In a recent Globe and Mail article entitled The positive side of pessimism, reporter Wency Leung wrote about people’s tendency to overlook the protective benefits of negative thinking. She cited psychology professor Julie Norem’s term “defensive pessimism” and Norem’s explanation that “by considering the specific ways that an anticipated situation could go awry, people can actively prepare themselves and prevent disaster”. Leung was writing about an individual’s approach to optimism and pessimism but the same consideration can be applied to Boards of Directors thinking about their organizations. Or in other words, what keeps the Board members up at night?
Risk management has become a very hot topic for Boards in the last few years and a key part of their due diligence. For example, the March 2103 issue of the Journal of the Institute of Corporate Directors has a special feature on risk management. Estelle Metayer, a consultant and professor writing in the journal, talks about cognitive biases that contribute to Boards missing opportunities or falling victim to blindspots. Robert Crosbie of Marine Atlantic talks about the broad range of political risks such as strategic uncertainty and the government’s willingness to invest. In short, risk is everywhere and Boards need to identify it and plan how to deal with it. As Crosbie says, “When you’re right in the middle of it, you can’t be learning as you go.”
In my career experience, risk management first came as part of planning insurance coverage and assessing financial risk to the organization. In the early ‘90’s, when I was in an IT role, it was all about disaster recovery, hot sites and protecting your data. The next iteration was business continuity and what are you going to do if the building becomes uninhabitable (trailers anyone?). My most recent risk related work has now expanded to Enterprise Risk Management (ERM) which encompasses the previous components and more.
ERM looks at the organization’s entire operation to develop concepts such as the organization’s risk universe, their appetite for risk, ranking of risks and mitigation strategies. At the hospital where I was involved in developing and implementing an ERM, we defined risk as the uncertainty and potential to impact on the achievement of the organization’s goals and strategic directions. This comprehensive approach to risk looked at governance, communications, clinical care, infrastructure, public image, innovation, people, finance, technology, legal and regulatory matters. We also wanted to minimize any incremental cost and effort and made sure to integrate ERM with other activities such as hospital accreditation and the risk self assessment we did for our insurer. At the end of the process, the overarching concern was reputational risk – what would happen if we lost the confidence of our funders, our regulators and the public? The top specific risks to achieving our objectives – not dissimilar to other healthcare organizations - came down to human resources, IT and policies and procedures. As we put it to our Board, do we have the right people with the right tools doing the right things to live our values and achieve our goals?
To me there were a few key lessons learned from the ERM approach to risk. The first was that the people who know it best are the people in the organization who deal with operations every day. Consultants can bring a lot to the table in terms of process and tools but your people are the ones who know what’s going on. The challenge is to get them thinking in an ‘out-of-the-box’, non-defensive way about what might go wrong and how the problems can be avoided. Secondly, the organization has to follow through on the mitigation strategies. The Board needs to be aware of the risk assessment results and receive regular reports on the implementation status of the mitigation strategy action plans. The final learning is how useful and important it can be to look at your organization through the often unfamiliar and sometimes uncomfortable lens of risk. Most often, organizations and Boards like to focus on the good things we’re doing and to celebrate our successes. This is more inspirational and satisfying than dwelling on what might go wrong. As Leung stated in her article, “people have tended to neglect the upsides to pessimism because optimism seems well … nicer”. On the other hand, if we can identify and deal with those things that keep Board members up at night, maybe that can help us all sleep a little better. And in our sleep deprived world, that’s not a bad thing.