Looking at the people side of risk

I was reading the McKinsey article by Alexis Krivkovich and Cindy Levy called ”managing the people side of Risk” which promote the argument that a strong risk culture can mitigate risk and maximize opportunities for business development. The idea seems appealing, that with the right leadership it is possible to implement the right type of risk culture and thereby enabling companies to “[acquire] new businesses, entering new markets, and investing in organic growth”.  However, this functionalist, positivistic idea of culture and risk does leave a lot of questions unanswered and possible constitute a risk in itself. Their main arguments can be split into three headlines.

Culture as a static entity

Is a risk culture something you can implement? Well, I will let it be up to you but from my almost 20 years in private an public organisations I can’t come up with just one example where a risk culture or any other culture have been implemented by management. I have seen many attempts, but never a successful one. The reason is that a risk culture can only be identified retrospectively. You only know that you have a successful risk culture if risk does not materialize into issues and tangible threats, on the other hand it could be that no issues arise because that issues and threats are simply not there. So the question is then, who can identify the culture if you have a strong risk culture if it is impossible to measure? Maybe it takes a McKinsey consultant…

People is the problem not the solution

Management rule their organisations like kings who can choose how individuals think and act in the world around them, or at least this is the claim of McKinsey. In their paper it is the idea that management have in-depth insight and knowledge about all the actions of their employees and that successful companies are the ones that have as much (mind)-control over their employees as possible. However, while we might strive for improved control and efficiency of organisational processes it’s only a few (feebleminded) who will claim that they have total control of employee’s actions. I think that we should count ourselves lucky that we do not have this type of control as adversity fuels organisations ability to innovate and develop and that striving for increased control on the magnitude indicated by the authors will only lead to organisational demise. So instead of perceiving people as the problem organisations should look upon people as the solution to mitigation of risk, not the cause.

Risk is universal

The claim is that successful organisations are the ones that hold people accountable for mistakes made – “To make aspirations for the culture operational, managers must translate them into as many as 20 specific process changes around the organisation, deliberately intervening where it will make a difference in order to signal the right behaviour.” It is not my claim that individuals should not be held accountable for their actions, but it should only be the extent that they actually have control. As risk is universal (fuelled by human actions and decisions) it cannot be one role or person sole responsibility to identify and mitigate risk. It would be impossible for one person to process just a fraction of the information on possible outcomes that organisations produce every day. Rather organisations should empower and disperse decision making to all individuals and groups in the organisation and hold them accountable for their own decisions and its consequences. The role of management becomes one of encouragement and support rather than control and punishment. They are there to ensure that people with right type of training and personal competencies are invited to participate in the continued development of the organisation so that they are equipped to handle mitigate or take advantage of the operational risks that they are facade with.

Mckinsey_MoF46_Managing people risk_

CSR is about focusing on the little things

It seems odd that when corporations show their commitment to society through CSR they get the most out of doing something about the little things. Companies that are successful looks at what they do well and tries to figures out how this impact communities that they are active in, in ways they could not imagine if they did not have the tools provided though CSR.

When reviewing the many definitions of CSR that is out there it gives little or no clue how actually to conduct social responsibility. It would seem that if one just followed conventional wisdom it would be hard if not impossible to satisfy even the simplest requirements given by all these different classifications.

“The Social Responsibility refers to the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society.” Bowen, 1953 in Social Responsibilities of the Businessman, which commonly regarded as the first milestone in modern CSR research and practice.

Another more modern definition have been issued by the International Standards Organisation (ISO) through their guidance on social responsibility “Responsibility of an organization for the impacts of its decisions and activities on society and the environment, through transparent and ethical behaviour that contributes to sustainable development, including health and the welfare of society; takes into account the expectations of stakeholders; is in compliance with applicable law and consistent with international norms of behaviour; and is integrated throughout the organization and practiced in its relationships.”

Both of these very fine definitions give little or no clue to what companies should actually do to both successful in terms of profit, development and continued competitive advantage, and at the same time being in tune with societies moral compass.

But some companies have actually done quite well trying to combine their CSR with their core business. Just to give a few examples.

Danish Novo Nordisk has committed themselves to the task of “Changing diabetes” and have successfully introduced new products like Victoza inline with their core mission statement

The Swedish fashion company, H&M have under the statement “Conscious” has with worked to create sustainable fashion through a comprehensive CSR system that reduce risks in their supply chain.

Vivendi, the French telecom company, have initiated a program that promotes the safe use of the Internet to youth.

All of these initiatives are small when it comes to the efforts that the company needs to put into them because it is embedded in the “what we do” part of their business, but even so that have a huge impact on their outreach to the communities they are active in.

So even though it would seem that these successful companies are focusing on the “little things” they do represent a significant societal impact exactly for that reason.

Women on boards study from Cranfield School of Management

It is always a pleasure to post good news especially when it is on an area that I think is important. Women in top management and on boards have a significant positive impact on corporate governance, financial performance and stakeholder engagement.

I would like to see a gendered approach to HRM and recruitment policies being implemented as part of a strategic effort to strengthen the corporate backbone. Some of the research I have done in the area on how this can be done could actually be made to work if companies believed that corporate executives have to grown using the corporate pipeline.

Enjoy

Women on Boards six month review

Corruption – The disease that kills new business

No Corruption

No Corruption (Photo credit: Ann Douglas)

What is Corruption?

Corruption can defined as “the misuse of entrusted power for personal benefit”. It can also be described as letting personal or family relationships influence economic decision making, be it by private economic agents or by government officials. Corruption is always kept more or less secret and therefore is the individual behavior of corrupt agents almost impossible to observe systematically in real life. You know it when you are subjected to it.

The objectives of government are vital to the understanding of the diverse negative effects of corruption on the public service. Corruption renders governments unable or unwilling to maximize the welfare of the public for personal or the gains of a small group of people.

A corrupt principal creates allocation inefficiencies and cripples its credible commitment to effective policies, and opens the door to opportunism. Because corruption must be hidden from the public and is not enforced by courts it entails transaction costs, which are larger than those from legal exchange. This suggests that corrupt contracts are primarily relational contracts where legal exchange serves as a basis for sealing and enforcing corrupt agreements. Legal exchange not only provides for corrupt opportunities, but for the necessary enforcement mechanisms. Examples of such legal exchange are long-term business exchange, belonging to the same firm or political party or being embedded in social relationships. The latter may even comprise the engagement in charitable institutions. Reform should not only focus on limiting opportunities for corrupt behaviour but also on impeding the enforcement of corrupt agreements.

Two types of Corruption

According to transparenecy International there are two types of corruption that one can encounter “According to the rule”- and “Against the rule”-Corruption.

“According to the rule” constitutes a situation where an individual receives an illegal payment for something he/she is required to do by law – for example when a state official solicit bribes from a company for expediting a routine public service. “Against the rule” refers to a situation where a bribe is paid to obtain a service that the receiver is not authorised to provide but gains access to through a bribe. For example skipping the queue to gain access to a prestigious school or gaining a permit for which would normally would not be granted. Both of which are deemed as counterproductive to positive social and economic development.

There is no way to know how widespread corruption really is and the level of impact on financial and social development. As a Social Risk corruption is properly one of the first things that organisations investigate when investigating possible investments in a region or country primarily because there is a direct link between the perceived level of corrupt behaviour and general social issues like crime, rule of law, healthcare, etc.

When evaluating social risk in a region Transparency International, EBRD, OECD, IMF and the UN good sources for your assessment pared with local sources such as trade groups, the embassy in the region, government business development initiatives, etc.

Links on more information on Corruption and its impact:

http://www.ebrd.com/pages/about/integrity/reports.shtml

http://gateway.transparency.org

http://www.unodc.org/unodc/en/corruption/index.html

http://www.oecd.org/corruption/

http://www.whistleblowers.org

http://www.dfid.gov.uk/R4D/PDF/Outputs/SystematicReviews/Corruption_growth_SR_Report_Final_Revised-v2_SO.pdf

www.u4.no

Articles:

Bishop, T.J. and Hydoski, F.E. (2009), Corporate Resiliency: Man- aging the Growing Risk of Fraud and Corruption. Hoboken, NJ: John Wiley & Sons, 51–208.

Uslaner, E.M. (2008), Corruption, Inequality, and the Rule of Law: The Bulging Pocket Makes the Easy Life. New York: Cambridge University Press, 30–249.

Svensson, J. (2005), “Eight Questions about Corruption,” Journal of Economic Perspectives 19(3): 19–42.

Weitzel, U. and Berns, S. (2006), “Cross-border Takeovers, Corrup- tion, and Related Aspects of Governance,” Journal of International Business Studies 37: 786–806.

Luo, Y. (2006), “Political Behavior, Social Responsibility, and Perceived Corruption: A Structuration Perspective,” Journal of International Business Studies 37, 747–766.

Cuervo-Cazurra, A. (2006), “Who Cares about Corruption?” Journal of International Business Studies 37: 807–822.

Jensen, N. et al. (2010), “Understanding Corruption and Firm Responses in Cross-national Firm-level Surveys,” Journal of International Business Studies 41: 1481–1504.

Clean safe water build societies

Česky: Pitná voda - kohoutek Español: Agua potable

(Photo credit: Wikipedia)

Help build resources for a clean water supply through helping water projects like the Charitywater project in Rwanda. Clean water is key to building societies and at this point it is not going in the right direction.

The rate of improvement in access to safe drinking water has long been in decline; the percentage of the world population with access to safe drinking water rose by 11.1% between 1970 and 1975 but grew by only 2.4% between 2000 and 2006.

Within the next half-century, access to safe drinking water may fall below the level of 1977, when the international community launched its first attempt to increase access to safe drinking water.1

The lack of access to safe drinking water is likely to impinge upon economic growth by 2050,if not earlier.

The emerging economies are expected to be the first to suffer from a decline in access to safe drinking water.

Because the emerging economies are an important engine for world economic growth, the impact on those economies’ performance is likely to have wider implications for the global economy.

Industry, governments and supranational agencies have an important role to play in conserving and increasing the supply of potential safe drinking water.

Water purification at the point of use is expected to make a major contribution in increasing access to safe drinking water around the world.

Clean water saves lives and builds society.