Diagnostic Framework
There are six drivers that can help analyse preventable surprises:
Narrow conception of risk: over-exposure to risk as a result of: technological arrogance (e.g. focusing on easily quantifiable risks whilst ignoring uncertainties which may be highly material but not quantifiable); lack of understanding of the importance of material environmental, social and governance issues; and weak attention to resilience (systemic and or longer-term business continuity). Weak concern for negative externalities: this market failure allows costs to be socialised (generally to poorer communities, the environment or future generations) whilst profits are privatised, resulting in (extremely) asymmetric assessments of risk/reward. Regulatory capture: corporate political influence (by legal and sometimes illegal means) combined with weak political governance (e.g. decisions made because of ideology rather than evidence/science and or because of short-term electoral considerations) creates regulatory failure. Can be direct (e.g. financial) or cognitive (where the control is mediated via herd-like thinking). Wilful blindness or Organisational learning disabilities: repetition of the similar mistakes over and over again, created by reluctance to accept and learn from past failures, not least because personal and organisational incentives make this learning disability the rational choice for managing career risk. Leadership failures: unbalanced decision-making driven by “saviour CEOs” without organisational checks and balances due to an overly collegial/compliant board and or co-opted auditors with the result being narcissistic or sociopathic corporate executives who are out of control. Shareholder value fundamentalism: a focus on very narrowly defined financial performance metrics (egg Total Shareholder Value, TSR), assessed on a short-term basis, often relative to peers and with a dysfunctional benchmarks (e.g. capital weighted indices), so putting pressure on companies to deliver growth, cost-efficient and share price increases regardless of the cost to the company, its immediate stakeholders and society. |