Todd Davies asks if a changing environment is a new norm – and explains how risk professionals can cope

Change is happening at a greater scale than ever before. We see it every day. This creates great uncertainty for the organisations that we serve, and should be a boon for us as risk professionals. After all, we’re in the business of managing uncertainty, or at least that’s what ISO 31000 tells us.

But the reality is that most people in the audit, risk and compliance fields aren’t dealing with uncertainties at all. We know that most of the risks that we anticipate are going to happen at some point in some sort of predicable manner. The only thing we don’t know is when or on what scale.

So as we merrily trundle along addressing these known-risks with known methods we add checks and balances. We add layers of approval. We write policies and procedures.

This is all great stuff in a steady-state environment. The only problem is that a steady-state environment isn’t the norm any more. In fact it hasn’t been for some time. Maybe you’ve noticed.

And in a non-steady state environment, the best risk response is the ability to adapt at short notice. This means scaling up capability quickly and dismantling it even faster. It also means the ability to innovate, scale and adapt could become more important sources of competitive advantage than existing assets and infrastructure.A truly frightening idea for most of us.

Heresy you may say. But have a look at the top 50 list from any stock exchange from 20 years ago and compare it to today. You won’t recognise much. A lot of change can happen in a very short time.

So back to today. With all of this change this in mind, does adding checks and balances add agility, or reduce it? How about layers of approval, or layers of policies and procedures? Or are we calcifying our organisations and making them less able to adapt?

Risk management is about allowing for success under multiple scenarios. In everything we do we must remember that steady-state is only one scenario, and possibly an unlikely one at that.

Charles Darwin said ‘It is not the strongest of the species that survive, nor the most interesting, but the ones most responsive to change’.

When we can manage risk by creating greater agility then risk management will stop being part of the problem and start becoming part of the solution.

This article appeared as a cover story in the inaugural web-based version of Risk Management Magazine.

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The good folks at Lexis-Nexis have been kind enough to invite me to be on the editorial panel of their new magazine Risk Management Today, and to have the lead article in the inaugural edition.  They’ve also been kind enough to make this article available free of charge to my clients and readers for a limited time.

The article aims to get beyond the literature and standards, and give insights on some of the key things to look for when assessing the adequacy of an organisation’s risk framework.  It is pitched at those who are not necessarily experts in risk management per se, but rely heavily on an organisation’s risk management framework.

Key points

• Despite organisations making significant investments in risk management, they still fall short in dealing with disruptive change.
• Regulatory changes seem unlikely to get to the heart of what really matters in avoiding significant destruction of shareholder value in the future.
• Seven key areas of risk management areas are discussed that investors, boards and the C-suite should be looking for.

Please feel free to download the article and pass it on.

Download the article (pdf, 3 pages, 86kB)

Also this publication is shaping up to be a very good one, and I’d encourage you to have download the inaugural issue and have a look (free download for a limited time).

Todd

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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/

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Part 1

Part 2:

Part 3:

Thanks to the the team from Resilient Futures and AHAUCHI who have been kind enough to record some of their work and make it available to the public free of charge.

More on this series can be found on the Resilient Futures YouTube site.

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The length and extent of debate was extensive ranging from the structure of the financial system, through to regulatory structuring, regulatory arbitrage, global regulatory frameworks, rules vs principles vs supervision and enforcement, Australia’s twin peaks and quadruple peaks model, ESG and a range of other useful debate, as well as the old chestnuts of shareholder input into executive remuneration.

I was encouraged by comments early in the meeting by Jules Muis, former Vice President and Controller of the World Bank saying that there are really only two key issues which need attention – strategic risk and systemic risk, and if we can get accountability for assessing and managing these at different scales, then we will be set for success in the future.

Lindsay Tanner, Federal Minister for Finance explained that conditions had changed and global markets can only be regulated through global coordination, while Anne Simpson, from CalPERS representing one of the largest pension funds in the world told us simply, that “we needed more joined up thinking”, eluding to the need for a wholistic, multi-faceted approach to systems thinking.

Al Gore reminded us that “we often confuse the unprecedented with the unlikely”, and Professor Mervyn King SC reminded us that “companies do not operate in a vacuum.”

Despite this sage counsel that we need an approach which allows us to think properly about strategic and systemic risk, and predict the “unprecedented but increasingly likely”, unfortunately these threads were not actively picked up, perhaps because this is an area which is not yet well understood.

In the area of risk management, boards are concerned about false comfort in risk systems – whereby companies hire a small army of risk experts who go away and implement risk frameworks such as COSO ERM, A/NZS 4360 or ISO 31000, and assure them that everything is okay, that their risk systems are sound, and the board and management can sign off.

The problem of course is that while routine bottom-up approaches to compliance, operational and reporting risk are good at managing the bread and butter of businesses, it’s rarely these areas which cause the material problems. Despite strategic risk and systemic risk now starting to be recognised globally by policy setters as the daddy of them all, people don’t have the capabilities in place to understand what these are, let alone manage them. Intuitively, boards know this.

The result is that a significant proportion of companies which experienced significant value destruction and earnings surprises in the last 18 months came out with the standard rhetoric “no one could have seen this coming”, leading to an inference that either the risk systems are not as we’ve been told (deceptive conduct) or the boards were incompetent (negligence).

I’ve been giving briefings and training on these areas internationally, including in public fora around Australia and the United States in order to help companies govern responsibly. In my mind, strategic and systemic risk are the elephants in the room which are still being overlooked and not understood.

I asserted in a public session at the meeting in front of some of Australia’s leading directors and experts that it might take someone to launch a class action in a move to get traction on this issue. After the session, one of the leading shareholder class action lawyers from New York suggested to me that being his expert witness could be very lucrative in the short term as long as I had no intention of ever being employed again, and perhaps I should stick to helping companies rather than suing them.

In Australia, internal auditors are being asked to give advice to boards on whether their company’s risk management framework is effective, and whether the risk profiles prepared by management give a true and complete picture. The advice I’m giving my clients is that if the organisation doesn’t have good capabilities around strategic and systemic risk, then the answer has got to be no, and therefore their public statements on this issue have to be qualified.

In an effort to raise awareness of strategic risk internationally, I’ve been speaking in public fora around Australia and the United States as well as through the Resilient Futures Network (RFN). The good news is that I’ve been getting traction with industry associations, community groups, pension funds, boards and large companies… and we’re beginning to prove that strategic risk doesn’t have to be difficult as long as you’ve got a good model and a diversity of perspectives (thanks to the RFN for their involvement with that).

If you’re an internal auditor trying to get your head around this, the Institute of Internal Auditors in Australia is running half-day training workshops on this topic nationally, which means you can get your head around this and bank some CPE credits at the same time. If they aren’t running near you, or if you want to run a session in-house, get a group together and The IIA will be happy to organise these.

If you’re a non-executive director and want to find out about the strategic risks which aren’t on your radar and should be, I’d be happy to give you a briefing. Please feel free to watch this primer and get in touch.

Todd

Todd Davies & Associates
Specialists in strategy, governance and step change

Web: www.todddavies.com.au
Email: todd@todddavies.com.au
Tel: +61 (0) 422 000 913

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Can your organisation continue to prosper as conditions change?

Organisations are facing greater challenges than ever before.  As a leader if you feel that you are facing more change than ever before, you are not alone.  The nature, scale and frequency of change is increasing which is putting tests on the resilience of all organisations.

Increasingly, the term resilience is popping up with a number of variants – enterprise resilience, organisational resilience, business resilience and others.  Some variants are narrow dealing only with a part of the problem.  Resilience from a HR perspective often talks about personal resilience – in other words, the ability of an individual to bounce back in the face of adversity – something akin to personal tenacity.  Resilience from a risk perspective is often limited to business continuity or crisis management.  Both models tend to plan for and react to disaster rather than empowering organisations and leaders to navigate strategically.

TDA takes a holistic view of resilience using the models embodied in the Resilient Futures Network models to answer the simple question for leaders – “How can we continue to prosper as conditions change?”.  Our models bring together the key aspects of strategy, risk, governance, leadership and assurance to allow for organisational resilience and transformation.

We can assist in a range of ways depending on the needs of the organisation with a range of modules and entry points including:

• Primer – introduction to the concepts of resilience and and understanding of why this is business critical and a potential source of ultimate competitive advantage for your organisaton
• Initial diagnostic – initial assessment of key conditions and capabilities required
• Strategic risk assessment – a deep understanding of emerging conditions, key depedencies and how this will affect the organisation’s business model going forward
• Resilience capability assessment – does the organisation have embedded resilience?  What maturity level is the organisation at now?  Where does it need to be?
• Catalytic projects – demensioning catalytic projects to transform the organisation
• Resilient leadership – training leaders within the organistation on key capabilities to allow for organisational transformation
• Program and project management – ensuring what needs to happen does actually happen

After nearly 20 years working in risk and organisational transformation roles I’m convinced that the next five years will be the most disruptive we are likely to see for a generation.  Those who understand and embrace the concepts will be incredibly well placed to create shareholder wealth and outcomes for their stakeholders.  Those leaders which don’t get their head around resilience are likely to preside over  significant value destruction and be the case studies for poor governance of the future.

For a briefing, please contact Todd Davies on (02) 9043 1719.

Need more information first?

Read Todd’s latest articles on the Resilient Futures Network which demonstrate how key events are unfolding today and how outcomes could be different by embracing organisational resilience.

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To see the rebuttal, have a look at page 3 of the July edition of Risk Management Magazine here.  And to see the original article which caused the contraversy, click here for page 3 fo the June edition.  (Now locked down, here’s the web version).

For more information on how strategy, risk, governance and assurance come together, please click here.

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TDA understands the GRC market.  We understand the strengths and weaknesses of different providers and can guide you through the selection process.

We can help you:

1. Understand the different possibilities including in this space such as continuous control monitoring, computer-assisted audit techniques, audit follow-up, data mining, control self-assessment, SOX compliance, risk assessment, legislative compliance, policy compliance, legislative training and integrated solutions.
2. Be very clear on what your specific needs are, including developing your strategy for enterprise governance.
3. Determine whether you require a generalised or niche solution
4. Understand what the most cost-effective solutions are including whether to buy, replace, build or configure
5. Be clear on which solutions have the strongest support base and longevity
6. Negotiate the right price

For more information, contact us.

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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.

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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.

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