The macroawareness challenge

Get free weekly news by e-mailMacroawareness of risk – is this really a reasonable expectation of executive leadership and the board? By Joe Long

Although it can be argued that there is nothing new under the sun, today’s business climate mirrors nothing like we have seen in the past. Over the last decade, the speed of the news headlines is only rivaled by society’s appetite for more and more news. From daily blogs to twitter to the myriad of news channels covering every business nuance worldwide, top executives for large organizations are expected, if not required, to stay on top of everything that has the potential to affect their business. Therefore, in spite of the very real threats of terrorism, pandemic, global warming, global economic meltdown, supplier bankruptcy, cyber attacks, etc.; the single biggest threat to directors and officers right now is the inability to sustain ‘Macroawareness’.

It is our belief that through proactive steps to shore up the resiliency of an organization, senior leadership can feel reasonably comfortable that their operations can absorb and recovery from a major disruption. Of course, this assumes that the disruption stems from some internal ‘meltdown’. However, as we are all witnessing today, the things that may permanently destroy an organization are often factors beyond their control. For illustrative purposes, let’s consider GM’s bankruptcy announcement in 2009. It is reasonable that a number of key debtors and creditors were in the loop. The dealer network was probably given a heads-up, and I would suspect that a whole swath of tier 1 suppliers were manning their ‘war rooms’ to contemplate the impact of a GM bankruptcy. In this case, the directors and officers of the companies tied to GM would have a reasonably easy time preparing for what some saw as inevitable.

Now if you turn the same situation around and select a supplier bankruptcy as the ‘flashpoint’ for a downstream customer disruption, how would the situation change? Would the customer have immediate insight into this unfolding situation? Will there need to be a need for an emergency meeting with the board to consider options? If an emergency meeting is called, will the board challenge the CEO on why he/she was unaware of the situation with one of the company’s suppliers? Was this risk contemplated in the ‘risk factors’ of the most recent Form 10-K?

Depending on where this supplier ranked on the organization’s list of critical suppliers, this situation may not have created a major problem for the customer. In addition, if the customer had a relatively robust process for assessing supplier resilience on an ongoing basis, this issue would have probably been flagged up well before the supplier announced bankruptcy. In both examples above, an organization’s ability to deal with major issues is inextricably tied to key leaders having access to good information at the right time.

So how can directors and officers bolster their Macroawareness? One suggestion is to pay closer attention to those who manage risk throughout the organization. To do this, an organization must adopt a fully integrated approach to resilience where both strategic and operational risks are constantly monitored and regularly reported to senior leadership. Unfortunately, risk and resilience too often become add-on agenda items that are easily cut when there are too many meeting topics.

As a result of this seemingly benign disconnect, senior leaders subconsciously undermine their own Macroawareness in favor of strategic issues they deem to be more business critical (e.g., service/production, revenue, quality, cash flow). To overcome this attitude, some companies are now looking to fully embed risk management into all facets of companies operations to better protect people, revenue and reputation.

Author: Joseph E. Long, ARM, CBCP, is the founder and managing director of Solomon Joseph – an operational risk consulting firm based in Tampa, Florida. He is a highly experienced senior risk management professional with nearly 15 years of experience in the automotive, aerospace OEM and management consulting industries. Mr. Long’s key areas of expertise in corporate risk are: corporate insurance, business resilience and continuity, corporate risk assessment, enterprise risk management, supply chain resilience and crisis management.

•Date: 23rd April 2010 • Region: US/World •Type: Article •Topic: Operational risk
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