We live today in a business climate that seems obsessed by the need to identify, quantify, analyze, manage, mitigate and otherwise corral risk in all its forms. While we fight these battles on the risk management front, we might be risking losing the war of survival of the fittest.
Success represents the biggest risk of all. Whether we look at the fall of Rome or the decline of the British Empire, the embarrassment of Fannie Mae, the collapse of the subprime market the first time, the second time, and no doubt the third, the list of such wars lost is long and examples ubiquitous.
In our compulsive, it seems, desire to tame risk, how do we handle this one? How can we tell when what looks and feels like success is actually the beginning of the end? This is a difficult task, as fish cannot see water. Stepping outside of ourselves to try to discern and interpret the augurs requires constant effort, rigorous vigilance, and effective mirrors. And we are trying to do this at the very time when the livin’ is just too easy. The money is rolling in, and it is so much easier just not to think about it. Discipline is a forgotten concept as we revel in rewards. We must be doing something right. Right?
Wrong. At that point, where profits are flowing and we are on top of the world, we are deaf, dumb and blind. What to do? First, a home truth. Anyone, any entity, person, organization, institution, civilization can fail and many do, all the time. Everyone is vulnerable, and never more vulnerable than when at the peak of success. No one is too powerful or successful to succumb. Thus, humility is an imperative as we remember that we all put on our pants one leg at a time.
Beyond that, with that scary awareness in place, are there signs in the midst of great success that can be codified that the vigilant can see? Our goal here is not to add another set of boxes to check on the risk management matrix, but to find insight we can use to protect ourselves. No model provides truth; the best they can do is help identify trends, especially those we may not be expecting. The issues are subjective, and every company experiences them differently.
Experience suggests the behaviors below can be indicative not of success but instead markers of the slippery downward slope.
The Deluded. Who has not seen leaders unable to distinguish corporate success from their own? Who find themselves taking success for granted, and developing an insufferable attitude of entitlement? Once that attitude takes root, such people often take on imperial characteristics, which leads to isolation, and then to great danger, for themselves and their organizations. Though they can often coast on momentum for a while, eventually they and their companies pay a terrible price as things go wrong, and the arrogant leader, out of touch and unfamiliar with the fundamentals that drive the company, is ashamed and thus frozen.
The Hyperactive. That arrogance, uncorrected, can lead to misinterpreting information through a lens in which the leader sees himself as invincible and corporate success as a right. In such circumstances, a production at all costs mentality can take hold, causing the constant pursuit of more, via acquisition or driving up volume. The subprime industry, where the drive to securitise more and more loans to support the perception of earnings momentum, driven by ever increasing gains on sale, caused underwriting standards to weaken to absurd levels and the resulting paper therefore to be near worthless provides a great example: the model was working, right? We achieved our earnings momentum, until we stopped literally dead in our tracks. The system’s failure was crystal clear to those watching from outside, but from inside, what had to be done, it seemed, was always more and faster, with ever weaker people in place as the able ones left the treadmill.
The Ostrich. Next comes the river in Egypt, which we all know is Denial. This is when no matter what the data says, the explanation is always that this will pass, the data are wrong, the other guys are making big mistakes, and if we just make the rear view mirror a little bigger all will see that really everything is fine. Experience suggests this is the reading of a management team that did not live through the difficult days of starting the company, but has instead often risen on the shoulders of others. If the Hyperactive above is in force, the company may be in deal heat, and has often appointed not an operator but a salesman or a lawyer to the top role.
The Game Changer. “Since the market is not evaluating us properly, we are going to have to do something drastic.” Sell, buy, new leader, radical change in strategy. In other words, if we are no longer succeeding, change the goals. This is often just another version of denial, and this is where the leadership structure becomes critically important. Is there someone at the top of the company, the board we hope, who realizes that changing the goals without addressing the sources of the difficulty is most often nothing more than rearranging the deck chairs on the Titanic? (Note that the rank and file generally already know this.) If so, can that person right the ship, as this is where the end of the story is often written? Precious time is wasted here, and often this stage does not end until the company literally runs out of cash.
The Whiner. Should the company still exist at this point, we will see much hand-wringing, usually tied to a corporate myth of some sort: “we are the low-cost producer” is a common one, or “we are the only xxx in the yyy.” By this time, everyone is yawning, and the question is how best to use the remaining assets and cash, when all the options the company once had seem to have evaporated, overnight, according to management.
The Antidote. As stated at the outset, humble and self-aware leaders are necessary but not sufficient for picking a company’s way through these minefields to sustained success. And the best risk management procedures and compliance professionals will not save the day. The best route to protecting the company from these treacherous behaviors is to rely on the vigilance of a board of directors that brings that precious commodity: perspective, gained from various deep and broad experiences outside the worldview of the company and its leaders. Not all boards can or will do this, but the best ones will press for honesty and answers, safeguard against the Deluded, the Ostrich and the Whiner, and be able to discern the difference between reality, wishful thinking, avoidance, window dressing and the various other forms of persiflage, while at the same time continuing to provide both needed accountability and support to management.