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Culture as Risk Mitigant: Cockpit, Country and Company

The practice of risk management -- perhaps business management as a whole -- is too dependent on that which is quantifiable. Culture should not be delegated to the status of an amorphous add-on. It is front and center to the challenge of risk resilience.
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How did the national airline of Korea transform itself from one of the most accident-prone to one of the safest carriers in the world in less than a decade? As Malcolm Gladwell forcefully argues in Outliers, the driver was "cockpit culture."

Most plane crashes are the result of an accumulation of minor malfunctions rendered disasterous by human interaction. As is hauntingly evident from flight recorder transcripts, preventable errors have prevailed due to a breakdown of teamwork and communication.

Cultures can be distinguished by the scale of their power index -- the rigidity with which hierarchical distance is maintained -- and the extent to which individuals are reliant on rules as opposed to resourcefulness in the face of ambiguities.

The assertiveness and choice of words with which a deputy communicates with his captain or his controller is a direct function of his cultural context. Consequently, linguists and psychologists proved to be as relevant to airline safety as technical engineers.

What is true in the cockpit is equally true at the level of the country.

At the 2013 annual meeting in Davos, the World Economic Forum unveiled its inter-disciplinary framework for Risk Resilience. In a world of complex linkages, resilience against 'unknown-unknowns' is as important as the management of known risk factors.

There are at least three components to a resilient, risk-ready system:

1. Robustness is the ability to contain and withstand shocks. In a system where decision-making is modularised into autonomous cells with firewalls in between, the potential for a localised shock to debilitate the entire system is reduced. The fact that the supply chain of food was largely functional after the Japanese earthquake in 2011 is illustrative of a networked managerial structure.

2. Redundancy is about back-ups on standby. It is also about a diversity of overlapping policies and plans of action aimed at tackling a given situation.

3. Resourcefulness is the ability to adapt and respond flexibly to crises. The relationship between "authorities" and communities and the degree of trust within communities have a bearing on our capacity for self-organization.

What is true for a country is equally applicable at the level of the corporation.

Companies across industries -- whether finance or commodities -- often address incidents of 'control failures' without acknowledging the possibility of 'culture failures.' Understandably, the attitude is: "do we not tar the vast majority of decent capable employees with the actions of a few"?

We don't.

Culture is not about individuals as isolated atoms. It is about the norms of interplay, how we interact with each other and how we rank our priorities at a practical level. With the wrong kind of software governing interaction, it is possible for the intelligence and integrity of an organization to be disconnected from the knowledge and integrity of individuals within it.

It was also at Davos that Bain & Co. hosted a session titled "Leading by Letting Go." We heard from some of the largest and oldest multinationals in finance, consumer goods and electronics that you gain control by giving away control. Within appropriate guard rails, timely feedback and clear executive direction, employees are seen as self-directing and self-correcting.

Don Tapscott and Anthony D. Williams, authors of Wikinomics, make a similar point: "To control your future in a volatile world, you will need a paradoxically different attitude of letting go. Encourage people to organize themselves, help you solve problems and come up with new ideas."

On this backdrop, there are three specific recommendations for companies seeking to enhance their risk resilience:

1. Spend as much time articulating and reinforcing principles and values as you would rules and procedures. Employees make judgement calls and on occasion face ethical dilemmas. Checkbox-ticking automatons don't make a strong line of defence when it comes to assessing and responding to material risk. Dan Ariely, author of Irrationally Rational, conducted an experiment with insurance claimants. For half the subjects, the signature line and statement "I promise that the information is true" was kept at the bottom of the page. For the other half, it was moved to the top of the page, before the details of the claim were filled in. Those who signed at the top cheated less! In the same vein, the Sydney-based St. James' Ethics Centre promotes the use of oaths amongst employees to reinforce good behaviour.

2. If your organization still relies on hierarchical information-hoarding and operational silos, make a few punctures into them. Let it be unambiguous that inquisitiveness, transparency and collaboration are actively sought after. Encourage cross-divisional, cross-team sharing of ideas not just in scouting for revenue opportunities but also in control practices. Horizontal checks and balances can shine the light on areas that may be missed by vertical ones.

3. Crowdsource views and opinions -- though not decisions. Failure to tap onto the wisdom of rank-and-file employees is wastage of shareholder value. While most firms have procedures for whistle-blowing, not enough have avenues for providing real-time feedback and suggestions on how to improve the operating environment. Create a virtual suggestions-box and encourage its usage. Support the minority of early enthusiasts and arrange for "reverse mentoring" of senior executives. An inclusive culture builds loyalty and loyalty not only reinforces resilience, it is also the best agent of recovery after a risk event.

The practice of risk management -- perhaps business management as a whole -- is too dependent on that which is quantifiable. Culture should not be delegated to the status of an amorphous add-on. It is front and center to the challenge of risk resilience.