OMG – We never saw that coming!

Disastrous consequences arising from corporate decisions are rarely intentional. However the whole point of risk management being a key responsibility of Boards and Executive management is to minimise exposure to consequences that are not intended.

Decisions at all levels of an organisation can bring about unintended consequences – where the cry goes up “We never thought that would happen!”.

For those with access, there is an interesting discussion abroad on the AICD Members Group on Linkedin about unintended consequences, offering  various views about what Boards (and individuals) can do or should do to minimise the fallout from their own decisions.

CostaCon2

 

The people in charge did not plan for this to happen…but it was foreseeable as a consequence of certain decisions.

(Image courtesy CNN World)

 

 

 Impacted by decisions not of our making.

In some cases however it is also about trying to predict the unplanned consequences of the decisions of others. In other words how much are we exposed to the decisions of external parties and is there anything we can do to mitigate the fallout to us, our organisation or our stakeholders from external influences that we cannot control?

Equally as good corporate citizens how often do we consider what might happen to affect other parties – our colleagues, competitors, associates, clients, suppliers, beneficiaries, customers, or other stakeholders should our decisions evoke serious unintended consequences?

Spheres of influence

Each level of organisation has its own sphere of influence in which managers can analyse the likelihood of side effects and whether they can do anything about it. These spheres can be described generally as :

Spheresofinfluence

Direct Control – Where I exert total control by doing things myself or through issuing instructions to those who do the doing, and where I personally monitor the outcomes.

Indirect Control – Where I provide direction to others who in turn issue instructions to those who do the doing. I must rely on those I direct to supervise the execution and monitor the outcomes, although I can indirectly control performance by specifying expected standards of quality.

Influence only – Where I cannot directly or indirectly control what people do through direction or instruction, but I may influence their decisions or actions by advice, argument or negotiation. I do not however have any authority to over-ride their decisions, although my influence might mitigate adverse effects on my interests.

No Influence or Control – Where the decisions or actions of others are completely outside my ability to influence in any way. I may not even be aware of the presence of their risk to me or my interests. If I am aware, I can only mitigate the impact on me or my interests by acting within the other spheres where I have control or influence.

 Assessing cost/benefit of risk management effort.

Board and Executive teams obviously can’t spend all their time worrying about be “unknown unknowns” but due diligence demands that reasonable enquiry should be made into the range of possible risks and consequences likely to arise from major decisions. How do we decide how much effort to put into these enquiries and what will be the cost/benefit to us an organisation?

Sometimes just a few high level filtering tests may suffice.

  • What is the scale of the resources, assets or outcomes that might be at risk in implementing a particular decision or strategy?
  • What is the likely scale of impact on our customers or other stakeholders if our assumptions prove wrong or our plans flawed?
  • How disastrous might be the most extreme possible consequence imaginable from our decision?
  • At the extreme, could our decisions conceivably produce a risk to life and limb or to the livelihoods and possessions of our employees or other people?
  • What matters bearing on these scenarios fall within my spheres of control and influence, and what action can I take to mitigate those risks?

Even the presence of these filters as a checklist may not have predicted the consequences of the corporate financial decisions leading to the Global Financial Crisis or the dire results of Australia’s Pink Batts fiasco, because they still need perceptive analysts to recognise the propensity for danger.

If you don’t know what a risk looks like you can’t see it coming.

That is why scenario modelling is such a powerful tool, although it seems to have gone out of fashion in modern management. Too many Boards and management teams get intellectually lazy by focusing too much on day-to-day operations and consequently develop a blinkered approach to scenarios that could identify undesirable outcomes.

Strategic risk management is not about trying to cover every possible angle. It is about understanding your spheres of influence and control and in those areas implementing adequate strategies to minimise or mitigate unintended consequences.

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