Prepare for the worst-case scenario

No comments

The Bundesbank recently concluded that banks with more women on the board took more risks than ones dominated by men.

The Bundesbank recently concluded that banks with more women on the board took more risks than ones dominated by men. That set me thinking -not about women on boards (I’m not brave enough to tackle that again), but about risk and how we deal with it.

There is a lot of corporate governance mumbo jumbo around these days about how companies should report risks, seen now in every annual report. Typically, there’ll be a list of risks, followed by the possible outcomes: loss of reputation, profit, cash and possibly all three. There’ll then be a sentence about how the company has got it all under control, has a contingency plan and it’ll be okay in the end. All of this is stupendously dull and no one surely ever reads it.

Retailers probably start their list with the risk of selling something that harms customers.

It’s a pretty good business rule not to kill your customers. As a result retailers have whole departments of quality control and health and safety. The butt of jokes they may possibly be, but we all know in our hearts that we take them for granted.

When I was a store manager, one day my deputy grabbed me in the produce aisle and said don’t go out the back. I looked blankly at him, while he explained that the bomb squad had cordoned off the warehouse. They were examining a suspect package that they thought had been planted by a Triad gang, aimed at the Chinese takeaway next door.

Now what risk management had the police employed that day to be certain that we were all safe on the shopfloor, barely 20 feet away? What were our procedures for a bomb alert, when the police seemed relaxed about the risk to our customers and staff?

Another time, I chased a shoplifter down the street, just instinctively, without thinking. My ever-patient deputy gave me a lecture on my return about the risks involved. Had I not read our procedures manual? What would I have done if I had caught him? (Answer, no idea of course). How did I know he didn’t have a knife?

Risks are just so dull on paper but so real in life. We don’t need more governance rules, but we do need managers to think about risk in everything they do. Every business proposal, which is of course so full of optimism about its certain success, must really consider what could go wrong.

The acid test is ‘what’s the worst that can happen?’ This needs to be properly thought through. I have seen so many projects, especially during this financial crisis - even written a few myself - where the reality turned out far nastier than the ‘worst case’.

Then you have to build the contingency plan. Acknowledging risks is just the first stage. The real value is in thinking through what you would do in advance. It is so much easier to do that, rather than trusting the worst will never happen. Not being like me and charging off down the road, only later thinking out the risks.

Ray Bradbury put it well; “Living at risk is jumping off the cliff and building your wings on the way down.”