Business Sustainability and Risk

Last week I was lucky enough to attend an Executive Workshop in Phoenix, Arizona, that was presented by the AHC Group, and led by the group’s founder, Dr. Bruce Piasecki.

For those who are familiar with the long-term focus of Bruce’s work, it will come as no surprise that the theme of this meeting was around various aspects of business sustainability—often referred to as corporate social responsibility (CSR). Windfarm-220x330These discussions revolved around the various ways that a business can approach the ‘three legs’ that define sustainability efforts: social, environmental, and economic (also commonly referred to as people, planet and profit).

Beyond the simple pleasure of leaving behind the subarctic temperatures of home—I must say that I really enjoyed the event, and I would like to share a few of the highlights.

The meeting itself was comprised almost entirely of speakers from the private sector—companies that are wrestling with the challenges of implementing these ideal world concepts in the unwashed reality of day-to-day business.

The topics were varied and well connected—but the session on evaluating risk really resonated with me, so I thought I would share a few of my notes.

One final thought before we get to the good stuff: this was a private event, so I’ll not be sharing any names. Apologies to those who will not receive credit for their contributions. I thought it better to err on the side of caution in this case. However, if you would like to have some first hand experience with these events, the solution is simple—sign up to attend!

Risk Management

  • Determining the Probability of an event is much more difficult than determing Severity. People have a fairly easy time finding agreement on the potential impact that a given event will have—but when asked to nail down the likelihood that it will happen, consensus is much more difficult.
  • There are some legitimate reasons to debate who your Risk/Safety group reports to—is it the CEO, CFO, Legal, or is there direct communication with the Board? It parallels the question: who is your legal counsel there to protect: the CEO or the Corporation? Two very different priority profiles can be in play.
  • Are you evaluating your Risk exposure thoughout your full value chain or is your focus internal? Are you asking your suppliers about their risk exposure and mitigation plans? Microsoft and nVidia both faced revenue challenges in the last quarter—and both pointed to reduced global sales of PC’s as the floods in Thailandresulted in severe shortages of hard drives. PC makers were unable to ship finished units. And who at these companies had figured East Asian environmental issues into their risk exposure?
  • Include an outsider in your Risk Identification activities. Many companies have been involved in ‘high risk’ activities for so long that it has become ‘normal’ to those who live it every day. They don’t see the degree of risk as they are simply too accustomed to it.
  • And, in a real eye-opener: every $1 spent on planning will save $4 – $7 in response costs.
  • Many of us are familiar with the Probability/Severity matrix, which often takes a form like this:

Risk map1-480x261

This is a very straightforward way to look at risk exposure. But the important issue that was raised: what happens when an event in the top left box takes place? An event with a very low probability of happening—but when it does, the impacts are profound.

Risk map2-480x261

Think Deepwater Horizen oil spill or the Fukushima I Nuclear Power Plant disaster. Events like this indicate the need for viewing that segment of the matrix in a different light.

Risk map3-480x255

Reputational Risk

  • There is growing corporate awareness of ‘Reputational Risk.’
    • The importance of this risk component appears to be driven by the increasingly frictionless sharing of information via the Internet and social networks.
  • It is thought that this concern with reputation will accelerate a move to the concept of the Triple Bottom Line as:
    • Shareholder returns are being increasingly impacted by negative reputation events, and;
    • We are beginning to see executive compensation packages that include KPI’s that track CSR indicators.
  • Businesses are finally coming to the realization that bad press on the Internet lives ‘forever’. A negative event or story can and will continue to surface in Google searches for months and years after the issue has been rectified. Is your company doing enough to surface the positive things that it is doing? And like it or not, social media is here, it is real, it is important, and companies had better get out in front of it—or suffer the consequences.
  • Remember that your supply chain can and will impact not only the direct operating risk, but also exposes you to great Reputational Risk (have you been tracking the Foxconn/Apple stories that were precipitated by theNew York Times investigation?)
  • This is not a static environment: what was acceptable in 2008 will not be acceptable in 2015.
    • Sharing of negative reputation is never going to become more difficult
    • Activists are becoming increasingly sophisticated and dedicated to online communications and community building

Reaction

As I listened to these discussions—particularly as the concept of reputation was revisited—I came to see that some of the same advice that we have been giving leaders to enhance their skills on the ‘micro’ level is equally pertinent on the ‘macro’ stage:

  • Employee engagement is the solution to many of their issues. How to encourage this engagement? Well, that’s a whole other series of posts—but let’s start with the concept of ‘trust’ and let it spin out from there.
  • Great leaders (and managers) must become great storytellers. The attention of our various stakeholders is so fragmented that, if you want to convey a lasting message, you must be able to grab and hold that attention. We are living in an era that is witness to the creation of a ‘YouTube Generation.’ Attention span has gone from hours to minutes, and is now measured in seconds. If you doubt this, think about the pacing of some of our classic movies, The Godfather for example:

Now, reflect that against the cuts that are made in the Best Picture of 2011, The King’s Speech (a restrained and slow moving film by current standards):