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.
The Öresund Bridge from underneath (Photo credit: Wikipedia)
It is quite amazing to see and hear what Institutional investors are communicating at the moment. For a long time it was their job to create more wealth for the people who had trusted their hard earned money into a few very well of funds. They invested freely in all kinds of projects and had portfolios that were very diversified (and some would say to diversified).
The first came the raise of the consumer activist who forced these huge investors to put in ethical screens that ensured that there was some form of consistency between the individual wishes and the investment targets. These pension funds have now taken a further step in the direction of creating a more sustainable investment platform by looking into projects that benefit the very society and people own them.
The financial and economic crisis means that public construction projects are on a diet, but now there are signs that there may be a tremendous boost on the way to the Danish infrastructure. A telephone survey done by a independent think tank, shows that the country’s ten largest pension and the state owned, ATP, are willing to invest nearly 60 billion kroner in the Danish infrastructure such as a harbour tunnel in Copenhagen, sewers or a large bridge between some of the main island of the country. According to calculations this will create 7,200 new Danish jobs annually over a period of 10 years when billions are invested in public works projects.
This means that there is cash then the government just need to provide the projects and vision needed to make it a reality.
A big story in Denmark or at least a big story to the ones that cares is that a big proportion of the Danish banking system has been receiving guarantees so that they will not fail. The state and there by the citizens of Denmark, have vowed that no matter what they do and what decision that take, that we in the end will come and rescue them from themselves.
But is this really in the best interest of the country? Or even a viable way to solve the crisis that we are in the mist of?
There are some 120 banks in Denmark at the moment, which is about one bank per 45,000 Danish citizens. In Germany there by comparison around 350 commercial banks, which calculate to around one bank per 231,000 citizens. While the number of banks per citizen is decreasing it is very far from any kind of sustainable structure.
At the same time a lot of banks are now trying to get into a very exclusive club of “too big to fail” institutions. The members are in reality guaranteed to be financially subsidized by the Danish state no matter how stupid or arrogant that they choose to be in the future. Many of these institutions only operate on a local or regional level and have a great deal of vulnerability especially towards the construction sector. It is estimated that just of these 20 banks will need around 20 billion Euros within the next few years just to be kept afloat. Even for a well-off country like Denmark this is a significant chunk of the GDP.
So the question is if we should take these vulnerary banks and liquidate them and thereby minimize the loss to society or should we wait and see what happens? These is of cause the dilemma that these are in essence private businesses but if they think of them selves as too big to fail should we not at least have some control over the process and governance within these companies. These is not doubt that selling the good assets now will bring in a significant bigger return compared to the price we can get when the bank is no longer sustainable and the subsequent loss on the bad assets is something we would have had to endure anyway.
Another benefit of liquidation of smaller regional and local banks has to do with governance. We have now seen numerous times that members of bank boards and executive management have been privately engaged with the people that they have been lending money. This close relationship have meat that common financial sense have been overridden by personal favouritism and to many second chances which in the end have meant that the banks commitment have been too deep and focused on a few companies in high risk areas. This have en essence meant that the risk exposure have been way to high and management have been willing to hide the exposure to other clients because of their personal commitment. And effort to liquidate will at least in theory bring a arms length approach back into the lending practices or at least enable institutions to spread their risk on a much wider field of different industries and individual companies just because of their size.
One final note is that the banks should not be owned or operated by the state but merely be sold off in pieces so that clients and “good” lenders continues to be provided with a banking service that they can rely on. A actually think that the state would properly be the worst place to have a operating government involved as it would easily be soon as a cheap place for getting funds for political projects. But on the other hand I think it is unwise to have so many banks in one country when it is so clear that it is not something which the country can even hope to be able to sustain.