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Women! Open the Pandora Box of Strategic Risk

In Risk, Risk Management on November 19, 2017 at 2:34 am

WomanRisk

Women! Open the Pandora box of strategic risk. Untangle it and mix it with your strength and weakness. This is the time when your strengths must speak.’

In general, the perception is ‘women are risk averse’ and therefore take fewer positions as CEO of a company. Alice Vaidyan (CMD of GIC Re) and Indra Nooyi (CEO of Pepsi) are well-discussed the examples of emerging successful women in the corporate world. Recently, I was the speaker at Conference on Empowering Women Entrepreneurs organized by FICCI partnering with NITI Aayog as a part of Road to GES Series at Chennai. During my presentation, I discussed that organisations’ face three types of risks: external risk, internal risk and strategic risk. Several women entrepreneurs during the forum discussed the issues related to unavailability of infrastructure to kick-start the business, and if they start it, it remains as small scale for years. They are not able to take it to next level. Why women need hand holding while men often do not complain about this. The market data also reflects the same:

After a high score in World Bank’s rankings for ease of doing business (Improve 30 places), India has declined in its overall Global Gender Gap Index ranking of the World Economic Forum (WEF). It slipped 21 places on the index to 108 behind neighbours China and Bangladesh, primarily due to less participation of women in the economy and low wages” (Excerpt from a News Report).

A few professors from University at California and Virginia found in their research that before 2007-08 crisis, large institutions have taken greater risk than the market average and booked the losses (Erkens, Hung, & Matos, 2012). The issue was more related to lack of understanding of risks undertaken and its inter-relatedness with other risks. If we accept some strategic risks which we do not understand, we cannot rightly estimate the consequences. There are three ways to deal with such risks: do not take such risk, take but fewer risks or thoughtless /thoughtful expansion to satisfy the greed of more and more profits. Women entrepreneurs, in general, chose the first or second option while large institutions chose the third one. For large entrepreneurs’ this made sense as they have the large capacity to take risks with structured systems and processes and capital to absorb the shock. Women entrepreneurs have less exposure to large strategic risks; they lack in capital back up. Also, they are surrounded by the culture issue of ‘not a failure’ therefore they can-not afford failures as it may serve as bread and butter for many of the families having kids and senior citizens. Emerging questions are: who will help them? How can they survive and sustain?

Understanding of Strategic Risk is one of their weakness. Even I found strategic risk-taking ability is the problem of many developing countries. Companies often know ‘what they can-not do’ but often don’t know ‘where they are good at’. Good means whether they are the better than their competitors in the local industry, country, globally or for simply a niche. It is the argument similar to a journey. If you don’t know where you want to go, you may fail many times. For example, the level of preparation needed to visit a cold place is substantially different than a requirement of hot place. Knowing you want to go locally or globally will make a significant difference. I met a very influencing lady at a conference in Lyon, France. The Turkish lady was the owner of a top scarf brand similar to the level of Louis Vuitton (a scarf costing around $ 1000). Though she was from Turkey, she decided to buy wool and silk from China, hired a team of designers from Italy and opened the first store in Switzerland. After the success of her scarf in Europe, she expanded throughout US and Asia including Turkey. I was also impressed with a CRO of a large reinsurance company who was very confident that they were the best in the aviation business and exploited the opportunities when the situation arises.

Understanding the strategic risk is important for the women executives. The gender does not change the business paradigm, the environment remains the same. In my opinion, women are NOT risk averse, they are in much better position to understand risk than their men counterparts. Afterall, it’s always ladies first ……..

References:

Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), 389–411. http://doi.org/10.1016/j.jcorpfin.2012.01.005

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An Organisation Risk Pendulum

In crime, fraud, Risk Management on September 9, 2017 at 7:17 am

“Risk is often misinterpreted as a bad thing; however, it is not. Business needs risk to grow and thrive. Understand it, take risks which help you fulfilling your purpose. The key question remains how to balance risk pendulum in the organizational life”.

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If your company offers a unique product, any risk which provides a value to the product or customer is worth considering, however, the proportion should not be increasing 50% risk for a minuscule value to the customers. Think twice whether you are capable of handling enhanced risk for value creation. If you are unable to handle it, build capacity and then take the proportionate risk. On the other side, some risks are inherent in the business. For example, fraud risk. You will be surprised to know that fraud risk is often considered strategic risk. Tightening of controls in the business may be considered as a constraining activity in short-run but imagine in the long run, employees say that these frauds happened under the nose of senior management and question their integrity? What is the relevance of board, risk management team, auditors and audit committees in such instances?

A country with negligible crime rate (i.e. Dubai) attracts high investments while a country (i.e. Nigeria) with relatively very high crime rate has to struggle in inviting investors. Do controls play a positive role in business? Yes, it not only reduces the risk but also provides efficiency to the business with a potential of strategic advantage.

Many of us heard that after 2008 crisis, some large organisations are reluctant to take further risks. Does it mean they are over-matured and declining, or markets are exhausted, or they have just become risk averse for some period? This shows how a crisis impacts the speed of the Organisational Risk Pendulum. When the speed is low, what these organisations do – sit idle, focus on weakest links in organisational process or improve their strength in one or two core domains or simply learn from others mistakes. Over and above this, some companies wait for the crisis to occur because they are expert in dealing with crisis situations. For example, Business Continuity experts get maximum business after a crisis. Enterprise Risk Management and Risk Governance experts do the same, many consulting and credit rating companies take over the customers and markets. A more generic example is a doctor. When a pandemic spread in the society, doctors suddenly become highly in demand. It is clear that investment in risk management enhances the organisation capacity to maintain the speed of organisational risk pendulum during the crisis while it provides confidence to retain the speed in normal and volatile market situation.

Another key question arises How to drive your organisation at a speed to maintain an equilibrium between the risk of riskiness and risk of safety? What is right – Riskiness, stability, survival?

I believe all are important as Enterprise Risk Management (ERM) by definition maintains a balance in downside and upside of risk and uncertainty and considers all risks holistically. Knowing your organisational risk at integrated level provides a strategic direction to the company. Don’t wait. Know what you don’t

Why Management practice is not practical?

In Management on July 24, 2017 at 5:31 am

Practice is a practice that is different from theory. Many of us argue that learning concepts are distinct from its application during practice. In this blog, I will discuss three arguments of practice discussed by academics, industry leaders and my own observation.

Theory and practice

Idea 1: Manager as coordinator and integrator

An academic will define coordination, and integration would be as good management practice for a manager. It does not matter how many hours an employee work. What is important – how a manager is integrating the unique abilities of its employees to achieve the goal. In fact, the success of a manager depends upon how he/she turns people talent into performance. In Physics, a force is called work when there is a displacement of the point of application in the direction of the force.

Idea 2: A Manager as ‘implementer’

Jack Welch (CEO, GE) believed to be a gatekeeper in transmitting the ideas to his managers by choosing right people, rightly compensated and channelizing their energy to implement the idea.

“If you pick the right people and give them the opportunity to spread their wings—and put compensation as a carrier behind it—you almost don’t have to manage them.” – Jack Welch

 Idea 3: A Successful Practical Manager

 In fact, when I returned after completing my PhD from University of Edinburgh, I found that practice requires impractical people. I argue that a short term thinking believes in practical management while a long-term approach leads to a sound management practice. Good management practice is not possible until senior management reward creativity by rightly compensating managers and establish an open and proactive culture.

Contrary to this, a new word for practical is unethical. In large organisations, rules and policies are set by the board of directors. This led managers to reject those projects which fall out of the scope of company’s policies. A practical manager will manipulate the language and may accept all the projects. He may show higher sales in short run and receive the bonus. In long-term also, that manager will gain as the consequences of accepting the projects will be faced by his/her successors. Very soon, rules will remain in paper and manipulation of language in a contract will become management practice. Competitors will also follow and may make it as the industry norm. If everybody is making some mistakes, it is nobody’s mistake.

P-O-L-C framework of management supports managers to respond to the challenge of creative problem solving.

Is something missing in this framework. I observed that management practice in general substantially differ from practical management. Ethics and risk management are important for managers. Ethics support in the decision making of what is right and what is wrong while risk management guides on the consequences. Surprisingly, both are not included in management curriculum at many places considering them as not practical. Planning, organizing, leading and controlling in normal market situation is easy however, it is very challenging in turbulent markets. We need reformist, leaders, veterans who can think, act and implement good management practices.

Corporate practices are full of such issues and to understand these practices, one has to be in business to learn how to do business. Another example could be word ‘professional’. Professionals are the people who are subject matter experts, have undergone specialised training and have capabilities for independent decision making. They are expected to demonstrate ‘ethical code of conduct’. With my current engagements in an Asian market. I found that many people talk about:

“Now a days’ doctors and lawyers have become professional”

I asked them that these doctors and lawyers are professionals from a long time, what’s new about it. They were pointing out the wrong definition of professionalism. From professionalism, they mean ‘unethical’. In this situation, everyone bears the losses due to some short-cuts are taken by others. Management as a practice will not survive until we don’t avoid unethical decision making under the umbrella of being ‘practical’.