Looking at the people side of risk

I was reading the McKinsey article by Alexis Krivkovich and Cindy Levy called ”managing the people side of Risk” which promote the argument that a strong risk culture can mitigate risk and maximize opportunities for business development. The idea seems appealing, that with the right leadership it is possible to implement the right type of risk culture and thereby enabling companies to “[acquire] new businesses, entering new markets, and investing in organic growth”.  However, this functionalist, positivistic idea of culture and risk does leave a lot of questions unanswered and possible constitute a risk in itself. Their main arguments can be split into three headlines.

Culture as a static entity

Is a risk culture something you can implement? Well, I will let it be up to you but from my almost 20 years in private an public organisations I can’t come up with just one example where a risk culture or any other culture have been implemented by management. I have seen many attempts, but never a successful one. The reason is that a risk culture can only be identified retrospectively. You only know that you have a successful risk culture if risk does not materialize into issues and tangible threats, on the other hand it could be that no issues arise because that issues and threats are simply not there. So the question is then, who can identify the culture if you have a strong risk culture if it is impossible to measure? Maybe it takes a McKinsey consultant…

People is the problem not the solution

Management rule their organisations like kings who can choose how individuals think and act in the world around them, or at least this is the claim of McKinsey. In their paper it is the idea that management have in-depth insight and knowledge about all the actions of their employees and that successful companies are the ones that have as much (mind)-control over their employees as possible. However, while we might strive for improved control and efficiency of organisational processes it’s only a few (feebleminded) who will claim that they have total control of employee’s actions. I think that we should count ourselves lucky that we do not have this type of control as adversity fuels organisations ability to innovate and develop and that striving for increased control on the magnitude indicated by the authors will only lead to organisational demise. So instead of perceiving people as the problem organisations should look upon people as the solution to mitigation of risk, not the cause.

Risk is universal

The claim is that successful organisations are the ones that hold people accountable for mistakes made – “To make aspirations for the culture operational, managers must translate them into as many as 20 specific process changes around the organisation, deliberately intervening where it will make a difference in order to signal the right behaviour.” It is not my claim that individuals should not be held accountable for their actions, but it should only be the extent that they actually have control. As risk is universal (fuelled by human actions and decisions) it cannot be one role or person sole responsibility to identify and mitigate risk. It would be impossible for one person to process just a fraction of the information on possible outcomes that organisations produce every day. Rather organisations should empower and disperse decision making to all individuals and groups in the organisation and hold them accountable for their own decisions and its consequences. The role of management becomes one of encouragement and support rather than control and punishment. They are there to ensure that people with right type of training and personal competencies are invited to participate in the continued development of the organisation so that they are equipped to handle mitigate or take advantage of the operational risks that they are facade with.

Mckinsey_MoF46_Managing people risk_

CSR as Supply Chain management

One area where CSR stakeholder engagement/management has been very effective is in managing corporate supply chains. For most businesses but especially for retail, the supply chain can be very comprehensive and might include several tiers before arriving at the primary supplier (Halldorson et al, 2007:286). In a CSR context the supply chain represent a unique set of challenges as it stretches the moral responsibility of the corporation outside its direct sphere of influence. It has been proven time and time again that even though the company might not have direct management control they are still held accountable for the decisions made in their supply chain both up and downstream (Austin & Reavis, 2004, Baron et al, 2004).

Effective supply chain management encompasses much more than just CSR issues but the idea of sustainable supplier relationships are becoming increasingly important. Where time, quality and price used to be the drivers for the logistics chains more and more companies are finding out that the “how” of production and transportation is on the “radar”. The question of how goods are produced and transported becomes most salient when companies start to source into areas where different management cultures, labour laws or governance practices are in place. Issues that companies in one part of the world take for granted is something that people need to fight for in other places. The challenge then becomes how to manage this diversity over a string of different supplier and customer relationships. A common approach adopted to manage supply chain is using Code of Conduct to gain some form of control over the suppliers (Vogel, 2008). Even though it is far from a foolproof system it does present a platform from which the company can get an overview and thereby a possibility to manage its organisational risks in its supply chain. For retail businesses a systematic system of information gathering, risk analysis and auditing is essential and will always have to be a cornerstone of CSR efforts.

It is the secondary effect that is central

When working with CSR we like to believe that there is a cause effect relationship between the activities that we engage in and the results we can measure. But we often overlook that it is the secondary results that represent our greatest achievements.

Most organisations look at the direct effects of communication technology like CSR systems and efforts to introduce sustainable technologies with a communication component. There is no doubt that there persist other perspectives on how organisations can achieve sustainable business development but in all cases is the communication part central. To illustrate one can look at CSR as part of the branding strategy of companies that in order to boost their image advocate their products as green or sustainable. This I will characterise as a 1st order communication strategy like a cause-effect system of meaning.

 

We can look at communication technology like CSR as “what management wants”. This can be decentralisation into global teams, working from home systems or technologies that enable projects to work cross boarders. The common denominator for these communication technologies is that they enable people to process more data more efficiently or/and with greater ease. However it is often the side effects or secondary effects of the introduction of a CSR systems approach that have the greatest impact on business development, an effect that is often ignored or underestimated in the original prospect. So what management wants is often not what management really gets because the secondary effects outweigh the first order ones.

So what does management need to look out for when implementing a new technology, like CSR. First of all one should not underestimate the effect of cultural changes. Organisations cant implement a new technology without assuming that people will do their tasks differently meaning that they will use or at least relate to the introduction of this new process that is presented. They do not have to embrace CSR but the presence of systems that coerce employees to relate to something than them selves will force a cultural change no mater what. One could say that CSR questions the status quo forcing employees to ask themselves; “who are we as and organisation and how do we interact with people outside”.

Another effect closely related to cultural change is the raise of new types of conflicts. When people question their own ethics they will natural also question the ethics of their fellow employees. This give raise to conflicts that relate to our understanding of the consequences of how we interact and do business with customers or other stakeholders. Are we really doing good? Or are we only doing well? Just look at the banking sector that for a long time did not ask these fundamental questions, but almost exclusively used CSR as a means create a image of “goodness”. But when the ethics were questioned an internal conflict erupted questioning the very fabric of what the business was all about which was mainly grounded in CSR or Ethical framework of understanding.

Lesson is that when starting on the path of CSR it is not only that directly related effects of the system that one needs to take into account of, but also the changes that comes with thinking differently about the organisation. If you ask the organisational members to think (and I mean really think) about the consequences of their actions one should take this into account when embracing a technology. CSR asks employees to think and react to consequences of the actions. So be prepared to embrace rather their input rather than only thinking of CSR as a way create a better image of the organisation to outside stakeholders.

 

Stakeholder Theory explained

Here is a video by Edward (Ed) Freeman on stakeholder theory and what he means by organizations need to engage with the community, customers, business partners and other interested parties. I think the stakeholder theory is central to the concept of CSR and if one wants to understand business ethics, corporate governance, triple-bottom line, and other concepts within the CSR discourse one also need to understand how stakeholders and stakeholder theory plays a central part. Enjoy.

What systems do and communication doesn’t

So is CSR an exercise in the effective management of systems or is all about communicating on the go so to speak? Being an “old” systems person I have always favoured systems over the ups and downs of communicating on a case by case basis. But even I have to admit that systems will not do the trick on its own there need to be some form of room to manoeuvre.

On the other hand one should not think that organizations can communicate their way of out of everything so here is a short and incomplete list of things systems will do which “communicating” alone will not help you with. Of cause one can always argue that systems are communication just in another form but in this case I will keep the two separate.

  1. CSR Systems will create consistency. Creating effective management systems is all about creating rigidity in the organisational processes. One should not look at systems as something completely static but as a way that management can ensure that there is some form of strategic direction and that the odd case will not distort the whole organisations approach. For stakeholders this means that there is some form of consistency when dealing with the organisation.
  2. CSR systems is organised learning. People change but systems remain in place. This process ensures that organisations are able to learn and develop regardless of the people within its walls. The day when employees stayed within the same company until retirement is long gone. Today people change jobs much more frequent sometime within the organisation but frequently they change organisations as well. Even though companies have elaborate programs for retaining their employees there will never be a employee loyalty program that will not be matched by something better.
  3. Systems are control. Not all employees will think that the strategic interest of corporate management is inline with their own desires. And while systems are not able to change peoples mind they can coerce employees to act in a certain way that management wants them to.
  4. Systems are effective. Of cause they are otherwise we would have found another way of organising our processes and knowledge. Systems help organisations become more effective at what they do but they do not help companies come up with new ideas or create new ways of addressing new problems. Sometime management will confuse systems with efficiency in all the issues that their organisations are dealing with. A “systems only” approach will normally results in miscommunication and loss of reputation as systems do not confront current issues but are rather a collection past experiences and learning.

So what communications do which systems can’t? Follow the next episode…