Well, what a week. If you ever wanted proof that the global economy is a complex adaptive system, and that new thinking is required to tackle wicked problems, this month has provided it.

The Australian government this week stepped in to guarantee bank loans and deposits. This was implemented as a solution to bank liquidity, and one that is being adopted around the world. The rationale for this was simple enough, lenders and depositors have been spooked by the prospect of defaults, and therefore this measure is aimed to give investors and banks confidence to do business with each other again, and not withdraw existing business. In other words, get credit flowing again, and make sure there isn’t a run on the banks.

This solution was adopted in many countries, and to some extent they had no choice. As part of global system, if you get a state change in one country, you’d better follow suit or end up out in the cold (no Iceland reference intended). And at first blush it seems to have worked. But in Australia, like other countries, this intervention has had unintended consequences. The security provided over bank deposits has effectively created two tiers of security – deposits guaranteed by the government (bank deposits), and everything else.

During the course of the week one analyst put a hold rating on Australian mortgage trusts, resulting in a run on Challenger’s funds, then Perpetual and AXA. By mid-week the phone lines were running hot by depositors to see if they could withdraw their money. The answer to which was clearly “no” – those funds don’t maintain that level of liquidity. In the words of Perpetual CEO on Sunday “On Friday I’ve never seen a call centre like it.”

More crisis meetings have happened at government level, and the guarantees are being capped, emergency meetings are being held next week with the mortgage trusts, more tinkering is likely and those sitting on the sidelines take pot shots at those in charge.

Meanwhile in the United States, former Federal Reserve head Alan Greenspan was summoned to Washington to face accusations by a Senate Banking Committee that he was partially responsible for creating this mess. His response was humble compared to previous appearances.

“A critical pillar to market competition and free markets did break down. I still do not fully understand why it happened.” Greenspan said. When asked about whether there were flaws in his model, he responded “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Clearly, this is different from other downturns and is requiring a different response. We’d suggest that different thinking is also required.

A resilience perspective

Part of our work at RFN is to help people make better sense of the world using the resilience thinking and process, and position themselves to thrive and prosper as conditions change. For those of you who have been following our occasional posts on current events, we hope that you are better able to look through the media sound bites and political rhetoric and so that you can respond in an informed way.

Here’s a few of my casual observations from the week’s events using some of the RFN thinking and process. If you haven’t been through the process or want a refresher before diving into this, you might want to watch Larry’s recent video first (27m 14s).

• Those who have been following some of my posts will note my suggestion that global markets operate as a complex adaptive system (CAS) ie. something that operates more like a biological organism than a predicable piece of mechanical engineering. You’ll also know that trying to influence the operation CAS is a wicked problem, and cannot be performed by tame solutions. Attempting to do so will result in unintended consequences and iterations. The impact on mortgage trusts this week is demonstration of this, and I’m confident we will see more of this in coming weeks.

• In times of crisis, fixed action patterns emerge and people start “snapping to grid” using existing thinking models almost like a tic. Did you notice the rhetoric about market interventions being akin to the work of the devil or communism? How about calls for the reinstitution of the Breton Woods system, in other words, fixing currencies and “unfloating” currencies like after World War II? Reading the letters to the editor section of newspapers and hearing responses from the sidelines is very entertaining at the moment. I can’t wait to see what’s suggested next week, we’ve got ideologies coming out of the woodwork that I thought were dead and buried decades ago.

• Economic models based on historical empirical data are not good predictive tools when there have been significant changes in conditions, even when based on 40 years of data. Beware of confidence based on history. Circumstances change. To thrive and prosper, you need a deep understanding of these.

• Financial and economic models are usually based on concepts like “all things remaining equal, if we do X, then Y will occur.” Of course other things don’t remain equal as there are systems within systems – and a plexus of networks. If you need evidence that this approach doesn’t work, just look at commentators who were surprised at how much the financial markets and the real economy were linked, or to the plethora of  tame solutions being proposed by commentators and politicians all over the world. A whole of systems understanding is required.

• Greater connectivity causes acceleration in effects (online 24 hour news and trading systems allow a backwash around the world of exponential proportions), accelerating forward loops and back loops even more so.

• Those entities with attributes of resilience such as redundancy and without single points of failure will be best placed when circumstances change. In this case the key dependency was capital. You only have to look at those able to pick up assets at fire sale prices, and those who ended up having to put themselves on the block to see this happening. Industry consolidation by resilient entities will be enormous, creating less resilient markets for their customers.

Without resilient thinking in policy development, we will work our way through to economic recovery by trial and error – which is what we’ve done in every other recession in the past.

Now we can’t say we foresaw what happened, nor that we have the solutions, but what we can say is that winners and losers will be determined by those with strong knowledge of conditions and aspects of the resilience model baked into their business or cause. If you haven’t assessed the resilience of your organisation or cause, you may be a putting them at risk, and perhaps joining the list of leaders being held to account as being reckless.

Todd Davies
October 2008

Reprinted with permission from resilientfutures.org

I’m writing this article while working in Western Australia – the home of the black swan. Black Swans are common here, to the extent that most people here would consider white swans to be an incredibly rare thing.

Nicholas Taleb recently popularised the idea of a black swan as an event which someone didn’t see coming. He now has a best seller on the idea, asking questions like:

• Why don’t we anticipate big disruptions?
• Why didn’t we see subprime coming?
• What’s the next big disruption?

These days I spend most of my thinking time on these sorts of questions and keeping an eye out for black swans, elephants in the room and 800 pound gorillas.

In Australia, our version of an emission trading scheme (ETS) is taking shape, and is being branded as the CPRS. This CPRS is not to be confused with the Canadian Public Relations Society – it’s the Carbon Pollution Reduction Scheme – which is useful branding in case we forget why the scheme was introduced as an industry builds around it.

Industry is now intensely focused on the CPRS. And why not? It’s in the media, it’s in black and white, it’s tangible and its proposed to be implemented in the next few years. Companies can do financial modelling to work out the day 1 winners and losers, and industry lobbyists can have a field day arguing for free permits and to keep their cost base as close to the status quo as possible.

At a presentation a few months ago, one of Australia’s leading risk experts pointed out that while an ETS and carbon accounting were important, there were bigger things afoot. He explained some of the consequences of climate change – increased frequency of severe weather events, issues with rainfall and water security and the like. He took pains to emphasise the bigger picture beyond this regulatory change.

Needless to say that I was a little surprised during the Q&A at the end of the event to find that nearly all questions from the audience revolved around carbon accounting and emissions trading. Had no-one been listening? Had the message failed to sink in? Why was this? Or to bastardise Taleb’s language, why was the swan still black even when shining a big spotlight on it?

The event in question was attended by senior public sector auditors and risk professionals – the sort of people we count on to ask such questions. I thought about why people gravitated to the accounting, reporting and compliance aspects rather than to the elephant in the room and I guess its human nature – it’s black and white, it’s tangible, it’s measurable and it requires a response in the short term. In other words this part of the issue is more tame than wicked, unlike the bigger problems that governments and their advisors are now attempting to tackle.

So what is the real elephant in the room you may well ask. As I see it there is no longer just one elephant – the ones I see tend to travel in herds.

We’ve already mentioned climate change – there’s plenty of literature on that. If you analyse search metrics on the web you’ll see the term’s popularity rise to a highly mainstream top of mind topic. This doesn’t mean people can see it clearly or are operationalising around it, (if fact it seems that many aren’t), but at least it means that they aware of a big lurking presence. This is a good start.

But there are others as well. A few spring to mind:

• The modelling is not yet public but there are indications that petrol prices could go up in the order of 5-10% under a CPRS. This seems like a significant jump, and for many industries this will be, but this needs to be taken in context. If popular opinion among energy forecasters is correct, then we are looking at a doubling, tripling of fuel prices or even more over the next 10 years. Within this context, a 5-10% carbon impost is not the main act – in fact it’s potentially a sideshow at best.
• The industrial revolution and the way we use air travel are driven by cheap energy. If energy prices jump what does this mean to complex supply chains that source lowest cost inputs from around the world? Will countries with cheap labour still be able to compete effectively in global markets in the absence of cheap freight? Was all this effort in establishing free trade agreements for nought? What does this mean to distribution of wealth and currency markets? What knock on effects will these have?

In taking the initial pain on CPRS in Australia, we need to remember that in other markets there was also an outcry by business before their emission trading schemes were introduced. In the years that followed, some argue that the carbon price fell dramatically because cutting carbon was far easier than initially anticipated. The carbon cap was possibly too low and some commentators believe this resulted in many years delay before reaching a sustainable carbon price and a lost opportunity for the environment that will never be regained.

Within this context one has to wonder whether the current bemoaning by some companies and industry groups about the CPRS is really about business disruption or just a clamour for free permits, and for protectionism of obsolete assets and ways of working.

Short term lobbying on the CPRS will generate short term winners and losers and perhaps will help some companies until their CEOs cash in their options.

The medium and long term winners will be those organisations and individuals with a deep understanding of emerging mega conditions and whole systems at a micro, macro and mega scale. Those entities that understand that you can’t lobby or cartel a black swan will be the ones on the journey towards resilience and ongoing prosperity.

Todd Davies
August 2008

Reprinted with permission from resilientfutures.org

As the developed world pulls itself away from the abyss of the global financial crisis, many around the globe are breathing a sigh of relief. Having dodged a major bullet, organizations are now returning to business as usual. But if the crisis was a wake-up-call for the world, did business leaders and internal auditors pay attention or just hit the snooze alarm? What’s the next “black swan,” or significant unforeseen risk, and what should internal auditors be doing about it?

In this free feature from IIA’s global magazine, Todd summarises several key areas should be on all company watch lists for 2010 and beyond.

http://www.theiia.org/intAuditor/free-feature/2010/february/a-look-ahead-top-risks-for-2010/

A lot has been happening with the Resilient Futures Forum this year. Resilient Futures has been kind enough to record some of their work and make it available to the public free of charge.  Highlights from Todd’s work with resilientfutures.org are set out below.  Click on a heading to watch / listen.

Risk and Responsibility (AHAUCHI Conference, September 2009)

[Streaming video: YouTube - 3 parts, 22 minutes total]

Presented as part of a three day strategy and leadership conference on the future of residential colleges, Todd Davies provides insights into the nexus between governance, leadership and risk, and provides a whole systems perspective into regulatory reform, avoiding the next GFC and the future of leadership on these dimensions.

A Leader’s Responsibility: Governance, Risk and Resilience (AHAUCHI Pre-conference, August 2009) [Streaming and downloadable audio: Resilientfutures.org - 1 part, 26 minutes total] As part of the lead up to the AHAUCHI sessions, Todd discusses the new context for the governance and risk responsibilities of leaders, especially directors and managers; the breakdown of conventional methods of risk and governance management in dealing with these conditions; the consequences of such a breakdown; new processes for more realistic governance, risk and resilience.

The Real Risks of Business as Usual  (Resilient Futures Forum event – “Planning for Growth: Water? Climate Change? Economic Shocks?, August 2008)

[Streaming and downloadable video: Resilientfutures.org - 1 part, 15 minutes total]

This is essential viewing for anyone in a governance, leadership, assurance or strategy role in a large organisation – corporate or government. This presentation is particularly timely given current conditions, increasing market turbulence, and the move by stock exchanges and regulators around the world who are beginning to expect CEOs and Boards to have a strong understanding of ‘material business risk’, and hence strategic risk.

There is also a lot of great material on the resilientfutures.org website and their Youtube channel.  If you are interested in understanding the future, complexity and the challenges and opportunities arising from this, these sites are well worth a look. Enjoy. TDA

Success is a lousy teacher. It seduces smart people into thinking they can’t lose.  Bill Gates

Most managers feel well equipped to understand and respond to the regular crises that emerge day to day in the business as usual environment. Risk management processes have permeated most organisations which give middle management a sense of comfort that they have things broadly under control.

But those who read the financial press will be aware of emerging state changes which are not picked up by their normal risk management processes.  As such, Directors and Chief Executives reviewing their risk profiles often feel that all of this effort in risk management is missing the big picture.

Emerging risks are known by many names.  Strategic planners call them external shocks.  Resilience practitioners call them discontinuities.  Risk practitioners call them strategic risks.  Economists call them corrections. Taleb calls them Black Swan events.  Greenspan calls it the age of turbulence.

Whatever you call them, an understanding of emerging strategic risks is critical to leading any organisation.

We have a habit of confusing the unprecedented with the unlikely.  Al Gore, Sydney Hilton, July 15, 2009

Todd Davies & Associates draws on a broad range of experts from a range of fields to provide briefings, training and advisory services on:

• Making sense of emerging and interconnected structural shifts, and how to turn these from strategic risks into strategic opportunities
• Making sense of unprecedented risks which are becoming increasingly certain
• Detailed briefings on each of these structural shifts
• Assessing and developing the capabilities in organisations to assess strategic risk on an ongoing basis.

To find out more, call Todd on 02 9043 1719, or email us to arrange a meeting.

What our clients are saying

“We brought Todd Davies in to conduct the “Understanding Strategic Risk” training sessions and they proved to be very worthwhile. Our audit staff appreciated the insights into sources of strategic risk from a local to a global level. No less than six methods of developing strategic capability were discussed providing something for everyone dependent upon your methodology, fit and preferences. Sound value.”  Allan Reidy | Head of Westpac Retail & Business Banking and Product & Operations Audit, Westpac Banking Corporation

Find out more first

Watch a 15 minute video presentation from Todd on gaps arising from typical risk management processes

Listen to a 25 minute audio interview with Todd on some of the key issues for leaders today

Read a brief article on strategic risk and how this fits in with regulation and standard setting

Silos.  It’s a word that can fill you with dread if your responsible for the governance of an organisation, yet they keep on appearing.  Organisational theory is currently aguing for matrix structures, but if you’ve ever tried to run one you’ll know that shared accountability without the right tools is the same as no accountability at all.  Silos are alive and well.

TDA has track record in brining these functions together for greatest impact.  We can help to ensure:

• Duplication between assurance functions is minimused
• Assurance programs are focused on what really matters
• Risk management has a top-down view of strategic risks
• Emerging risk capability informs the strategy and risk functions
• Strategic risk insight informs the strategy process
• Strategy drives capability development

To find out more, contact us.

I’m really pleased to announce that the Resilient Futures website went live today.

Resilient Futures was formed in April 2008 as a result of a number of practitioners in various fields believing that the current thinking in their respective professions was inadequate in dealing with the problems of tomorrow, and that resilience thinking and the concepts underpinning it provide much needed clarity in a rapidly changing interconnected world.

The Resilient Futures partnership consists of a divergent practitioners in strategy, risk, urban planning, leadership development and networked systems.  There is a range of innovative but practial thinking coming out of this one and I encourage you to have a look around, read a few articles, download a whitepaper or two, and subscribe to the RSS feed.

I particularly encourage you to have a look at my recent article Are you being a reckless leader without realising it? which gives a feel for where some of the thinking is heading, or our offering on emerging risk analysis here.

Resilient Futures can be found at www.resilientfutures.org.

Strategy, risk, governance and assurance

“Corporate governance, sustainability and strategy have become inseparable.  They are inextricably linked.” Mervyn E. King

A lot of firms specialise in strategy, risk, governance or assurance, but few seem to bring them all together. In everything TDA does, we bring the other disciplines to it, whether using risk management to underpin delivery of your strategy, or getting strategic alignment with these areas.

Please click on a link below to find out more.

Governance & Leadership

• Enterprise Governance – getting everyone on the same page
• Enterprise Resilience – positioning for prosperity in the face of dramatic change
• Compliance with the ASX Corporate Governance Council Principles and Recommendations

Strategy

• Relevance regained – strategic planning for NGOs
• Strategic risk and emerging risk capability

Risk & Assurance

• Fine tuning your Internal Audit function – Internal Audit transformation & quality reviews
• Getting the most out of internal audit sourcing – outsourcing, cosourcing and partnering
• Navigating the GRC maze – understanding GRC solutions and software selection
• Getting what was promised – project assurance and project risk management

Todd is a highly sought after speaker, commentator and evangelist in the fields of business, risk, governance and internal audit. He is a regular commentator on topics such as emerging risk, resilience and makes an effort to stretch people’s thinking and point out the ’elephants in the room.’ in these areas.

Recent Articles

TDA’s articles and case studies are now available free of charge via an occasional email newsletter.

• Key insights into internal audit across Australia | Risk Management Today  | July 2010
• Is your risk framework adequate? Questions directors, investors and the C-suite should ask | Risk Management Today  | June 2010
• A Look Ahead: Top Risks for 2010 and beyond | Internal Auditor  | February 2010
• AXA, Perpetual, Challenger – As the backloop grows stronger it draws more entities in | resilientfutures.org  | Oct 27 2008
• Resilient leadership? | resilientfutures.org  | Aug 29 2008
• Carbon Pollution Reduction Scheme – Main Event or a Side Show? | resilientfutres.org | Aug 23 2008
• Shell shocked | Risk Management Magazine | July 2008
• What can we learn from the WA Gas crisis? | resilientfutures.org | Jun 20 2008
• GRC – The Great Risk Con | Risk Management Magazine | June 2008
• Allco, ABC, Babcock. Should we have seen these coming? | resilientfutures.org | Jun 15 2008
• Are you being a reckless leader without realising it? | reslientfutures.org | May 18 2008

Speaking & training circuit

Some of his recent speaking engagements.

• Best practices in public sector internal audit, audit committees and risk management | IIA Asia Pacific Conference (SOPAC)
• New global risk standard – ISO 31000 | Interview with Michael Parkinson on the new global standard (available in streaming video)
• Providing Internal Audit Opinions | National masterclass & webinar series – IIA-Australia
• Understanding Strategic Risk | National masterclass series – IIA-Australia
• Risk and Responsibility | Association of Heads of Australian University Colleges and Halls (AHAUCHI) national congress (available in streaming video)
• Smashing Open the Addiction to Business as Usual | Bryant University / MA Chamber of Commerce (USA)
• The Real Risks of Business as Usual | WA Water Strategy & Climate Change Resilient Futures Strategy Forum
• Audit Opinions – Part of the process or optional extra | AICD National Public Sector Conference
• Building a Good Audit Committee | SOPAC – IIA’s premier regional conference for Australia, South Pacific & Asia (with Jon Isaacs – prominent Audit Committe Chair)
• Futurecasting | Mega trends for forecasting, strategy and risk in a rapidly changing world – ACL user’s forum
• ASX Corporate Governance Council’s Revised Corporate Governance Principles and Recommendations | Intitute of Internal Auditors Canberra Chapter
• Internal audit as a change agent | ICAA Business forum Victoria (CPE week, Melbourne)
• From the Backroom to the Boardroom – a new horizon for Internal Audit | IIA Western Australian Internal Audit congress, Perth
• Fundamental change in the Audit Profession… Where is it going, how will it affect you and what do you need to do about it? | NSW Internal Audit congresses, Sydney, Penrith (IIAA)
• Corporate Governance and Risk Management for Not for Profits and NGOs | Australian Society of Association Executives, Sydney (AuSAE)
• Pulse Radio – a case study in radical innovation | LQA Innovation program, Melbourne
• Fundamental change in the Audit Profession… Where is it going, how will it affect you and what do you need to do about it? | Association of University Auditors (ACUA) Australian National Conference, Sydney.

Public comment

Todd was recently appointed as the Institute of Internal Auditors of Australia’s Policy Director and is their spokesman, technical advisor and author on technical, policy and advocacy matters in relation to governance, risk, control, audit, assurance and related matters in Australia.  Copies of his statements, presentations and articles are available at www.iia.org.au.

Academia & education

Todd leads and/or develops the majority of short courses and masterclasses for IIA-Australia on complex and emerging areas.  These include:

• Strategic risk
• Mastering the new Principle 7 (Recognise and Manage Risk) of the Australian Stock Exchange Corporate Governance Principles & Recommendations
• The new International Professional Practices Framework
• Providing internal audit opinions
• Technical & Regulatory updates
• A range of other ad-hoc topics.

In addition Todd has been a guest lecturer and tutor at the following:

• Advanced Management Accounting Module | Institute of Chartered Accountants – (CA Program)
• Cashflow forecasting, financial modelling and valuation models | Edith Cowan University  (National Enterprise Workshop)
• Company Law – Edith Cowan University | (Bachelor of Business Program)