such, they were sensitive about the risks of harming their shareholders through shaky investments.  They made sure that any decision they made or any action taken by their firms would ultimately be good for their companies, their shareholders and their customers. Overall, they exhibited an unrelenting determination to contribute to the good of the organization they serve, the people who follow them and the communities in which they operate.

By contrast, the worst failing exhibited by some leaders before, during and after the crisis, is that they just did not care about what might happen to other people.  Some knew that their companies were building a deck of cards destined to collapse.  They must have realized that people could get hurt, and that some investors could lose their life savings.  Nevertheless, it didn’t seem to matter.

In summary, policies and procedures for predicting, evaluating and managing risk are important.  But if leaders don’t ask the right questions, if they don’t seek out a diversity of opinions and perspectives, and if they don’t act with integrity, these rules won’t make any difference.  And when that happens, the blame for the damaging consequences rests solely with leadership.

 

*I encourage all corporate, public and not-for-profit leaders and board directors to read this important report. You can purchase a copy at: www.iveyleadershipinstitute.ca.

 

The Author:

Carol Stephenson, O.C.

Former Dean, Ivey Business School from 2003-2013. Ms. Stephenson spent many years in the Canadian telecom industry before joining Ivey. As a widely respected CEO, she brought more than 30 years of progressive experience in marketing, operations, strategic planning, technology development, and financial management to Canada's premier business school.



Enter your email address to subscribe to our mailing list.

Author's Articles
related articles
most read articles