Participative Leadership Originated In 4th Century BC In India

My last post on Indian Management Model generated a common comment – “India already has a management model where obedience to the boss comes first!” That is the common perception so I decided to delve deeper into the subject. Where did the authoritarian style of leadership come from in India?

The common perception of modern day CEO was that a CEO had all the answers. He was all knowing same as the prior period kings. In this century, the management mantra is that CEOs don’t have all the answers and should have the ability to ask the right questions. They need inputs from all to form decisions. Therefore, the shift clearly is towards participative leadership style.

After some research, I found that authoritarian leadership style originated from the Greek terminology “autocratic leadership”. My view is that Indian history is full of examples of participative leadership. Let me explain this viewpoint further.

In Ramayana, the main characters considered obedience a virtue. However, Buddha propagated the view – question everything, don’t take anything at face value. Subsequently Mahabharata is full of characters doing exactly as they please, breaking all the rules and getting into a lot of trouble. In it, Krishna asks Arujuna to fight his teacher Dronacharya, his elders, most of his relatives and friends since they were supporting unethical Dhurypdhana.

Further, Kautilya’s Arthshastra gives a full process for the king to take decisions after consulting his ministers, officials and public where required. He discussed participative leadership in 4^th century BC. Surprised! Let me share his thoughts with you.

1.     Discuss with ministers and employees

The king shall deliberate over matters with a number of people as required. It states that “No deliberation made by a single person will be successful; the nature of the work which a sovereign has to do is to be inferred from the consideration of both the visible and invisible causes.”

2.     Obtain outside counsel

It further mentions that discussions should not be restricted to ministers and their direct reports. The king “shall sit at deliberation with persons of wide intellect.” Hence, it discusses the concept of consultation from people outside the ministry.

3.     Encourage constructive confrontation

Next, the Arthshastra mentions that the king should hear all opinions even contrary to his. It states – “He shall despise none, but hear the opinions of all. A wise man shall make use of even a child’s sensible utterance.”

4.     Selection of advisers

Then Arthshastra states that king should not select people on a random basis or those who have no clear idea of the execution of work required. It states -“He shall consult such persons as are believed to be capable of giving decisive opinion regarding those works about which he seeks for advice”. Hence, qualification and knowledge of advisers is a prerequisite.

5.     Opinions of competitors

Kautilya does not suggest that advice should be sought from friends and allies alone. He states – “nor shall he (king) sit long at consultation with those whose parties he intends to hurt.” Hence, getting competitive information and viewpoints hasn’t been ruled out.

6.     Number of advisers

Kautilya advises that in the normal course of business the king should discuss with 3-4 ministers. He states that discussing with one minister is useless, as he will advise “ willfully and without restraint”. Discussing with two would not help as “the king may be overpowered by their combined action, or imperiled by their mutual dissension”. Discussing with too many minsters will cause a great deal of trouble and slow down the process.  I think Kautilya has adequately covered modern day challenges of selecting advisers.

7.     Method of discussion

Last but not the least, Kautilya defines that the king should choose to hold a collective meeting or individual interactions depending on the situation. In his words – “The king may ask his ministers for their opinion either individually or collectively, and ascertain their ability by judging over the reasons they assign for their opinions.”

Closing thoughts

Kautiliya comprehensively covered most of the aspects of participative leadership in his Arthshastra.  Authoritarian leadership appears a western concept and not an Indian concept as is commonly believed. The style took major hold during industrial revolution. With globalization and increasing complexity of business, participative leadership is gaining ground. Concepts of collective intelligence and crowd sourcing are garnering strength.

Moreover, the main concept of Hinduism is – everything that is created is destroyed and everything that is destroyed is recreated. If it is true, then history repeats itself. Then isn’t it better to understand the historic management concepts and learn from them.

Lastly, in the creation of new world order, nothing is sacrosanct. In words of Jalaluddin Rumi – Don’t be satisfied with stories, how things have gone with others. Unfold your own truth.

References:

1. Arthshastra by Kautilya

Winner of the Competition of Bullshit Quotient Book

Thank you all for participating in the poll and the competition held in the post “A Book Review – Bullshit Quotient“. Over a 100 people voted and mostly in favor of the views expressed by the author Ranjeev Dubey. Ranjeev has personally gone through the comments and chosen a winner. He has also expressed this thoughts on the various comments. Read below, as I am sharing an unedited version of his opinion.

“ My thought as I read through the thoughtful comments posted by your followers was mainly at the high level of comprehension here. Why we nevertheless allow this endless repetition of culpable double speak is a moot question. Why this clear understanding of the reality on the ground does not translate into a program of change is another moot question. I can draw your attention to the following nuggets that I particularly liked:

“The business of the company is to deliver value to the stakeholders/shareholders. Everything else is incidental. All the stuff about delivering value to customers is BULLSHIT. - M Seshagiri Rao:

“Small practices often have no audit trail. Accountability is ensuring that you understand and carry out the actions of the law, with ethical and moral actions. So, the laws are there, [but] the government is in the hands of those who thrive on power, regardless of having the right to vote, that doesn’t even matter…”- Joanne McNamara:

“As a cynical private investigator I have found that the bigger the lie, regardless of the circumstances, simply means that there are more person involved.”- Jeff Moy

“To add to the misery, a nation in need of an inspiring dream, is fed the empty corporate drivel”. - Amey Kawale

But at the end, the prize goes to the one who goes beyond the points made, to the next level so to speak. And for me, the winner is:

“Commercial organization sometimes fail to realize (or take the ostrich approach to the fact) that they don’t exist in a vacuum, but within an ecosystem where the (mostly competing) interests of companies, customers, employees, regulators, environment and the larger society are required to be optimized. This was the stated (though in a different way) objective of the concept of Trusteeship, which sadly has gone out of the window gradually after Indian independence.” – Deb.

Thank you all, and especially, thank you Debashis

Rajeev Dubey “

The winner of the competition is Debashis Gupta. Congratulations!

Debashis please email your address to me and we will send you the prize.

Risk Assessment of Marketing Function

The global economy is facing turbulent times with US in recession, Europe in economic crises and emerging markets growth slowing down. Frequently organizations panic on hearing forecasts of looming recession. They cut down marketing budgets, innovation of products and capital investments. The reaction further adds to the woes, and accelerates the downward trend in sales. Risk managers normally do not focus on marketing department activities and generally are not called upon to share their views on marketing strategies. A look on these areas may prevent the company from going in red and thrive in chaotic times. Here are a few suggestions for risk managers.

1. Bench-mark Marketing Function

The complexities of business world are escalating marketing risks. For survival and growth organizations need resilient marketing and sales functions. They have to identify strategic inflection points in the market and adapt accordingly. In recession customers interest, values and budgets change. With new competition and changing regulations, organizations need to reinvent business models. Hence, as a first step risk managers  need to bench-mark the organization’s marketing function.

Philip Kotler and Johan A. Caslione in their book “Chaotics - The business of managing and marketing in the age of turbulence” have presented a table on marketing function attributes. Out of the 14 attributes, below are 5 critical ones distinguishing between poor, good  and great marketing functions.

Srl    Poor                                        Good                                              Great

1. Product driven                    Market driven                                    Market driving

2. Product offer                       Augmented product offer                 Customer solutions offer

3. Price driven                        Quality driven                                     Value driven

4. Reacting to competitors    Bench-marking competitors             Leapfrogging competitors

5. Function oriented               Process oriented                                Outcome oriented

McDonalds marketing strategies reflect these attributes. In India, McDonalds is opening a purely vegetarian restaurant near Vaishu Devi ( a renowned Hindu temple) and Golden Temple (Sikh’s foremost gurdwara). It is catering to the Indian sentiments; in most religions Indians do not eat non-vegetarian food in a place of worship. Near the temples, generally local vegetarian eating joints thrive and there are no global food chains. The huge number of devotees provide a large market.

A few years back, McDonalds customized its menu according to Indian tastes and introduced vegetarian burgers. The McAloo Tikki (a potato burger) contributes to 25% of the total sales.  It may shock the Americans, but no beef burgers are served in India.

2. Evaluate Cost-cutting Measures

The attitude frequently is to cut costs across board. For instance, if marketing budget is XXX dollars, the total budget will be reduced by 25% without assessing the details and profitable products. Here risk managers need to assess the soundness of decisions taken to reduce costs. Below are a few examples to look for:

a) Advertising : Is the total advertising budget reduced? This would be a wrong move. During recession, the core products that contribute to revenue need aggressive advertisement. The advertising budget spent non-core products and loss making products can be dropped. Moreover, explore cheaper advertising models – social media, internet etc. and reduce budgets on paper and television media.

b) Discounts : Another option adopted to increase sales is to discount all products by a certain percentage. This is a self-destructive strategy as discounts on core premium products would damage the revenue stream in the long-run. If customers require cheaper products, cut the frills in the premium products and introduce a bare minimum model. This will maintain the brand and revenue.

3. Assess Strategy and Systems

Risk managers must assess the marketing strategy and systems to ensure that the risks are systematically identified in a timely manner. Here are a few examples of the same:

a) Core products: Does the strategy focus on core products? Are there systems in place to show the winners and losers? If the systems are inadequate profitability, market spend and customer behavior cannot be captured accurately. Hence, the organization will be unable to adapt strategy to the changing marketing trends and customer behavior. Moreover, companies cannot  reduce costs without identifying inefficient spending.

b) New products : Has the organization delayed the launch of new products during recession? The customers require cheaper products during hard times. Hence, the strategy should be to delay expensive products but focus on products that cater to the new customer requirements and changes in behavior.

Closing thoughts

With economies slowing down, the marketing functions are facing many challenges. Customers are better informed through social media and internet, competitors copy products faster, and price of the product is a driving factor. Risk managers can contribute by conducting risk assessments of the marketing function and helping the teams in identifying the upside and downside risks to their strategies. This is a good place to add to  profitability.

References:

1. Chaotics - The business of managing and marketing in the age of turbulence - Philip Kotler and Johan A. Caslione
2. Beefy McDonald’s to Open Veg-Only Outlet in Katra – Economic Times

Culture and Communication Risks

The two things bringing a cultural revolution globally are – recession and social media. Both nations and organizations are struggling to adapt to the changes required in mindset and behavior. Recession has ensured that the fittest corporate citizens are those who can operate globally, work where the demand is, and compete at a global level with the cheapest resources. Social media has connected everybody and everyone is accessible on the same platform. A CEO  is just a tweet away from Gen Y fresh graduate. The layers of authority and distance are diminishing. The organizations and employees that adapt to the cultural change quickly will thrive in the next few years.

Therefore, the need of the hour is to become a global employee with a capability to understand cultures of at least a few of the countries with high Gross Domestic Product – US, France, UK, Japan, Germany from the developed countries and Brazil, China, India, Mexico, South Africa and Russia from the emerging markets. Multinationals are trading with these countries and/or have offices in these countries.This cannot be taken lightly. The graph below from the Economist Intelligence report “Competing Across Borders” will help you understand the impact of cross-cultural communication.

About one-third of the respondents stated that profits, revenue and market share improved significantly with better communication. To counter the cross border communication challenges, organizations are focusing on providing cultural, linguistic and conflict resolution training. However, there is no simple solution. Though training might help, it gives a current scenario. Psychologists Dov Cohen and Richard Nisbett, conducted experiments to assess the probability of entering into disputes depending on the cultural background. They realized that current behavior of a person is influenced by history of couple of centuries. Where the person is coming from matters. Typically, a warrior class, such as Sikhs and Gorkhas in India, are going to be more aggressive in organizations. As leaders and employees both bring their personal values while at work, the corporate culture changes on the basis on the position and number of people  of a community.

Though this experiment raises questions on whether any individual can truly become a global citizen, it is a critical requirement. Disputes are caused due to cultural and linguistic differences as shown in the adjoining graph. Insufficient clarity in communication can cause major disasters, especially when bounded by cultural protocol. Malcolm Gladwell in his book “Outliers – The Story of Success” gave example of Korean Air. The airiline, Korean Air, during 1988 to 1998, had a loss rate of 4.79 per million departures. In comparison, American carrier United Airlines, for the same period had a loss rate of o.27 per million departures. That is, Korean Air was having 17 times higher loss rate than the American airline. It had 8 airplane crashes in the period.

The reason attributed for most of plane crashes was “unclear communication” and not plane defects or pilot inexperience. The Korean culture has high power distance index and the flight officers were unable to plainly tell their captains that they were flying on the wrong route, were out of fuel or weather was bad. Can you believe it, due to the respect and deference flight officers showed to their captains and officers in air traffic control rooms, over a thousand passengers lost their lives? Instead of taking control of the plane they chose to show reverence!

Another amazing fact mentioned in the book is that more planes crash when the captain is the pilot, rather than when flight officers are flying. Simply because when flight officers are doing something wrong, the captains due to their position of authority, do not hesitate to call out the mistake. On the other hand, flight officers chose diplomatic responses which have a higher probability of misinterpretation as severity of the situation is not conveyed clearly. Korean Air recovered and became a safe airline, after they trained all captains and flight officers on speaking clearly and plainly in English while flying, among themselves and the air traffic control rooms.

Looking from another lens, employees are less likely to highlight risks to seniors in countries and organizations with authoritarian cultures. Juniors may hesitate to paint the full picture explicitly for senior managers to understand high risk situations, and crises would occur without proper risk mitigation. Risk managers and crises managers need to be taught the art of clearly communicating concerns and issues.

Closing thoughts

English has become a global language, but without taking the cultural context it doesn’t make sense to a reader from another country. For instance, take a look at the blogs of  Americans, British, Australians and Indians, all are writing English but very differently. Just by reading the blog post, one can identify the country of the blogger. Hence, with increasing complexity in business, the nuances of communication become more important. Communication failure can cause disastrous consequences. When I am flying, I would prefer that the flight officer says to the captain – “Buddy, we are flying on the wrong course.”

Reference:

1. Competing Across Borders – Economist Intelligence Unit
2. Outliers – The Story of Success – Malcolm Gladwell

Performance of Indian Boards

The board of directors have the responsibility for steering the organization in the right direction and guiding the CEO and senior management. However, worldwide they are lambasted for catering to the manifested interest of CEO and senior management at the expense of shareholder interest. The criticism is that boards’ failure to maintain independence results in  under-performance.

A prime example is the decision of Satyam board to acquire Matyas. The board approved a deal of USD 1.6 billion to acquire Maytas Infra for USD 300 million and Maytas Properties for USD 1.3 billion. Ramilanga Raju after admitting the Satyam fraud stated that deal was to fill Satyam with real assets instead of fictitious assets. The scandal came out as shareholders refused to approve the deal and Raju didn’t have a way to cover the fraud. The recent case of  Kingfisher Airlines debacle clearly shows that the board was not asking the right questions.

Mr. N. R. Narayan Murthy, founder of Infosys, in his book “A Better India, a Better World” succinctly describes the prevailing trends. He wrote – “A a result, the 1990s was the era of the stock-option-fattened, superman-superwoman CEOs who could do no wrong in the eyes of their admiration-heavy boards, and who were seen as demigods. Lax oversight by the boards made these CEOS more or less omnipotent.” He has lead corporate governance in India by walking the talk and his scathing comments are right on target. He has given a number of suggestions to improve corporate governance and board performance.

Let us see, whether Indian boards are up to the task. To analyse the performance of the boards, I have taken the best practices of the board from the report of Trinity Group and Mr. Narayan Murthy’s book. The statistics are from  India Board Governance report 2011 and the relevant laws are from the New Companies Bill 2011.

1. Constitution of the board

Corporate governance practices mention ideal board size of 8-12 members with around one-third to half the members being non-executive and independent directors.  Indian boards on an average had 9.6 directors of which 5.2 were independent directors in 2010 and 60% of the boards have separate roles for CEO and Chairpersons. On the whole, this sounds good, however, in light of the additional information given below, the perspective changes.

a)    In 2010 in India, board chairpersons were members of 9.5 external boards though majority of the memberships were of private companies. According to the survey “the maximum public board memberships held by an individual was 12, and the maximum private board memberships a whopping 37″.

b)   The CEOs & managing directors were on an average board members of 7 external boards. “The highest number of public company board memberships held by a CEO was 10, whereas it was 32 for private company boards.”

c) Non-executive directors, on an average held a total of 6.7 total board memberships, with 2.1 public and 4.6 private memberships.

d) 56% of the directors surveyed identified the limited talent pool as an impediment, with 38% perceiving it as a major hindrance. Yet, less than 10% used search firms or other 3rd party sources to locate suitable talent.

The lack of experienced and trained directors is the key reason for a few directors available in the talent pool holding multiple memberships. When most independent directors are selected from the social circle of the CEO or Chairperson, there are very few who would not toe the line stated by the CEO. With the multiple holdings, a conflict in one board may impact the relationship in another board. Hence, instead of independence, diplomacy and self-interest prevails.

Mr. Murthy candidly mentions that “board independence from management continues to be affected by directors who have limited accountability to shareholders and are ill-equipped in exercising management oversight.” He stated that in Infosys, directors are given training and a job charter to ensure that they fulfill there responsibilities appropriately.

2) Strategy review by the board

According to the best practices given in the Trinity report, “the board’s primary responsibilities include : (a) reaching agreement on a strategy and risk appetite with management, (b) choosing a CEO capable of  executing the strategy, (c) ensuring a high-quality leadership team is in place, (d) obtaining reasonable assurance of compliance with regulatory, legal, and ethical rules and guidelines and that appropriate and necessary risk control processes are in place, (e) ensuring all stakeholder interests are appropriately represented and considered, and (f) providing advice and support to management based on experience, expertise, and relationships.”

On the other hand, the Companies Bill mentions the board’s power as: “ (a) to make calls on shareholders in respect of money unpaid on their shares; (b) to authorise buy-back of securities under section 68; (c) to issue securities, including debentures, whether in or outside India; (d) to borrow monies; (e) to invest the funds of the company; (f) to grant loans or give guarantee or provide security in respect of loans; (g) to approve financial statement and the Board’s report; (h) to diversify the business of the company; (i) to approve amalgamation, merger or reconstruction; (j) to take over a company or acquire a controlling or substantial stake in another company; (k) any other matter which may be prescribed“

The theoretical legal powers given are quite different from the actual working of an effective board. On an average in India in 2010, board members met 6.5 times during the year. The minimum number of meetings were four, that is a statutory requirement and maximum were 19 board meetings by a company. The boards met on an average three times during the year for strategic and business review.

Considering the number of meetings conducted by the board, with the legal responsibilities and practical requirements, it is not feasible for the boards to do a constructive strategic review of the business or provide regulatory oversight. Too big a mandate has been given, while the time spent on it is relatively small. It is not surprising that most boards are acting as rubber stamps to the senior management plans. It is a case of imbalance between power, responsibility and time commitment.

3. Focus on risks

After the Satyam scandal and financial crises, the board focus on risk management has increased. The boards ideally need to determine the risk appetite, review internal audit reports and external auditors reports, understand various strategic, financial and operational risks, and maintain compliance oversight.  In India, the Company Bill mandates an audit committee for listed companies, with majority being financially literate independent directors.

In 2010, in India, 69% of the board members respondents stated that boards are considering risks as top priority. However, 31% mentioned that boards are not involved in systematically addressing corporate risk management.

My view is that the focus on Indian boards is more on risk of misreporting financial statements rather than others. Risk management field as such is still in young stage in India, and board members are ill-geared or untrained on the various aspects.

4. Information availability

The decision-making of the board is subject to the information available with it. As per law, board members are ideally required to receive all relevant information about board resolutions and decisions, seven days before the meeting. However, board members responded that most of the documents are given prior to the meeting or just a couple of days in advance.

Moreover, “a vast majority of boards depend largely on management reports (90%) and informal management discussions (79%) for business information. Third party reports and stakeholder views are used as tools only by 23% of the companies.”

With such limited information, and high dependability on company sources, the directors may not be in a position to make informed decisions. The directors don’t even have sufficient time to study the presented information to make independent decisions and cross question the senior managers. Hence, this could be a key reason for poor performance.

5. Performance Review of CEO & senior management

The compensation committees recommend the CEO and other senior managers. In India, around 80% the respondent companies had a compensation or remuneration committee. The issue of CEO compensation isn’t as big as the western world, however, it is fast gaining prominence. Some high earning CEOs in the top 100 list are being evaluated on the basis of returns to investors.

The board as such has to evaluate  CEOs performance. In the west, the “star” CEOs are in the limelight and are paid high salaries in relationship long-term company performance. However, India scenario is different. Most of the critical positions in family organizations are held by family members and relatives. In such a scenario, the board or compensation committee are hardly in a position to evaluate the performance or recommend salary.

6. Performance review of board

As per law, the nomination committee reviews directors performance , and recommends removal. However, two-thirds of the independent directors stated the roles and responsibilities of non-executive directors are not defined clearly. Hence, without the clarity in role, the evaluations can hardly be constructive.

As such, the boards in India have the following three priorities: “ensuring overall corporate and statutory compliance (90%), monitoring business and operating performance (87%), and establishing and monitoring financial standards and internal controls (82%). Leadership development, succession planning, CSR and risk management continue to be low on the board priority list.”

The professionally run organization do claim for independent evaluation. For instance, Tata  and Infosys succession, the nomination committees were said to be doing independent evaluation. However, in both cases, questions were raised on the final selection. Though Mr. Murthy in his book mentioned that – “At Infosys, the chairman of the board sits with each board member, discusses his/her evaluation, and suggests remedies and course-corrections. The chairman’s performance review is handled by the lead independent director.“

In my opinion, the practice of evaluating board performance only exists in some companies in India.

Closing thoughts

Unless the mindset changes to compassionate capitalism where business is done with integrity, decency and in a principled manner, boards will continue to be tutorial heads without much power and say. To ensure boards perform better, shareholders and investors need to become more active. The regulators need to ensure governance codes are followed in spirit and not just tick box mentality. A more elaborate role can be defined by regulators with mandatory requirement of time commitment and reporting requirements.

References:

1. The Group of Thirty on Effective Governance
2. India Board Governance Report 2011
3.  New Companies Bill 2011.
4. Maytas- Satyam deal

Derailment of Leaders- Profiling Steve Jobs

The corporate world citizens operate on two myths – “We all are great leaders” and “We all have bad bosses”. We cling to these two fallacies with our dear life, most probably because if we let it go, corporate life may become unbearable. These two paradoxical statements make us feel better about ourselves as the delusional views cushion us from harsh realities.

The problem arises due to corporate world’s obsession with leadership. Interviewers question a 21-year-old fresher in the first interview about his/her leadership skills. After six months, s/he will give an opinion how the CEO doesn’t have adequate leadership skills. An employee will risk his/her career if s/he admits that they are good managers and do not have adequate leadership skills. This is despite the fact that most leadership surveys show that 50% of the managers are ineffective leaders.

On the humorous side it reminds me of Scott Adams definition of leadership – “Leadership is an intangible quality with no clear definition. That’s probably a good thing, because if people being led knew the definition, they would hunt down their leaders and kill them.”

On a serious note, I couldn’t help contemplating about Steve Jobs, considered the most successful CEO in our times. He is one of the few CEOs who was thrown out of the company he formed and came back to succeed beyond anyone’s expectations. On the positive side, people viewed him as a visionary, innovator and a driving force. Moreover, his negative traits were equally prominent. His teams said he suffered from “distorted reality”, bullied them no end and was extremely insulting. His professional career shows that in some ways he was an insufferable bad boss and an incredibly good leader. The complexities of his character make an interesting case study to assess leadership derailment.

I read his biography by Walter Isaacson and mapped his leadership skills to the traits mentioned in Michael James Benson’s research paper titled “A Walk on the Dark Side of Personality & Implications for Leadership (In)Effectiveness.” Briefly, it states that derailed leaders have same traits as successful leaders. However, they have additional traits and personality flaws that cause derailment. In Isaacson’s book, initially Jobs showed most of the traits that result in leadership derailment. In his second coming at Apple, he showed more maturity and balanced it out. A mellow version of his intense personality made him more successful.

It is important for risk managers to understand the derailment traits for leadership. Enron, WorldCom, Satyam are prime examples of leadership gone wrong. Prevalence of derailment traits and major personality flaws cause leaders to take unnecessary business risks, create dysfunctional work cultures and have low focus on corporate governance. As top management drives the risk culture in an organization, it is worthwhile for risk managers to assess their derailment characteristics.

In the following paragraphs, I am discussing five derailment traits and am exemplifying it with Steve Jobs life. Before you start reading it, remember all leaders have these traits. Leaders possessing these traits in low to moderate qualities continue to be successful. However, excessiveness of these traits causes derailment.

1.       Ego-centered

People close to Steve Jobs thought that he felt a strong sense of abandonment due to his adoption. This propelled him to consider himself special,  i.e. not required to follow norms of regular people. His ex-girlfriend Redse even thought that he had narcissistic personality disorder.

An amusing story about his employee badge showed his false sense of entitlement. On Apple’s formation, Scott assigned employee badge number #1 to Woznaik and #2 to Jobs. Steve demanded badge #1 and when he didn’t get it, he asked for  badge #0. He kept the badge, though Bank of America still processed his salary as employee number #2.

 His personality flaws showed in other small things. For example, he didn’t want a “reserved for CEO” parking slot, however parked his car in slots reserved for handicapped people.

 His ego-centrism drove Apple in murky waters. He wished to project the image that he didn’t work for money and took a salary of $1 per year as CEO. In 2000 when the board offered him $14 million stock options, he refused and asked for a plane. Subsequently, he demanded $20 million stock options. He received backdated stock options and although he didn’t make any monetary gains from it, Apple got some negative publicity as SEC investigated the case. Walter commented that – “On compensation issues in particular, the difficulty of defying his whims drove some good people to make some bad mistakes.”

 2.    Manipulation

 Everyone thought Steve Jobs was a master manipulator.  Sometimes, for him there was no difference between truth and lies. Bud Tribble one of his teammates said Steve doesn’t accept facts, which do not fit, into his picture. He said, “Steve has a reality distortion field. In his presence, reality is malleable.”  

 Another colleague Andy Hertzfeld said that even if one knew that Steve was manipulating, a person still was influenced. He stated- “The reality distortion field was a confounding mélange of a charismatic rhetorical style, indomitable will, and eagerness to bend any fact to fit the purpose at hand.”  

 Adding to the trouble, his teams complained that if their idea were a good one – “he would soon be telling people about it as though it was his own.”

 Apple employees though knew they had a difficult boss, still considered themselves lucky to be working for him. He inspired people to do what they thought was unachievable. Most probably because manipulators are great at cajoling, persuading and flattering people into complying with their wishes.

However, this did create a dysfunctional culture in Apple. Due to his oscillating behavior, his staff handled him like fragile glass. Most probably, Apple lost quite a few top performers because of this treatment given to them.

He definitely lost his job as a CEO because his manipulations caused turmoil in Apple in 1985. Apple board ousted him out and Sculley remained.

3.    Micromanaging

In some ways, Jobs can be categorized as a control freak. He chose to integrate hardware and software of his products to control customer experience. At one point of time, he banned download of applications to iPad and iPhone that defame people, were politically explosive or pornographic. He morally policed his customers.  According to him, he was providing his customers – “Freedom from programs that steal your private data. Freedom from programs that trash your battery. Freedom from porn.”

Throughout his career, he was at war with Bill Gates on open versus closed platforms. Gates promoted open systems while Jobs ardently opposed it. Though he professed to belong to hacker counterculture, he didn’t want people to be able to use Apple’s platforms without permission.

Even in designing and developing products, Jobs controlled every aspect of the decision-making. His teams while appreciating his capacity to go into the details, did resent lack of authority to some extent. He had the final say even on the look of the cord and sockets of the products. He ran the organization at 10,000 feet and zero feet.

The awesome bit is that with his ideas and approach he managed to change six industries and developed path-breaking products. In this, his customers were not complaining, his competitors were. His control philosophy made the technological world sit up and take notice. One has to marvel at it, and contemplate whether micro managing has benefits in some situations.

4.     Intimidating

Steve Jobs learnt his most effective intimidation trick from Robert Friedland in college. He unblinkingly stared intensely at others and them kept silent for a long time to unnerve opponents.

Moreover, if some project or product didn’t meet his “insanely great” standard, the product was shit and the guy was a bozo. His colleagues referred it to as “hero/shithead dichotomy”. He voiced his unedited opinions without the normal social graces that caused many of his teammates to breakdown emotionally. . His frequent unfiltered scathing comments were hurtful and created a fear factor. Although, known to be emotionally intelligent, he was unrepentant of mistreating others.

Though his behavior looked like my way of highway, he succeeded as he appreciated the people who confronted him. His teams could push back and if Steve found the person capable, he would respect the person. His Mac team gave an annual award to the employee who did the best job of standing up to him. “Jobs knew about it and liked it.”

However, in the second stint as CEO, his intimidating nature negatively affected independence of the board. For instance, he invited former SEC chairperson Arthur Levitt to join the board. But, when he read Levitt’s speech on independence of board, he withdrew the invitation on phone.

5.    Passive Aggressive

 Jobs was blatantly aggressive; hence, this trait didn’t fit his personality. However, his partner Steve Woznaik did show this trait to an excessive level. For instance, Woznaik was hesitant of participating in Apple in a leadership position. He said he was happy that – “I could stay at the bottom of the organization chart as an engineer.” He never attempted to be a manager or leader. He played the good guy image to the hilt. While he appeared satisfied for Jobs to take up the mantle of bad guy and fight the corporate battles.

Woznaik claimed in his biography that he did a job for Atari to remove chips and Steve cheated him of the bonus. He claimed  - “Ethics always mattered to me, and I still don’t understand why he would’ve gotten paid one thing and told me he’d gotten paid another. But, you know, people are different.” He further added – “I would rather let it pass. It’s not something I want to judge Steve by.”

 Steve Jobs on the other hand denied the allegation and said that he has always been fair to Woz. He said in his defense – “In mean, Woz stopped working in 1978. He never did an ounce of work after 1978. And yet he got exactly the same shares of Apple stock that I did.” It showed Woz avoided confronting Steve though didn’t mind maligning his reputation. Woz projected an image of childlike innocence. I suspect, without Steve Jobs driving force and personality Apple would have collapsed if Woz had become the torch-bearer.

Closing thoughts

Leadership is a complex phenomenon and the more I read about it, the more I think Scott Adams definition is accurate. There is a lot of truth in it. However, as risk managers we cannot take leadership derailment traits lightly. Excessive derailment traits create a dysfunctional organization culture. They are a harbinger of unprecedented risk taking activities. Uncontrolled behavior can put organizations in peril. Hence, risk managers need to devise ways to monitor it. They must ensure proper checks are incorporated in succession planning for early detection of derailment traits.

“One more thing”, what do you think it takes to become a Steve Jobs of risk management?

References:

1. New Explorations in the Field of Leadership Research: A Walk on the Dark Side of Personality & Implications for Leadership (In)Effectiveness - By Michael James Benson

2. Steve Jobs – Biography by Walter Isaacson

Risk Management Induction Training to Business Teams

I had joined a new company and was taking the induction training. I thought it would be a good idea to get fellow participants perspective.So I asked a young employee – “How did you find the risk management induction training?” He responded – “Was that training? It sounded more like a rulebook of corporate prison.” The training had bored me to death and I shared his opinion. I wondered whether risk management team took feedback seriously or were purposely designing trainings to turn off new employees.

Normally in India, a trainer reads out from the presentation the various dos and don’ts of the organization’s code of conduct, regulations impacting the organization and technicalities of business ethics. To enhance interest further some provide detailed information of GRC organization chart. The training comes to a dramatic end when in the last few slides, the trainer delivers the key message to the participants – We will fire you if you do not follow all this.

The newcomers already have butterflies in their stomachs. To add to their woes, we present a dry subject in a dull and boring manner. Then we expect them to imbibe the messages in their daily working life. Let’s face it, we are facing competition from Lady Gaga.  Gen Y is more likely to remember the lyrics of her song, than risk management training. To get their attention we need to reframe risk management training. There is no rulebook that says trainings must be without any rammatazz and unimaginative to the core.

Yeah, that's a HR Management book

I contacted Peter Cook, an unconventional and creative business author, speaker and consultant, to get his views. He is reinventing the art of human resource management. His recent book “Punk Rock People Management” is a winner. He innovatively connects human resource fundamentals with music. Unbelievable but true, you have to read one of his books to find out how he does it. His perceptive views on induction enormously impressed me. Here is my favorite paragraph from the book:

“Post-punk princesses Madonna and Lady Gaga unwittingly stumbled upon the problem of induction with their songs ‘Like a Virgin’ and ‘Bad Romance’ as did punk group The Boys with their minor hit ‘It’s my first time’. However good your hiring of people is,  failing to induct people properly can cost you in thelong run. Classical HR induction sessions emphasize all the statutory stuff, such as health and safety and getting your corporate identity badge (whilst losing your identity). But they generally fail to establish what is called a ‘psychological contract’ between the new recruit and the company, which leads to long-term performance and commitment. The costs of NOT doing this include rapid turnover, poor performance, corporate sabotage and mental sabbaticals (the lights are on but no-one’s at home) etc.”

Peter makes an excellent point about psychological connection. Risk management trainings fail to positively influence the participants. The lines below highlight the ridiculousness of expecting participants to be gung ho about the training.

“Imagine what would happen if this approach were adopted when you fell in love. You would have a ARRSE (Adviser – Romance Risk Strategy Executive) come along to show you some PowerPoint slides on the risks of falling in love,issuing you with badges to say you are officially in love, and so on. So, why does common sense go out the window when we enter the crazy world of work?”

 This prompted me to pick up three most applicable points for risk management induction training from Peter’s book and I requested him to share his views on the same.

1.    Understand the audience

The one-size fits all doesn’t work for risk management training. For instance, in Indian ITES sector, new employees join right after school. To them, terms like audit, fraud, ethics are practically incomprehensible. Their head will spin if we give them a download on various laws and regulations in the first training session.

The same applies in other industries also.The choice is ours – to be either amused or appalled at their naiveté.  The story below depicts the level of understanding of a fresh recruit.

An experienced purchase manager working in food and beverages industry was offended with a new junior. The junior had accepted a gift from a supplier in their first meeting. The purchase manager called the junior to his room and asked in Hindi –“Do you understand ‘AAchar’ (ethics)?“ The junior replied in English– “Of course sir, it means pickles (Achar).”

This is the risk managers’ starting point for training. Therefore, prepare a training calendar with various sessions over 6 months to bring them up to speed. Peter mentioned that there are 57 ways to train besides classroom training – workshops, e-learning, mentoring, storytelling,  etc. Identify the staff learning styles and develop the training accordingly.

2.    Make training fun

I know it is tempting to give a few thousand pages to read to the participants. That is what we, as risk managers had to do. But remember the training participants haven’t signed in for a risk management professional course. Don’t give them manuals in the name of e-learning. That’s only going to make them panic. Make it simple and fun. Peter succinctly put this point across in his book. He says create an environment where people are naturally engaged. For example, he wrote:

Pubs do NOT have mission statements that say:

 “We aim to encourage sociosexual networking and leverage mission critical knowledge, skills and wisdom through the use of addictive depressant substances in a relaxing lifestyle environment that encourages the suppression of societal norms of decency and so on”

If you read this statement while entering a pub, will you immediately fall in love with the pub or hesitate to enter? Same rule applies to induction training. Why not explain the statutory stuff without using the corporate and risk management jargon?

3.    Help participants succeed

The biggest obstacle in the successful implementation of risk management training, is the attitude of the risk managers. The managers sometimes focus more on the numbers covered so that they can tick off from their to-do list and report to compliance that training was conducted. The trainers are not accountable to make the business teams effectively manage risks.

Sometimes, when the classroom training is over the participants do not know whom to connect with if they have questions when they start working. In some e-learning courses the same problem is exists.

Peter gives some good advice here. He says - “Make sure that new people understand on the first day exactly what they can do to succeed. Connect the new members with the people who can help them do their best”

Closing thoughts

Use induction training as a starting point to develop risk awareness and culture within the participants. Don’t make it a big ruse to cover numbers. If the training is good, the new employees will become unofficial ambassadors of risk management. By creating the right chemistry, risk managers will have long term allies in business teams. Make the start a memorable and happy one for the new employees, and they will keep coming back for more.

Risk Managers Become Linchpins

Risk managers are under siege. They have to deal with various stakeholder expectations – regulators, investors, shareholders, board, CEO, CXOs and business teams. In most situations, they are outnumbered and overpowered. Most risk managers face some level of resistance. Some are mere cogs in the wheel to ensure organizational compliance to regulations. On the other hand, a few have mastered the art of becoming invaluable to the organization.  Accenture 2011 Global Risk Management Study segregates the best practices of “Risk Masters” from the general practitioners. The top 10% of the 400 respondents constitute risk masters group. The survey shows that the gap between the “best and the rest is increasing”. Check the graph below to understand the huge difference.

Accenture 2011 Global Risk Management Study

The interesting bit is that about 75% of the respondent organizations had revenues above USD 1 billion. That means the analysis of risk management functions is amongst the top performers of the industry. Hence, the question is – in the best of class organizations why there is a difference in focus and perception of risk management functions. What has made a few risk managers linchpins?

Seth Godin describes three categories of people in his book Linchpin – (1) Linchpins, (2) Supporters and (3) Leeches, devils advocates, pessimists and obstructionists. Don’t mind it, but frequently business executives think risk managers belong to the third category. They think risk managers as naysayers, problem creators, critics etc. The point to think is that at least 10% of the organizations consider risk managers as Linchpins. So what are these risk managers doing differently from the rest?

Accenture report highlights some of the best practices Risk Masters adopt.

1. Be a source of competitive advantage
2. Participate in key decision-making process and developing strategy
3. Use sophisticated analytic and modeling tools to predict risks.
4. Deliver business solution by going beyond compliance mindset
5. Integrate all GRC functions
6.  Appoint Chief Risk Officer reporting to CEO
7. Build risk culture within the organization
8. Invest in tools, technology and other risk resources.

 Now the above key points are not new to us. The difference is that some risk managers successfully implemented them, and others are still struggling. We can safely assume that most risk managers working in organization with over USD 1 billion turnover have the required domain knowledge and qualifications. If we do not take the victim mentality of blaming senior management and organization culture for lack of support to risk management functions, then we have to acknowledge that some soft aspects are at play.  Question is –what are these soft aspects which make them Linchpins?

According to Seth Godin – “Linchpins are the people who make a difference, the ones that ship, the rare ones that truly have an impact. This group of people, in that moment of time, change everything.” Linchpins are valuable as they are irreplaceable and indispensable. The Linchpin’s attributes are:

 1.    Provide a unique interface between members of the organization

 Seth Godin – Linchpins help lead and connect to people with finesse.

 Risk managers frequently are unable to connect to business executives’ mission, vision and plans. Although they are in a position to provide a unique interface, they compartmentalize the business problems according to business departments or risk departments. Hence, the business executives become resistant to suggestions of risk managers as they don’t give business solutions.

 2.    Deliver unique creativity

 Seth Godin – Unique creativity requires domain knowledge, a position of trust and the generosity to actually contribute.

 Most risk managers have the domain knowledge, however may lack the other two aspects for unique creativity. Gaining trust of business executives is difficult especially if risk managers are not handholding them through tricky business situations. Secondly, risk managers focus on going by the rulebook, audit programs and manuals. They may hardly indulge in creative thinking to provide competitive advantage.

3.   Manage a situation or organization of great complexity

 Seth Godin – Linchpins make their own maps and thus allow the organization to navigate more quickly.

 With globalization and technological advancement, organization complexity has increased. Risk managers need to address – financial, operational, legal, reputation, political, business, strategic, market, credit, liquidity and emerging risks. Since risks are inter-connected, working in silos results in unaddressed risks. Old approaches are redundant and new maps are needed to address risks in a more holistic, integrated and strategic manner. GRC functions need to be integrated under a Chief Risk Officer.

  4.    Lead customers

 Seth Godin- As markets fragment and audiences spread, consumers are seeking connection more than ever.

 Risk managers stakeholder demands are increasing and they are facing challenges due to lack of internal selling capability. The compliance mindset with tick in the box mentality is restricting them from providing strategic guidance to Board/ CEO/ CXOs. They are waiting to take orders from senior management instead of influencing them by presenting good business cases. Hence, risk managers are failing to connect with senior management.

 5.    Inspire staff

 Seth Godin – Understanding that your job is to make something happen changes what you do all day. If you can cajole, not force, if you can lead, not push, then you make different choices.

 Risk managers are relying on bureaucracy to get their job done. With the old mindset of an auditor, they wish business executives to comply. They don’t realize that business executives cannot comply when they don’t know what to do next. With new products, markets and technology, risks are forever changing and new ones appearing. Risk management is no longer a cut and dried checklist driven task. Hence, risk managers fail to build a risk culture within the organization.  

 6.    Provide deep domain knowledge

 Seth Godin – Mapmakers often have the confidence to draw maps because they understand their subject so deeply.

 The complex economic environment requires a deeper understanding of systemic and emerging risks. The financial crisis has shown that financial institutions failed as they launched products with inadequate understanding of risk components. Domain knowledge coupled with strategic direction gives business team great advantage. The superficial regulatory compliance adds limited business value.   

 7.    Possess unique talent.

 Seth Godin – When you meet someone, you need a superpower. The ‘super” part and ‘power” parts come not from something you’re born with but something you choose to do and, more important, from something you choose to give.

Risk management is a fast changing discipline. Twenty, ten and fiver year old qualifications, procedures and knowledge are passé. Those relying on excel worksheets and out-dated software will fail. It is a world of analytics, data mining, risk business intelligence reporting, software solutions etc. Upgrading skills and domain knowledge is a necessity to address current day risks. Without the talent, knowledge and insight, there are no takers for risk manager’s advice.

Conclusion

 In nutshell, while the best practices for risk management functions are known, quite a few risk managers are failing to meet the required performance level. Hence, take a deeper look to assess the reasons for failure and decide whether different soft strategic approaches will benefit the organization more.

So, can you become a Linchpin risk manager? Up to you.

References:

• Accenture 2011 Global Risk Management Study
• Seth Godin’s book Linchpins

Leading Risk Management Function with Emotional Intelligence

Have you ever felt as a risk manager that business teams don’t want you around them? Behind your back business teams in three words describe you as “critical slimy burger”, in two words “painful preacher” and in one word “#@$&^@#$”. Your ideas and opinions are strongly opposed and good ones too sink due to death-by-association syndrome.

Sometimes, from top to bottom levels of the organization business executives stonewall risk managers’ efforts and the risk management team faces this antagonistic attitude.

Ascending the Maturity Curve - Economist Intelligence Unit

Even the Chief Risk Officer (CRO) and other risk managers fail to cut ice with senior management. A recent report “Ascending the Maturity Curve” published by Economist Intelligence Unit shows that just 28% of business executives consider CRO and other risk oversight members as usually helpful in achieving business objectives. The adjoining graph reflects that thought process of business executives about risk managers.

In light of this, it is clear that risk managers face a challenging and conflicting relationship with business executives. These issues make risk managers’ jobs notoriously frustrating and thankless. Hence, risk managers need a solution to be effective.

 I thought it might be a good idea to study why business teams react negatively and how to make then think positively about risk managers. I read Daniel Goleman’s book – The New Leaders, which covers ways to use emotional intelligence in leadership. It sheds light on disastrous leadership outcomes when leaders deal with teams without sufficient emotional intelligence. There are a number of lessons for risk managers to learn from the book and here are some of them.

Briefly, Goleman has described resonant and dissonant leadership styles. Resonant leaders attune to other people’s feelings and communicate emphatically to move their feelings in a positive direction. While dissonant leaders fail to recognize feelings of the people they are dealing with and create negative emotions – anger, frustration, fear – in them. He has defined six leadership styles, four are resonant and two are dissonant. In my view, risk managers reflect these leadership styles and a better understanding of it will help them in building relationships with business executives and within the team.

1.   Visionary style

According to Goleman, visionary leaders articulate the purpose that rings true for themselves, and attune to the values shared by the people they lead. This also initiates transparency by removing barriers and smokescreens within the organization. However, the downside is that visionary leaders sometimes sound pompous and overbearing.

In my view, when CROs and other risk management seniors adopt visionary leadership they facilitate business teams in seeing the bigger picture. The risk management functions are perceived negatively as they adopt a check box mentality and highlight small regulatory issues as major problems. They sometimes do not spend adequate time with business teams articulating how risk management will benefit them in achieving business objectives. Hence, business executives are resistant to suggestions, as they have limited idea on how their risk management ties up to the overall corporate mission, vision and strategy.

Here, the takeaway is that risk managers need to sell the bigger picture of risk management functions and trust the business teams to identify and mitigate risks. Understand the need of business teams to feel important that their work matters.

2.   Coaching style

Goleman states coaching style builds rapports and deep emotional relationships; however, most leaders tend to ignore it. It is a resonant style if done properly. When executed poorly coaching looks like micromanaging or excessively controlling. He further adds managers are inept at giving performance feedback that builds motivation and not fear and apathy. Hence, give coaching that makes the employee feel that it is in their best interest rather than feel manipulated and attacked.

According to me, this is the crux of the problem. Risk manager’s role – especially the compliance and governance – demands identifying weaknesses in business operations. Frequently, risk managers issue draft and final reports to senior management without really explaining the details to the middle and junior level executives. This causes anxiety and fear in business teams. 

Psychologically, mild anxiety results in attention and energy to the job, prolonged distress hampers work performance.  Secondly, chronic anger, anxiety and sense of futility cause emotional hijacking.  Considering this aspect, it isn’t surprising that in long-term audit or investigation assignments, the business teams are distressed. If risk managers do not provide periodic updates on their observations, the continuous anxiety results in negative reactions. Here regular coaching becomes essential.

Therefore, risk managers must attune themselves to the emotions created by their work and communications in the business teams.  Give feedback in a way that doesn’t diminish the value of work being done by the business team.  Not in a manner where the person feels that, s/he is the problem.

3.   Affiliative  style

In Goleman’s view, affiliative style represents collaborative competence in action. This style is good for relationship building as it promotes harmony and friendly interactions. It allows a person to be kind along with being candid. However, the negatives of this style are that it can drive down performance if constructive feedback is not given or if used in a disaster scenario, the person may appear clueless.    

 In my opinion, risk managers can use this style to build relationships with CEO, CXOs and Board. The risk managers are not getting a seat at the board level or do not have sufficient visibility with the CEO. Hence, a few organizations have a slip-shod approach to risk management.

The messages given by senior management on risk management build the risk culture within the organization. According to Goleman’s study – “Roughly 50% to 70% of how employees perceive their organization’s climate can be traced to the actions of one person: the leader”. Hence, CEO’s actions and sentiments towards risk management get reflected throughout the organization. Therefore, relationship building is critical at this level for risk managers. Become a friend of the CXOs.

4.    Democratic style

Daniel Goleman says that democratic style is generally the most successful resonant leadership style. Leaders discuss issues, listen to others, take feedback and then make a collective decision. The advantage is that there is limited backlash for harsh decisions as it builds trust, respect and commitment. The disadvantage is that over-reliance on this approach results in endless meetings without firm direction.

My outlook is that auditors and compliance officials cannot adopt a democratic style for conducting an assignment, as it will hamper independence.

Nonetheless, democratic style should be adopted for recommendations and improvements in business. For example, if process re-engineering or additional controls are being suggested, it is useful to listen to business teams and discuss the solutions to them. The business teams are closest to the problems. Hence, the style benefits when risk managers perform advisory or consulting assignments. It is also a useful tool to understand the business executives concerns and anxiety points. Let the business teams take decisions about risk management and ownership for the same.

5.   Pace-setting style

Goleman says that in modern times pacesetters are thought of as good leaders since the leadership style adds to the bottom-line in short-run. Pacesetters focus on performance and excellence. However, if the leader drives employees too hard the morale plummets. Pace setting only works when employees are self-motivated, highly competent and need little direction. Meeting high standards of excellence has a cost, as it is task focused and not people focused approach.

There are two key insights to be gathered from Goleman’s analysis. The first one is that if CEO and board are driven by quarterly results and showing good performance, in the long run the organization is likely to pay a huge price. Hence, CROs need to monitor this form of leadership and culture, and guide the senior management.

The second aspect is the CROs and other risk managers need to ensure that they themselves do not become aggressive pacesetters in their functions. Sometimes the targets on number of reports, project timings, and quality of work become so critical that CROs ignore other aspects. In these situations, the star techie gets promoted who may not have adequate leadership and people management skills. Hence, there is burnout in the risk management team and conflicts with business teams. This is a dissonant style of leadership hence use it with care.

6.    Command style

The command style though frequently used is the most dissonant style as per Goleman. It is a coercive style – do it because I say so – being the message that makes employees feel threatened and intimidated. It is least effective as an intimidating cold leader contaminates everyone’s mood and the quality of overall climate spirals down. Employees think of it as a reign of terror so stop bringing bad news as the bearer is killed. The upside is that in crisis this style is effective.

A risk manager may claim that their role is recommendatory in nature and they do not have line authority over business teams. Hence, this kind of situation would not result from their actions.

On the contrary, if risk managers start playing political games and use their negative findings to downgrade a business executive’s career, the same results will ensue. Hence, they definitely have responsibility to ensure that their actions do not intimidate business teams or make them feel threatened.

However, if they are doing a million dollar fraud investigation or detecting a data theft situation, this style will work. It will reduce panic in the business teams since someone is in command and is showing direction.

Closing thoughts

As I read the book, one message was clear – risk managers need a range of leadership styles to be effective.  Risk managers emotional intelligence determines their success and failure in building relationships with business executives.  In Goleman’s words –

“The triad of self-awareness, self-management and empathy all come together in the final emotional intelligence ability: relationship management. Managing relationships skillfully boils down to handling other people’s emotions.”

Here is a clue. Psychologically laughter is the easiest way to create positive emotions. So risk managers leave your serious-brow furrowed look and smile.

References

Book: The New Leaders – Transforming the art of leadership into a science of results – Author Daniel Goleman

Report: Ascending the maturity curve -Effective management of enterprise risk and compliance – A report from the Economist Intelligence Unit Sponsored by SAP

Good to Great Risk Management

In the aftermath of the financial crises, it would seem fair to presume that risk management functions now have higher visibility, authority and influence. However, a recent report “Too good to fail” issued by Economist Intelligence Unit covering financial institutions and insurance companies shows contrary results. The report indicates that only one-half of the respondents say that risk management function has gained authority. The other half state it has remained the same or declined. Nearly 35% state poor communication between departments as one of the key barriers to risk management. Lastly, progress on revamping and strengthening risk management departments has slowed down. The graph below points out the problem areas:

Too Big To Fail - A report by Economist Intelligence Unit

This graph to me shows that risk managers didn’t properly leverage the lessons learnt from the economic crises and have failed to make a long-term improvement. Risk managers in financial institutions are the best of the breed and still failed to cut ice with business teams. While CFOs have entrenched themselves in the boardrooms, CROs still face a daunting road ahead. Hence, the most difficult question that most risk managers face today is – how to build a risk management function valued by board and business teams.

I was reading Jim Collins book “Good to Great” in which he has developed a framework for transforming good to great companies. I contemplated on ways to apply the framework to risk management function. It was worthwhile exploring the idea and here are some of my thoughts on it. Hope you find them useful.

1.    Level 5 Leadership

The book mentions that at the time of transition of a company from good to great category, the CEO was a level 5 leader. Two main traits – personal humility plus professional will – identify a level 5 leader. The level 5 leader puts organization goals before personal agendas. In contrast the level 4 leader shows the big dog syndrome; an egocentric drive for personal greatness with the organization becoming a monument to their ego.

In my view, in most organizations risk management function is in a transition stage. It needs to make that big leap to become a primary business partner. To do so, CROs and other heads of risk management department need to become Level 5 leaders. Secondly, to be successful they need to have their second-in-commands and/or successors also to have level 5 leadership skills. In short, replace the “I” with “We” to collaborate with business teams.

2.    First Who, Then What

Jim Collins has aptly summarized the importance of right people – “If we get right people on the bus, the right people on the right seats and the wrong people off the bus, then we will figure out how to make it someplace great”.

I think most of the risk management functions suffer because of lack of appropriately skilled resources. For example, in India risk managers are technically good however lack communication skills. In the EIU report, Neil Owen regional director at Robert Half Financial Services Group, a recruitment consultancy, hit the nail on the head by saying – “A high-performing risk team will be made up of individuals with different strengths—both commercial and technical”

 The message is clear, get the right skill set mix in the team and structure the department appropriately. Break the silos between different risk management functions to give accurate, timely and summarized information to business teams.

3.    Confront the Brutal Facts

Risk managers crib list is quite long. It goes – CEO doesn’t give us time, board ignores us, business teams don’t listen to us and on and on. The gist of it is risk managers are blaming everybody else and are not looking in the mirror for their own shortcomings. The irony is that while risk managers find shortcomings and problems in business, they are unable to see their own reality. The graph below depicts the barriers to risk management.

A graph from Too Good to Fail - A report by Economist Intelligence Unit

Risk managers must initiate dialogue and debates to identify brutal facts without playing a blame game. As mentioned in the book, adopt “The Stockdale Paradox – Retain faith that you will prevail in the end, regardless of difficulties and at the same time confront the most brutal facts of your reality, whatever they might me.”

4.  Hedgehog Concept

 In the next step Collins wrote -“The fox knows many things, but the hedgehog knows one big thing.” According to him, people with hedgehog traits “simplify a complex world into a single organizing idea, a basic principle or concept that unifies and guides everything” He has further defined the hedgehog strategy as intersection of three circles –“ what are you deeply passionate about, what drives your economic engine and what can you be the best in the world at.”

 In my view, this is the crucial bit where risk managers are missing the point. As the EIU report states, just 60% of the respondents have a clearly defined risk management strategy. Now these may or may not be addressing the strategic risks of the organization.

 Hence, risk management functions need to develop a hedgehog strategy with everything else falling in place around one simple idea. To give a clue, they are passionate about risk management, need to align the strategy to economic drivers of the business and identify the risks to ensure that the organization is best in the world in its area.

 5.    Culture of Discipline

Collins explained the culture of discipline using the analogy of an airline pilot. A pilot has freedom and responsibility within a framework of highly developed system. Regardless of the information and guidance from ground control room, the pilot has the ultimate responsibility for the safety of the passengers.

 Developing a risk culture within the organization is similar. As Professor Board of Henley Business School stated in the EIU report – “The business should be in a position where it’s not taking gratuitous risks and doesn’t want to do so. Ideally, there should be an autonomous, risk-aware culture in the business that requires only limited intervention from the risk function.”

 I have said before and am repeating it again, building a risk aware culture within the organization is of paramount importance. Risk managers need to train business teams to have the discipline to formally identify risks for each decision and mitigate the same. If it is outside business teams experience or bandwidth, the risk managers must hand hold the teams.

 6.    Technology Accelerators

I really appreciate Collins insight on use of technology in organizations. He summarized it as follows – “How a company reacts to technological change is a good indicator of its inner drive for greatness versus mediocrity. Great companies respond with thoughtfulness and creativity, driven by a compulsion to turn unrealized potential into results, mediocre companies react and lurch about, motivated by fear of being left behind.”

 On the other hand, the EIU report states the following – “Despite this continuing investment in data and IT, the problems are far from being addressed. Most institutions have a patchwork of systems, often as a legacy of mergers and acquisitions, which are incompatible with each other.”

The CROs problem is clearly identified – with multiple platforms and systems it is hard to get accurate data to identify risks in a timely manner. The alternative is that CROs invest in risk management software and systems that facilitate in identifying and managing risks. Some CROs are still slow in investing in technology and this mindset needs to be changed.

 Closing thoughts

Collins captured the transformation of good to great companies in the following words –

“No matter how dramatic the end result, the good-to-great transformations never happened in one fell swoop. There was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no wrenching revolution. Good to great comes about by cumulative process- step by step, action by action, decision by decision, turn by turn of the flywheel – that adds up to a sustained and spectacular results.”

In one line, risk managers need to adopt this motto to transform risk management function from good to great.

References:

1. Report – Too good to fail? - New challenges for risk management in financial services A report from the Economist Intelligence Unit
2. Book: Good to Great – Author Jim Collins