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With risk management under fire after the recent economic meltdown its adherents failed to prepare for, corporations are reassessing how to protect themselves in the days ahead. In Harvard Business Review, Nassim Taleb, author of the best seller The Black Swan: The Impact Of the Highly Improbable, and University of London's Daniel Goldstein and Universa Investments' Mark Spritznagel outline six mistakes that executives make in risk management:







TRYING TO PREDICT EXTREME EVENTS

We are inept at trying to predict unlikely events - the so-called "black swans" that Mr. Taleb highlighted - such as periodic financial crises or the Sept. 11, 2001, terrorist attacks. By focusing attention on extreme scenarios, we neglect more likely possibilities, leaving us vulnerable.

Instead, companies should concentrate on the consequences of extreme events, as nuclear plants have done by shifting from trying to predict when an accident might occur to preparing for such a crisis. If a small but unexpected fall in demand could set your company reeling, rather than trying to predict the likelihood or when it might occur, pay attention instead to how it could withstand the impact.

STUDYING THE PAST

We are convinced that studying the past will help us manage risk, but black swan events don't have precedents. Moreover, today's world is more interdependent, so organizations can get sideswiped easier.

NOT HEEDING CAUTIONARY ADVICE

In a profit-seeking world, managers ignore cautions in their zeal to pursue opportunities. Risk managers place a greater emphasis on making money than avoiding losses, despite the fact that companies can advance considerably if they prevent losses while rivals go under.

PUTTING FAITH IN STANDARD DEVIATION

Standard deviation, the measure used routinely in finance to evaluate risk, and the models that flow from it, such as regression analysis, are poorly understood - to the point that even quantitative experts have trouble fully comprehending their meaning. Besides, the authors stress: "Anyone looking for a single number to represent risk is inviting disaster."

FRAMING RISKS POORLY

Two mathematical descriptions of a risk may be the same but provoke different responses. For example, if you tell investors they risk losing all their money in 30 years, they are more likely to invest than if you tell them they face a 3.3-per-cent chance of losing a certain amount every year - same probabilities, but different responses. Always look for ways to present risk to ensure that the response is appropriate. In particular, keep in mind that providing a best-case scenario usually increases the appetite for risk.

SEEKING EFFICIENCY

Trying to be more efficient can increase corporate vulnerability. Companies that are highly leveraged (a prized situation, because it's financially efficient) can go under if a sales forecast is missed or interest rates change. Companies that become specialists in one product, industry or geographic area are more vulnerable when something goes awry than are companies that have a more balanced portfolio.

IGNORING DISINCENTIVES

The mythology is that capitalism is about incentives, but what about disincentives? "No one should have a piece of the upside without a share of the downside," the authors state. "Moreover," they argue, "we shouldn't offer bonuses to those who manage risk establishments such as nuclear plants and banks. The chances are they will cut corners to maximize profits. Society gives the greatest risk-management tasks to the military, but soldiers don't get bonuses."

'MANAGEMENT TODAY IS MORE OF A RELIGION'

For the past five years, consultant Adrian Savage has offered some unconventional management advice at the Slow Leadership blog. But in his last commentary before closing the blog, he moved from slow leadership to no leadership:

"The very best leadership, I am convinced, is engaging in as few 'managerial' activities as possible." That means spending less time - or no time - creating plans and budgets, setting strategies, setting up mergers and acquisitions, holding meetings, analyzing data and developing marketing schemes.

"Nearly all such actions get in the way of real business and lie at the heart of most problems that leaders face. If you must do something, encourage and train your staff, talk with customers, monitor quality and spend as much time as you can with 'non-managerial' actions like inventing new products and services and improving old ones," Mr. Savage says.

He contends that "management has become a self-replicating and self-justifying process we would be better off without."

Management schools, of course, are caught up in that justification in order to exist, even though he says their own statistics show nearly all "managerial" activities - like mergers, marketing and fancy financial engineering - destroy value on a massive scale.

"Management today is more of a religion, based on unquestioning belief in semi-sacred texts and dead prophets, than a useful and practical way of spending time," he says. "My ideal for each of you, as a manager and a leader, is that you never waste your time and talent again on any conventional 'management' tasks."

PRESENTATIONS: APPLYING SUMI-E TO POWERPOINT

Want to improve your PowerPoint presentations? Garr Reynolds, on his Presentation Zen blog, suggests hewing to the prescriptions of the ancient art of Japanese brush painting known as sumi-e:

More can be expressed with less.

Never use more colour when less will do.

Omit useless details to expose the essence.

Careful use of light and dark is important for creating clarity and contrast.

Use colour with a clear purpose and informed intention.

Maintain balance, clarity, harmony and simplicity.

POWER POINTS

Maximize productivity

Make an energy map of your days. With your spreadsheet or weekly planner create a sample week. Then, during the day, periodically write what you are doing and how productive you feel, on a scale of zero to 10, with 10 as productive as you can be. Blogger Trent Hamm says this map will illuminate your natural energy levels, allowing you to slot important or high-concentration tasks into periods where you're highly productive and less important or low-concentration tasks in non-productive periods.

The Simple Dollar

Create a client culture

There is no hotter prospect than your current client. "Why aren't you talking to them? Why aren't you telling them more about you? Why aren't you asking them more about them?" asks marketing consultant Drew McLellan. The Marketing Minute

Know your boss

One of the most important things to understand about a new boss is his or her personal style of communication. How much information does the boss want, how often and in what time length of briefings?

Management Today

Dainty Dells anyone?

Dell laptops will be coming soon in nail-polish colours. Are you ready for "Strawberry red" and "Kyoto pearl?"

Springwise newsletter

Don't lose those links

When redesigning your website, remember to make sure that existing links to your company on third-party sites will still find the appropriate page. This can be arranged by a webmaster through redirects.

MBA Depot blog

Tracking time zones

If you're holding virtual meetings with folks from other time zones, your Outlook calendar can help you by displaying other time zones right beside your own, so you know what time it is for the other individual.

Right click on the listed meeting hours, select Change Time Zone, and check the Show An Additional Time Zone box. If you're travelling, you can switch your Outlook to reflect the time zone you're in by applying the Swap Time Zone button.

Katherine Boehret, Wall Street Journal

 

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