How risk leadership leads to better, more rational decisions
Authors:
- Bhavik Modi, Senior Director, Innovation and Digital Transformation at BTS
- Dr. Annette Hofmann, Director of the Lindner Center for Insurance and Risk Management at the University of Cincinnati, author of The 10 Commandments of Risk Leadership, and Editor-in-Chief of the Risk Management Insurance Review (RMIR).
Dr. Annette Hofmann is a researcher, author, and leading expert in the field of organizational risk. In this interview with Bhavik Modi, Senior Director, BTS, Dr. Hofmann explains how moving beyond a traditional approach to risk and developing risk leadership competence can help companies become more resilient and profitable—and may even save lives.Bhavik Modi: Dr. Hofmann, I’ve been fascinated to explore your research into risk in relation to the healthcare and insurance markets, and to industry in general. Under your leadership as director, the Lindner Center for Insurance and Risk Management is doing fantastic work in researching and collaborating with industry. BTS is excited to be partnering with the center on a new course based on your research. Thank you for agreeing to discuss your insights with me.Modi: I’d like to start with defining terms. Organizations have traditionally focused on risk management. How is this different from risk leadership?Dr. Annette Hofmann: Speaking specifically about the insurance industry, risk professionals are typically trained to think in terms of established concepts of coverage—additional insureds, medical payments, etc. They use risk maps or ratings to classify different risks and then evaluate them to find an appropriate risk-management technique. They focus on the mechanics, the quantitative aspects, of managing risk.Risk leadership addresses not just the quantitative but also the qualitative aspects of dealing with risk. This requires risk literacy. Understanding individual risk perception, risk aversion, risk perception-related behavior, and how emotions respond to risk and the cognitive biases that result is crucial to developing the risk literacy that enables better decision-making. This understanding is especially important for leaders, as their decisions have greater consequences. Risk leadership also requires communicating about risk, providing direction and guiding the company through tough times by coordinating efforts to deal with major risk exposures, anticipating opportunities to avoid risks, and implementing a risk-related strategy to ensure long-term success.Modi: Often, risk leadership is associated with the insurance or actuarial professions. How can this concept be applied to organizations in other industries?Hofmann: Many new titles have emerged in the past decade—Chief Risk Officer (CRO), Director of Risk Management, Vice President Risk Services—demonstrating a broad recognition that risk management deserves to be a top priority. The challenge is to move from competence in risk management to true risk leadership.In The Leader’s Brain, Wharton Neuroscience Professor Michael Platt describes how key areas in our brain work and how insights from this can be used to teach us how to develop better leadership abilities. He writes that while it’s difficult to train people in some areas, such as ethical decision-making, improvements in risk literacy are relatively easy to accomplish. The task consists mainly of acquiring knowledge about the risk-related biases our brains are commonly exposed to and gaining insights into how these biases can be avoided. Understanding the hidden forces that drive our decision-making processes under risk and uncertainty, we can be trained to make more rational decisions.Modi: What is the “uncommon sense” when it comes to risk leadership? What behaviors are well understood but often not put into practice? Or which behaviors are counterintuitive to how we would traditionally think and work?Hofmann: Managers are often seen as having sophisticated information-processing capability, as being able to make rational risk-related decisions based on economic incentives and the fullest available range of information. But managers are human beings, and like all of us, prone to biases and cognitive mistakes when they interpret risk-related information. These mistakes, together with emotions, hinder the objectivity of their decisions, which ultimately may hurt the financial survival of their firms.For example, the lack of objectivity prevents managers from identifying and taking into account secondary risk effects, which is when avoiding or trying to mitigate one risk creates another risk. Risk leadership means not only seeing the potential for secondary risk but also communicating throughout the organization how this is influencing the decision-making process.Consider the case of a U.S. manufacturer that recently experienced a small explosion leading to worker injuries. The company decided, following pressure from employees, to stop producing the part that was responsible for the explosion. Consequently, the part is now being imported from a Chinese supplier. Was this a wise decision? Well, the risk of another explosion is avoided, but now there is a secondary risk: the imported part could be defective; it might be delivered late or not at all. The decision to stop producing the part now creates supply chain risk.Good risk communication, letting employees know about the very small risk of explosion and the firm’s efforts to prevent a recurrence while continuing to produce the part, might have been a superior strategy for the company.Modi: How much of risk leadership is preventive versus reactive? And what are the consequences of poor risk leadership in a reactive or preventive situation?Hofmann: When it comes to reactions, one of the best illustrations of poor risk leadership can be found in the behavior of government officials following the terrorist attacks of September 11, 2001, killing almost 3,000 people.Officials did not provide the public with information about this type of risk that may have headed off a misguided reaction. After 9/11, many people used a car to get to another city or location far from their home rather than taking an airplane. Because driving is so much more dangerous than flying, this switch resulted in an estimated 1,600 more fatalities in the U.S. in the year following 9/11 than would have occurred if people had continued with their previous plans and patterns of travel. Our ability to make decisions based on factual probability data is often influenced by our fears and emotions following big events like the terrorist attacks, and policymakers did not address this effect by communicating potential second-order risk effects to the public.When it comes to preventive risk leadership, people often neglect the potential occurrence of natural disasters by adjusting their subjective probability judgments.People tend to prefer insuring against a high-probability-low-consequence risk such as a bicycle theft, over a low-probability-high-consequence risk, such as a flood. They purchase add-on coverage to the homeowner's insurance policy to cover the risk of bicycle theft rather than covering the risk of loss due to flooding.Studies of insurance demand suggest that individuals tend to ignore or undervalue low probability events.However, after a catastrophe occurs, people suddenly think this will happen again soon and then decide to purchase coverage, which according to probability they are less likely to need the following year. A preventive risk leadership approach would be to inform people about this misguided behavioral pattern and incentivize them to purchase catastrophe insurance before something happens.Modi: It’s clear that developing risk leadership requires a dramatic shift in thinking, including a recognition that, as you say in your book, we are not rational in the face of risk. Change is hard. Why is it worth it for organizations to make this change?Hofmann: Risk leadership enables organizations to identify, and therefore eliminate, the cognitive biases that lead to bad decisions. This needs training and I am happy to help – but of course I am human and therefore my decisions are also far from perfect. Training in risk leadership will lead to better decisions and better communication of those decisions, and ultimately to more profitability and greater long-term success of a company.
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You’re buckling in for an overseas flight in a brand-new Boeing 777. The pilot comes on the PA: “Ah, ladies and gentlemen, our flight time today will be six and a half hours at a cruising altitude of 33,000 feet. And I should mention that this is the first time I have ever flown a 777. Wish me luck.”
Before setting foot in the real world, pilots, military personnel and disaster response teams use intense simulations to learn how to respond to high-intensity challenges.Why should we place corporate leaders and their teams in situations without first giving them a chance to try things out? The risks are huge — new strategy investments can run into the hundreds of millions of dollars. BTS offers a better way to turn strategy into action: customized business simulations.
‘Now I Know What it’s Like to be CEO’
A customized business simulation of your enterprise, business unit or process, using real-world competitive dynamics, places leaders in a context where they step out of their normal day-to-day roles and gain exposure to the big picture. Participants make decisions in a risk-free environment, allowing them to experience critical interdependencies, execution best practices and the levers they can use to optimize their company’s key performance indicators. It takes the concept of a strategy and makes it personal, giving each individual the chance to see the direct impacts of their actions and the role they play in strategy execution.
Leading corporations are increasingly turning to business simulations to help build strategic alignment and execution capability when faced with the following business challenges:
- Key performance objective and new strategy implementation.
- Accelerating strategy execution and innovation.
- Improving business acumen and financial decision making.
- Transforming sales programs into business results accelerators.
- Leadership development focused on front-line execution.
- Implementing culture change as tied to strategy alignment.
- Modeling complex value chains for collaborative cost elimination.
- Merger integration.
Within minutes of being placed in a business simulation, users are grappling with issues and decisions that they must make — now. A year gets compressed into a day or less. Competition among teams spurs engagement, invention and discovery.
The Business Simulation Continuum: Customize to Fit Your Needs
Simulations have a broad range of applications, from building deep strategic alignment to developing execution capability. The more customized the simulation, the more experience participants can bring back to the job in execution and results. Think about it: why design a learning experience around generic competency models or broad definitions of success when the point is to improve within your business context? When you instead simulate what “great” looks like for your organization, you exponentially increase the efficacy of your program.
10 Elements of Highly Effective Business Simulations
With 30 years of experience building and implementing highly customized simulations for Fortune 500 companies, BTS has developed the 10 critical elements of an effective business simulation:
- Highly realistic with points of realism targeted to drive experiential learning.
- Dynamically competitive with decisions and results impacted by peers’ decisions in an intense, yet fun, environment.
- Illustrative, not prescriptive or deterministic, with a focus on new ways of thinking.
- Catalyzes discussion of critical issues with learning coming from discussion within teams and among individuals.
- Business-relevant feedback, a mechanism to relate the simulation experience directly back to the company’s business and key strategic priorities.
- Delivered with excellence : High levels of quality and inclusion of such design elements as group discussion, humor, coaching and competition that make the experience highly interactive, intriguing, emotional, fun, and satisfying.
- User driven: Progress through the business simulation experience is controlled by participants and accommodates a variety of learning and work styles.
- Designed for a specific target audience, level and business need.
- Outcome focused , so that changes in mindset lead to concrete actions.
- Enables and builds community: Interpersonal networks are created and extended through chat rooms, threaded discussions and issue-focused e-mail groups; participants support and share with peers.
Better Results, Faster
Well-designed business simulations are proven to significantly accelerate the time to value of corporate initiatives. A new strategy can be delivered to a global workforce and execution capability can be developed quickly, consistently and cost-effectively. It’s made personal, so that back on the job, participants own the new strategy and share their enthusiasm and commitment. This in turn yields tangible results; according to a research report conducted by the Economist Intelligence Unit and sponsored by BTS, titled “Mindsets: Gaining Buy-In to Strategy,” the majority of firms struggle to achieve buy-in to strategy, but those that personalize strategy throughout their organization significantly outperform their peers in terms of profitability, revenue growth and market share.
Business Simulations: Even More Powerful in Combination
Comprehensive deployment of business simulation and experiential learning programs combines live and online experiences. The deepest alignment, mindset shift and capability building takes place over time through a series of well-designed activities. Maximize impact by linking engagement and skill building to organizational objectives and by involving leadership throughout the process.
Putting Business Simulations to Work
Simulations drive strategic alignment, sales force transformation, and business acumen, financial acumen and leadership development, among other areas. A successful experiential learning program cements strategic alignment and builds execution capability across the entire organization, turning strategy into action. Results can be measured in team effectiveness, company alignment, revenue growth and share price.
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I recently read an HBR article discussing why the traditional approach to leadership development doesn’t always work.
It stated that instead of traditional methods, the best way to identify, grow and retain leaders to meet today’s demands is to “Let them innovate, let them improvise and let them actually lead.”
Over the past 30 years, as we’ve partnered with clients facing a vast range of challenges, we’ve seen the truth behind this – that people learn best by actually doing. That’s why business simulations are such a powerful tool: they allow people to do and lead within a risk-free environment, and condense years of on-the-job learning experience into a few days, or even hours.
We also know that learning is not just a “one and done” situation – it is a continuous experience. In many cases, a learning journey, which blends a variety of learning methodologies and tools over time, is the most powerful means of shifting mindsets, building capabilities and driving sustained, effective results.What a learning journey looks like depends entirely on the context of your organization. What challenges are you addressing? What results are you driving for? What does great leadership look like for your organization?
To bring this to life, imagine the following approach to a blended learning journey for aligning and developing leaders – in this scenario, within a financial services firm: Financial technology has “transformed the way money is managed. It affects almost every financial activity, from banking to payments to wealth management. Startups are re-imagining financial services processes, while incumbent financial services firms are following suit with new products of their own.”
For a leading financial services company, this disruption has led to a massive technology transformation. With tens of thousands of employees in the current technology and operations group, the company will be making massive reductions to headcount over the next five years as a result of automation, robotics and other technology advances.
This personnel reduction and increased use of technology is both a massive shift for the business as well as a huge change in the scope of responsibility that the remaining leaders are being asked to take on moving forward. As such, the CEO of the business unit recognizes the need to align 175 senior leaders in the unit to the strategy and the future direction of the business, and give them the capabilities that they need to effectively execute moving forward.
To achieve these goals, BTS would build an innovative design for this initiative: a six-month blended experience, incorporating in-person events, individual and cohort-based coaching sessions, virtual assessments and more. Throughout the journey, data would be captured and analyzed to provide top leadership with information about the participants’ progress – and skill gaps – on both an individual and cohort level, thus setting up future development initiatives for optimal success.
The journey would begin with a two-day live conference event for the 175 person target audience, incorporating leader-led presentations about the strategy. The event would not just be talking heads and PowerPoint slides, but rather would leverage the BTS Pulse digital event technology to increase engagement and create a two-way, interactive dialogue that captures the participants’ ideas and suggestions. Participants also would use the technology to experience a moments-based leadership simulation that develops critical communications, innovation and change leadership capabilities, among other skills.
romAfter the event, participants would return to the job to apply their new learnings. On the job, each participant would continue their journey with four one-on-one performance coaching sessions, in addition to a series of peer coaching sessions shared with four to five colleagues. They also would use 60-90 minute virtual Practice with an Expert sessions to develop specific skill areas in short learning bursts, and then practice those skills with a live virtual coach. Throughout the journey, participants would access online, self-paced modules that contain “go-do activities” to reinforce and encourage application of the innovation leadership and other skills learned during the program.
As a capstone, six months after the journey has begun, every participant would go through a live, virtual assessment conducted via the BTS Pulse platform. In three to four hours, these virtual assessments allow live assessors to evaluate each leader’s learnings from the overall journey and identify any remaining skill gaps. The individual and cohort assessment data would then lead to and govern the design of future learning interventions that would continue to ensure the leaders are capable of implementing the strategy.
As you can see, this journey design leverages a range of tools and learning methodologies to create a holistic, impactful solution. It’s not just a standalone event – each step of the journey ties into the one before, and the data gathered throughout can be used well into the future in order to shape the next initiative .
Great journeys or experiences like this can take many forms. In addition to live classroom and virtual experiences, there is an ecosystem of activities, such as performance coaching, peer coaching, practice with an expert, go-dos, self-paced learning modules, and more, that truly engage leaders and ensure that the learnings are being reinforced, built upon, practiced and implemented back on the job. We find that these types of experience rarely look the same for every client. There are many factors that determine which configuration and progression will make the most sense. There is one common theme that we have found throughout these highly contextual experiences, however – that the participant feedback is outstanding and the business impact is profound.
Leading with Purpose, Part 1
Most CEOs I speak with are not 100% at peace with their company’s purpose. As the market, their people and their business evolve, so will their purpose. As some of the best companies of past and present show us, there is strength, and even magic, in a great company purpose. What is also clear, however, is that this magic does not come from just having a “purpose” or “vision,” but rather from how well a company is executing against their purpose.
When Southwest Airlines (which has been profitable for 45 consecutive years, and on FORTUNE’s list of World’s Most Admired Companies for 24 straight years) was first starting out, their mission was to make flying affordable.1 They rallied their people on the idea that a grandmother should be able to affordably buy a ticket, at the drop of a hat, to get on a flight to see her new grandchild. This simple mission led to the “Southwest Effect,” which transformed the airline industry, and continued to be a lens with which the Southwest leadership team made key decisions.
Today, Southwest’s vision has evolved: “To become the world’s most loved, most flown, and most profitable airline.” And they are executing on this vision. They continue to drive superior shareholder returns against all industries on the S&P 500 (as they have for the past 44 years), and in 2018 were named the top low-cost airline in JD Powers customer survey reports for the second year in a row.
As the Southwest example highlights, great company purpose combined with a leadership team who will build the work-flows, culture, processes and metrics to live up to it can be an enormous employee motivator. But we have also experienced, both at BTS and with our global clients, that a good company vision and purpose on their own are not sufficient – employees need them to be even more personal to them as an individual. I remember a lunch I had twelve years ago with a 24-year old new hire who was my direct report. After some small talk he looked at me and said, “Why are you here? Why have you spent seven years with the same company?”
I’ll never forget that lunch. It was the first time I had been asked the question, and it was the beginning of a new decade where our employees were much louder and more active about wanting to reflect and spend time on our mission and purpose, linking it to their personal values and the impact they strived to have in the world. Luke, that 24-year old new hire, has made me and our company better as a result of his question.
In the last decade, there has been a growing emphasis in the business world on finding a deeper motivation to unlock greater meaning at work. For some this may sound ‘fluffy,’ or as one executive we spoke to commented, “Is this just the next version of the pursuit of vision and values? It sounds great on paper but too often makes little real difference as it tends to stay on the wall, rather than live in your heart.”
Yet your people spend the majority of their life at work and with colleagues. At its best, a sense of purpose is a way of bringing meaning to their work and understanding the contributions they are making to the company, as well as greater society. It makes sense, then, that employees who are clear on their personal and professional purpose end their work day invigorated and proud of what they’re doing instead of exhausted by mindless work that is bereft of real meaning.
According to a recent PWC study, 79% of business leaders believe that purpose is central to business success – but only 34% use their organization’s purpose as a guidepost for their leadership team’s decision-making. Signs that your workplace may be lacking organizational purpose are distracted employees and a lack of comradery. These are significant factors – so why don’t more organizations devote time to developing clear purpose and values? Well, developing organizational purpose is no easy task, and much of it starts with your own personal purpose. If you’re unsure of what exactly your own personal purpose is, have no fear – in the next two installments of this blog series, we will offer simple steps to help you uncover your personal and organizational purposes and get closer to leading through the lens of purpose.