In this recently ended economic bubble, too many companies isolated the function of risk management to a few select individuals. Meanwhile, a broad spectrum of people had risk-taking, broadly defined, within the scope of their roles. This imbalance is one finding from a recent study of how major corporations are changing tactics in 2009, completed by Ernst & Young and articulated by firm partner, Paul Battista on Business News Network last week.
Battista believes that in 2009 many companies will work toward institutionalizing a culture of risk management, insisting that all employees think about potential threats as well as work toward helping the company be sufficiently flexible to handle the unexpected.
Extrapolating from this information, it suggests at least two major changes to workplace culture during these uncertain times:
- New ideas or new innovations will be more closely scrutinized. What will the implication be for short-term cash preservation? What will it mean for attracting and retaining clients? What will the implication be for long-term goals?
- More human resources will be dedicated toward assessing different short- and medium-term business climate scenarios.
- And, I predict, this time around, people at all levels of organizations will be asked to participate. Younger workers likely tune into business news and industry trends in different ways from their baby boomer bosses – using and viewing Twitter, blogs, and RSS feeds with greater regularity as well as tapping into the observations of Facebook friends.
What has changed in your workplace culture since the economic slowdown hit?
January 19th, 2009 at 8:26 am
Very prescient, Wendy. On a personal level, I know that people around me are far more interested in economic affairs than they were before, and begrudgingly taking an interest in the “small print” of deals, checking out ownership of companies they’re dealing with etc.
Your point about a tendency to be risk-averse chimes rather awkwardly with the calls of many here in the UK for the government to condition bank bailouts so that banks have to lend to SMEs. In a risk-averse culture, surely the rate of new business start-ups slows, the banks themselves will limit the loans, and consumers will be reluctant to switch suppliers?
February 2nd, 2009 at 7:05 pm
Wendy, your post seems to suggest that an improved culture of risk management on the part of individual firms could play a preventive role in the next great economic crash. However, for this to be effective, you’d have to somehow convince each individual firm to prioritize the health of the greater economy over their immediate profit margins. That is to say, if you can’t ensure that everyone is avoiding the same risks, then someone is going to profit big time from choosing to take those risks. These risk-loving firms might even survive to profit from these risks long enough to inspire a market trend, which would pretty much force all their competitors to take those same risks just to remain competitive in the market; to do otherwise is pretty much tantamount to market suicide, and you couldn’t ask a company to willingly kill itself based on some risk management analysis, right?
In my mind, there’s no better example of this conundrum than the root of the financial crisis: the sub-prime mortgage industry. In a recent blog post (Part 1: Our Anemic Economy, the Question of How vs Why), I posed a hypothetical story of a moral-bound investment bank CEO who diligently foresaw the risk in certain lawful malpractices that would eventually lead to the great crash of 2008. I know this is unlikely, but let’s just assume he had a great, great risk management staff hehe. If this CEO had decided to refrain from messing with sub-prime mortgages on the basis of his risk management analysis, I’d bet he would be out of a job pretty quick. Considering how lucratively the market was trending toward profiting from manipulation of sub-prime mortgages, do you think his shareholders would have believed his prophetic warning of 2008? No way! Times were way too good to be thinking anything bad could actually happen.
Don’t get me wrong though, betting against market trends on the basis of risk management is not a futile undertaking; in fact it is crucial in a healthy economy. However, as I argue above, long-running market pitfall trends (like sub-prime mortgages) cannot be prevented by the risk-adverse actions or inactions of individual firms because market competition would eventually force everyone to join the big race to the bottom. Please tell me if I’m wrong!
That said, I agree that prevention is key since there is no stopping certain market trends once they get underway. However, I just don’t see how relying on the risk-adverse decisions of individual firms can produce the desired preventive effect any more than the most centrally planned economy could have prevented today’s cataclysmic situation. Yes, people run the markets but more often than not, the markets end up running them. What is to be done???