Take Risk Management Seriously

During the time I served as a pathologist and Deputy Coroner in Los Angeles, I learned to look past the disaster-of-the-moment to the root causes of a crisis so that others can avoid a similar fate. A sign, above a double doorway at the end of a hallway, announced in Latin, “Mortui Vivos Docent.” It’s here that the dead teach the living.

Here is the lesson now, in the midst of the Coronavirus crisis, for this President and future Presidents, for CEOs of businesses small and large, for members of Boards and members of Congress: Give your risk management team a seat at the table and make sure their voices are heard and heeded in the C-Suite and the Oval Office by responsibly executing your leadership and governance duties.

In the corporate world, we’ve seen events over the past year devastate the reputations of companies from BP to Boeing – some, like Johnson & Johnson, known for decades as the standard for safety and service – because apparently no one with sufficient clout in leadership or governance recongized that cultural changes within these organizations were fostering enterprise-level risks.

Now, in the middle of a pandemic and economic crisis, we learned that cultural changes unique to this administration damaged the nation’s risk management apparatus. Last year, the Director of National Intelligence warned the US Senate that: “The United States and the world will remain vulnerable to the next flu pandemic or large-scale outbreak of a contagious disease that could lead to massive rates of death and disability, severely affect the world economy, strain international resources, and increase calls on the United States for support.” As evidence mounted that this risk was actually materializing, the executive branch failed in its leadership function and Congress in its governance responsibilities.

Intelligence gathered by a risk management team is only as valuable as its ability to inform leadership – and leadership’s willingness to direct action. In many businesses, risk management teams have been pared to the bone, limiting their ability to gather intelligence on the new existential reputation risks that have emerged over the past few years.

The National Security Council saw its directorate for global health and security and biodefense dismantled in March 2018. The House voted recently to restore NSC’s capabilities in this area, but so far, there’s been no further action. In addition, there’s been significant turnover in the leadership roles of Director of National Intelligence, National Security Adviser, and White House Chief of Staff.

Meanwhile, Congress largely exhausted itself in other risk governance and oversight tasks such as understanding the role of foreign governments in the 2016 elections and the ethics of senior executive branch members. The greatest near-time threat to the American way of life got lost among more immediate—and in hindsight lesser—concerns.

While no longer a pathologist, my current firm, Steel City Re, is in the business of analyzing and underwriting corporate reputational risk employing principles of informational and behavioral economics. Informational economics teaches us that as humans, we do not necessarily accept information that is at odds with what we believe. In the case of the outbreak and impacts of the virus, even had the information flowed through the executive branch unimpeded, the President was committed to a different narrative. Even as the threat became glaringly obvious, he dismissed it. He chose promotional salve over risk management action. This is comparable to a company believing so strongly in its own reputation that it ignores warnings from risk managers and obvious signs of dangerous flaws in its current operation.

Our country will recover of course. Resilience and rapid recovery, as we have learned from studying some of the worst corporate crises of the past decade, favors companies where leadership is deeply trusted before a crisis, where debt is responsibly managed before a crisis, and where financial actions taken in the shadow of a recent crisis successfully convey an air of confidence and determination.

It is recognized worldwide that our country’s leadership has a difficult relationship with the truth. This same leadership, and our Congress, are challenged when faced with fiscal responsibility. And unfortunately, the Fed used so much of its ammunition earlier in an effort to maintain our hot economy and stock market that when we faced a serious market collapse, the few rounds it had left were viewed by the market as desperate and irrelevant.

It now appears, however, that the administration is finally pushing a more significant economic plan, similar to the one implemented in 2008, and even more radical approaches such as sending cheques to every American. The one advantage governments have over businesses is that they can literally print money. But not forever.

There’s one more lesson we’ve learned from the corporate world about recovering rapidly from a painful reputational crisis. Leadership needs to apologize for its mistakes. In addition to the type of major economic moves that the world will take seriously, leadership needs to reassure the public that it understands what went wrong in our risk management apparatus – why we were so far behind in addressing the crisis – and that we as a nation are committed to unifying and rectifying the discrepancies in our unbalanced finances, controls, leadership and governance so that this type of crisis will never be repeated. The actions American voters will take in November, like the actions of investors in the equity markets, will help focus our leadership’s attention to these vital matters.

Written by Nir Kossovsky.

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