Taking steps to minimize risk

Nov 06, 2015  |  Mark Gravett  |  risk, CEO, risk management, crisis | 0 Comments

In the aftermath of a high-profile corporate crisis, it is a foregone conclusion that chief executives must respond quickly to avoid further backlash. However, according to the HBR article Strategy: How to Live with Risks, a recent survey shows 60% of corporate strategy officers said that their company's decision-making process is too slow and that 91% of these companies plan to reprioritize risk management in the next three years. So what can senior executives do to prepare, or better yet avoid a highly combustible situation?

There are three ways CEOs can use their authority to create risk awareness. First, they should oversee a transparent process that defines and delegates responsibilities for risk management throughout the organization. Second, they should effectively communicate, through words and actions, the importance of risk management and how the corporate culture needs to change. And third, they must thoroughly prepare their own response and establish contingency plans in the event of a crisis.

Based on past experience, we believe chief executives are best suited to take the lead in any attempt to develop a culture of risk awareness -- regularly emphasizing the need for change and how it will be done. It is their responsibility to convey how the new culture will be embedded throughout the organization and setting clear expectations on what needs to be done in the process.

Holding one person accountable for each area of risk can add an extra layer of protection. Assembling an independent brainstorming team is another effective way to safeguard against potentially damaging situations. The team's purpose would be to report potential risks to the board, and might include both suppliers and customers.

When all else fails, one of the most important contributions a chief executive can make is when  a crisis erupts. An Oxford Executive Research Briefing in 1997 found that the stock price of major public companies that mishandled crises plummeted an average of 15% over the first year, whereas those with an effective response actually saw an increase of 7% from their pre-crisis price. With the scrutiny of the internet and 24-hour television news coverage, the average negative impact of perceived missteps is now even more devastating.

In case of a rainy day, periodic rehearsals for a variety of disaster scenarios should be practiced by the chief executive and the board. What crisis management experts call the golden hour is crucial -- beating the media to the punch by seizing immediate control of the narrative before any negative spin is made. For example, McDonald’s made all the right moves in 2004 when its then chief executive, James Cantalupo died suddenly of a heart attack during a transition from a fat-rich menu to one that included more healthy alternatives. The clear irony of the situation made the company vulnerable to ridicule and negative reporting. However, the company seized the moment with the announcement of a new chief executive and chairman within three hours of the notification of Cantalupo’s death. Instead of focusing on the negatives, the media and analysts chose to highlight the company's future potential and share prices quickly recovered as a result.

Here are seven steps a chief executive should consider when attempting to mitigate risk:

1) Planning -- Formulate a clearly defined disaster plan.
2) People -- Appoint a management team to run the disaster plan, clearly distinguishing them from other strategic teams.
3) Transparency -- Assume the lead in establishing transparent roles and responsibilities for risk management throughout the organization.
4) Preparation -- Assemble a task force to brainstorm risks that the organization has yet to consider. Rehearse regularly for a broad variety of disaster scenarios.
5) Active Management -- Make sure all levels of management are involved and actively managing their teams -- setting expectations among their respective teams.
6) Measurement -- Establish a system to measure and monitor risk management performance to create added visibility for executives.
7) Communication -- Frequently communicate the steps needed to change the risk management culture.

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