When Lehman Brothers failed, was it a failure of corporate risk management, or corporate crisis management, or both? Rigorous risk management is a crucial element of good governance, not a euphemism for guessing. As became painfully evident in the Lehman case and a slew of other recent crises, not having adequate risk-management systems and acting accordingly can lead to a downturn in public confidence, and can easily become viral.
Crises aren't new. Why, then, has the management of risk attracted so much research and occupied so much time in corporate boardrooms? And why is it that, even as we've invested increasing resources in institutional risk management, we still too often encounter a profound lack of public trust?
A recent seminar organized by the Canadian Institute for Advanced Research and York University's Hennick Centre for Business and Law focused on this challenge. What systemic knowledge can we glean to better anticipate such dangers or ameliorate their harmful consequences? How can we build institutional capacity to better plan for change, understand risks and adapt in the face of increasing interconnectedness, complexity and blurring of jurisdictional ownership and accountability? What can we learn about better managing risk and handling uncertainty before they manage us?
Every crisis is different, but they all share common traits. When a crisis strikes, for example, there is always tension between the desire to understand the nature of the emergency and the urgent need to take immediate action. There is no single rule book for managing crises, but their commonalities offer clear lessons on what matters:
1. Leadership and strategic communications matter. Since biblical times, every crisis narrative involves a hero, a villain and a victim. Successful crisis management relies on strong leaders who can effectively frame how events should be contextualized and manage expectations as to what may be achieved and in what time frame. As Churchill once noted, "mountains inspire leaders, valleys mature them."
2. Delegation and networking matters. Very few crises respect institutional mandates or jurisdictions or even sovereign boundaries. A classic immune-system response is swarming – blood clotting when we cut a finger or sneezing when sinuses are congested. This kind of self-organization, the ability to pull off an "all hands on deck" reaction, is critical to building resilient institutions and systems. To achieve this level of intelligence and rapid response you need extensive networks, within and across organizations, which have to be built up over time, invested in and nurtured.
3. Reputation matters. When crisis strikes, an organization's reputational risk moves quickly to "macro perceptions." When things go wrong, those at the top are held accountable and are on their own. At the outset of a crisis, there is some leverage to shape public expectations, but transparency, expertise, commitment and empathy are key to remaining credible and minimizing reputational damage. Negative perceptions last a long time.
4. The long term matters. Taking a broader, long-term view in the heat of crisis seems counterintuitive, but is not. In times of stress, it's human nature to adopt a narrow, short-term focus. This is equally important in managing risk absent a crisis. The culture of every corporate leadership should anticipate, and aim to avoid, causing harm or overreacting to a crisis to ensure that it's properly contained.
5. Information matters. Under-investment in information and analytic capacity undermines risk management and the ability to handle crises. Information is key for both risk management and crisis management: It separates anecdote from fact, and rumours from reality. The more complex and global the interconnections in a crisis, the greater the informational challenge, and the higher its value.
In the immediate aftermath of a crisis, people are often keen to allocate resources to prevent any reoccurrence. But memories (and fears) fade quickly; as one seminar participant noted, "the fellowship of the lifeboat is rapidly dissolved."
The world is at an inflection point, with dynamic changes reshaping economies, societies, politics and global alignments. The ability to manage uncertainty – and inevitable crises – presents the greatest challenges and opportunities for leaders of any significant institution. It is hard to imagine more worthy investments.
Kevin Lynch is vice-chair of Bank of Montreal. Ed Waitzer is director of the Hennick Centre for Business and Law and a partner of Stikeman Elliott LLP.