With most of us now working from home we’ve all been finding new and better ways to communicate. As part of this we’ve given our team the opportunity to contribute to our blog on any topic they want. We thought we’d start sharing some of these with clients. This first instalment is from our Risk, Governance and Compliance Manager:
When you’ve had an inside seat on a number of crisis it is easy to become a bit hardened and analytical, and easy to forget that there is always a human cost. Never more so is that human cost apparent than with the current Coronavirus crisis. The human cost is not just financial this time but deadly, and I’m sure like most of us there is not a day that passes at the moment where some news story doesn’t play on my emotions, both the tragedy and the positive sacrifices people are making. We at Bevan Buckland cannot claim any heroics and aren’t saving lives, but we have been trying to do our bit to help our clients and we will hopefully continue to do so. As much as a distraction for me as anything else I thought I’d write a few words on the crisis from my risk management perspective.
Mine was not a conscious career decision to end up specialising in Risk Management and strategy, however looking back it is not surprising that I did. My first job after graduating was working in a liquidity forecasting team for a bank, I started on July 22nd 1998 and on August 13th 1998 the Russian stock market collapsed prompting a wider emerging markets crisis. The bank I worked for had significant Russian and emerging markets exposure, so 3 weeks into my career I found myself at the eye of a storm as we struggled to figure out the financial impact of the crisis and what we needed to do to manage it. It was an immediate lesson that in business things can and do sometimes go badly wrong. Unfortunately, that wasn’t the only time I experienced a financial crisis close up. By the early 2000’s I was working in equities and had a ring side seat for the dot.com bubble and the Enron collapse, in 2003 I was living between Tokyo and Hong Kong when the SARS crisis hit, and most spectacularly in 2006 I was seconded into the mortgage backed securities team at Lehman Brothers. Soon after that move, I wrote a report highlighting a number of concerns I had about the business and the rest, as they say, is history. Although it’s worth pointing out that the 2007 financial crisis is not just history, as the impacts are still being felt today. It didn’t end there, in 2011 I was a manger in an ETF team when the UBS ETF rogue trader scandal hit, and later I was at JP Morgan when the “London Whale” scandal happened. Like most things in life and in business, you learn a lot more from when things go wrong than from when they go right, so it is definitely no surprise that I have since focussed my career on risk, regulatory compliance and corporate governance and it is also not surprising that it has become a bit of a passion topic for me.
When I interviewed for the risk manager role at Bevan Buckland one of the first things, I said was that Risk Management is a history of failure. Crisis happen, and they happen more often than we think, and Risk Managers have all too often got things spectacularly wrong. The role of a risk manager is not always to prevent a crisis but to make sure an organisation is prepared , that a business is able to limit the impact of events both within and beyond our control and that we can make good decisions when bad things happen. Most crisis that happen have at some point in history and In some form happened before, and the coronavirus crisis is no exception. All that changes is the timing, location, scale and impact of the crisis. Much like armies tend to always be ready to fight their previous battle, so risk managers tend always to focus on closing the stable door from the last horse that bolted, and that is one of the key reasons risk managers tend to fail to spot the next thing coming. A better understanding of how history repeats itself is a key skill of a good risk manager. Having had experience of so many crisis I am acutely aware that understanding how to manage uncertainty and having the right corporate structure in place is key to making good decisions in a crisis, and that continuous improvement is key to making sure everyone is always looking ahead.
Each crisis tends to teach us something new. The emerging markets crisis in 1998 taught me that accurate and timely data and information is key to managing your way through a crisis. In 1998 we weren’t prepared. Good data and good metrics around your business is fundamental to good decision making, and the time to get that right is before a crisis hits. The dot.com bubble taught me the lessons of hubris and complacently. Yes, the world changes, but people don’t, and the good times are always the times when I worry most. It is when there isn’t a crisis that I think most about what the next crisis is going to be, I guess at least when there is a crisis I know what that crisis is and can work to manage it. The one thing you’re certain of during a crisis is that there is a crisis. The lessons from Lehman Brothers are long and complex, and perhaps an entire topic on their own, but the key ones were making sure senior management have clear visibility of what’s happening the business, the lessons of failure in regulatory oversight and organisational culture, and the global economic structural dependencies we are all subject to. Other than that, it was a reminder that liquidity and credit are everything when it comes to what turns a crisis into a recession. Finally, the UBS and JP Morgan scandals are a reminder that individual and organisational conduct is important. Many crisis can be effectively managed and responded to if you have the right culture and people in your organisation, it is usually poor culture and individual conduct issues that turn a crisis into something that threatens the organisations survival.
Although the current crisis is far from over, with my risk manager hat on I am already thinking about the lessons we must learn and where the failures have been. Epidemics and pandemics are not an unknown risk, there have been many in history. The plague is something in every child’s history books. So my first question is why did this seem to take everyone by surprise. The reality is it was not as much of a surprise to governments as they want us to think, it was widely known and discussed that this could happen. Reports from both the US and UK governments show that pandemic risk was something that had been raised and discussed at the highest levels as recently as last year. So that then offers the question: why do some governments appear to have been unprepared? Effective risk management starts with clearly understanding the impact and likelihood of specific events. The government reports I have read are very clear on the impacts of a global pandemic, the UK government report last year estimated deaths over 100,000 and £2.3 trillion in economic impact, so it was not the impact that was underestimated. This leads me to believe that it was the likelihood of a global pandemic that many governments got wrong, and this is perhaps the first risk management lesson we can learn.
The last major pandemic was the Spanish Flu in 1918, long before most of our memories begin. More recent epidemics have been well managed by public health bodies – SARS, Ebola, Bird-flu – and have not ended up having any significant global impact. Most of us have also grown up in a world where, thankfully, most devastating and contagious diseases have been near eradicated. On top of that medical, technological, economic and political advances, particularly in developed countries, have given us a deep sense of health, prosperity, peace and security. These have most likely combined to give us and our governments a false sense of being invulnerable to issues like pandemics, and thus the probability of a pandemic was most likely underestimated in the minds of our politicians and that has left us appear unprepared. This lesson translates to business. The really big risks that can devastate a business tend to be very low in probability, and the longer we go without the experience of bad things happening, the more complacent we become and the more we tend to underestimate the risk. We do so at our peril.
The other lesson I infer from the current crisis is what I’ll call a loss of corporate memory. Not only do we tend over time to underestimate the risk of something will happen when we don’t see it happening, over time we lose the memory and experience of what to do when something bad does happen. Obviously there are not any people in government who remember the Spanish flu, but in countries like Taiwan and South Korea, who are regarded as having been prepared and responded well to Coronavirus, the corporate memory of the SARS crisis is fresh in people minds and experience and that helps decision making. What we are perhaps seeing in the UK and the US is slow and muddled decision making because our political systems, over the past 20 years, have undermined the corporate memory of our civil service and replaced it with an ever changing army of inexperienced special advisors with no connection to the decisions and actions of the past. That’s not a party political point, both the Conservative and Labour governments of the last 20 years have contributed to this. The last economic crisis was only 10 years ago, and the rapid response of the UK Treasury and Bank of England to the crisis is likely a more positive example of how the experience and corporate memory of 2007 helped them to act quickly and decisively in providing financial help. Experience is an important factor on decision making and having the ability to get things done.
There is an economic and behavioural term for all this, it’s the availability bias. This is when people judge the likelihood of something happening based on the ease with which examples come to mind. There is also confirmation bias where we make decisions skewed by our own experience. Our decision making and our interpretation of risk tends to be weighted towards our experiences. If we don’t have experience of something having happened, it’s difficult for us to imagine it happening or consider it a serious risk. This sets us all the challenge at a time like this of trying to think outside of our own experiences to plan the future.
Having a management team which knows how things work, who can see the challenges, set realistic expectations, prioritise issues and get things done and think outside of their own past is key to surviving a crisis. As a risk manager, the current crisis proves that good governance, strong corporate structure and culture, the right mix of management experience, and having the right people in the right roles is something important to governments and businesses at all times.