10

Epilogue

“Risk is a part of God’s game, alike for men and nations.” Warren Buffett

Justin

He did his best to repair the hurt feelings between Paul and himself, but their different leadership philosophies towards risk became a sticking point. There was too much water under the bridge, and soon he and Paul jointly realised that they could no longer work as equal partners.

It took many meetings and lots of creative financing for them to agree to a reasonable “divorce.” The risk they could not afford was to break up the company, so with that intent they were able to come up with a plan to make the company’s continuity the priority. PJ Investments (PJI) spun off most of its land and buildings holdings to Justin’s new company, and he received cash in exchange for his shares. His ownership dropped from 50% down to 15%, a position he believes will allow him to support as needed, yet not interfere with, Paul’s dreams. Justin asked several employees who had been with him for years and preferred his more moderate approach to risk taking to work for his new company, and all of them agreed. We assisted with the implementation of enterprise risk management (ERM) in his new company.

It is somewhat ironic that Justin is now Paul’s landlord.

Paul

Paul’s pursuit of ever-larger risks worked for him but not for Justin. Paul prefers to manage the portfolio of companies they have invested in and was happy that Justin took over the land and buildings, which he always considered a royal pain.

Paul contacted and wooed a wealthy fraternity brother and former surfing champion to join the company. With the cash his friend contributed, Paul was able to buy most of Justin’s shares. Paul’s new partner, who now owns 25% of PJI, has a similar attitude towards risk, and this both pleases and worries him. Realising that he needed an executive team that could provide better balance when facing risk and opportunity, Paul decided to promote some employees. With our assistance he selected nine employees who were assertive, moderate risk takers and good leaders.

PJI International

The implementation of ERM went as planned and designed. Through the efforts of their managers, PJI employees quickly got on board and now use the tools. Not all their risks have gone as smoothly as desired, but each new investment opportunity gets handled with poise and discipline.

Due to the change in management structure, a number of employees left, a risk Paul knew would be inevitable. Finding their replacements is taking longer than expected and creates extra work for everyone who stayed. The unexpected challenge has been finding the right fit. They developed a profile of the ideal employee—a balanced risk taker—and they are finding it’s an attitude that is difficult to find (Murphy’s Law at work).

The employees who chose to stay with Paul support his vision and are excited about the new investment opportunities ahead.

The Future Is Bright

The future looks good for PJI and its employees and for Justin’s company, as well. Both men continue to dream because it’s in their DNA.

Justin plans to convert some of his company’s buildings into manufacturing incubators, places where risk-taking entrepreneurs can design and build their products without having to invest in a costly manufacturing plant. In exchange for a reasonable rent and custom facilities, Justin will take an equity position in these start-ups. He is eager to coach these visionaries on how to take thoughtful, planned and balanced risks.

Paul has a similar dream. He plans to create an incubator institution for visionary entrepreneurs who are just getting started. For a reasonable management fee, PJI will take care of most of the back office logistics that prevent idea people from pursing their dreams. Paul wants to coach them on how to be visionary and still take thoughtful, planned and balanced risks.

Though their roads to success are now heading in separate directions, I foresee the paths merging again in the future. By combining resources they could help launch hundreds of new businesses before they retire. They would do it using their own versions of ERM to ensure these emerging companies achieve success faster and sooner than start-ups that do not practise risk management.

Both men deeply understand there will be potholes along the way and are committed to facing them with confidence and courage.

You and Your Organisation

You now fully understand that risk management is a holistic and comprehensive body of knowledge that has grown into a critical competency for the management of an organisation. ERM will aid you in being and staying successful, regardless of whether you define yourself as a visionary, a creator or simply a steward.

You can explain to peers and employees that your ERM programme must be a structured and disciplined approach that aligns your firm’s strategy, processes, people, technology and intellectual capital with the purpose of evaluating and managing the uncertainties you face as your organisation moves into its desired future. It needs to become a truly holistic, integrated, forward-looking and transparent process approach to managing all key business risks and opportunities with the intent of maximising the value of your enterprise for the stakeholder.

You now know that developing a risk management programme alone does not decrease your risk or its negative consequences. Developing this programme and its structure is not something you can easily do. ERM is customised for your firm’s unique needs. Although ERM considers every risk, your programme cannot be pre-packaged or a generic solution.

You now understand that managing risk cannot be sold as an idea or a theory. It must have substance, and with the help of your employees you use consensus to determine what the substance looks like. Each organisation must design its own unique approach to risk management by following current best practices, two of which are ERM and strategic risk management.

You now recognise that implementing an ERM capability provides greater value by building in you and your employees the confidence to take on risk rather than avoid it. By actively managing the right risks, especially the critical ones, you will soon have a timelier, more comprehensive and deeper understanding of the risk, which in turn facilitates better decision making. You will also gain greater confidence to take on new risks or accept higher levels of risk. Your risk tolerance or appetite will grow.

You now see that a wise investment in risk management in your own organisation will

• create a greater competitive advantage for you.

• reduce your cost of capital.

• make your organisation more valuable.

You now realise by this point that analogies work well to explain what risk management is all about. Here is my final one for you to share with employees, fellow managers and anyone who needs to understand ERM’s importance and power:

You already practise risk management and do not realise it. Let’s walk through a situation as a demonstration of what you want your employees to do to prove you know the process.

Case Study: The Hornet’s Nest

I am hosting a party in my backyard, and someone comments that the music is a little loud. Being a good host I decide to turn down the outside speaker’s volume. The volume knob is located under a shelf near the grill. I notice a small wasps’ nest next to the knob, so I cannot lower the volume outside. I go inside and lower the volume. Before I leave I verify that the nest is quiet, with no activity in or around it. I have a risk.

Although I could spend time worrying about the cause, doing that is a pointless waste of time because the risk is real. Not paying attention to its existence (I have not used the grill for months) is the only lesson I need to retain. My urgency is to remove the downside of this peril.

I have several choices for how to react:

• I could ignore the nest. Not a good decision! If I ignore it I put my guests in harm’s way because Murphy’s law exists, and the wasps could attack.

• I could remove the nest right now. Not a good decision!

• I could remove the nest later. Maybe this is the best way to handle the risk under the conditions, but that creates another peril. As I use the grill the heat and activity might stir up the wasps, but I have to use the grill, and I don’t want to send my guests home early.

I have two more choices:

• I could say nothing. Not a good decision!

• I could warn the guests and ask them to avoid the area. A wise choice!

Before I do that I go through a few scenarios in my head:

• If I stay silent I expose anyone who goes near the area. Not a good decision!

• If I announce the nest some of the children in attendance could get curious and poke at it to get a reaction. Murphy’s Law at work!

I create an action plan. I calmly inform my guests of the problem and suggest they stay away or remain indoors. I ask a family member, someone I trust, to assist me in keeping people and children away from the area. During the evening I frequently check the nest to ensure the wasps are quiet. Thankfully the evening passes without any mishaps.

I am not done because my risk is still there. The next day I know I have more choices:

• I could avoid my responsibility and develop intentional amnesia, knowing the peril will grow. Not a good decision!

• I could put off finding a solution, knowing the peril will grow. Not a good decision!

• I could remove the nest now, which may be the best way to handle the risk, but I have another peril. I am highly allergic to wasp venom, so by addressing one risk, I create another.

I develop a viable mitigation plan, and within one hour the wasps’ nest is gone without incident; however, I am not done with the risk. I poke around the house and look for other nests because one nest usually leads to another. Sure enough I find three more small ones. Luckily the overall peril is in its early stage. Using the same mitigation plan I remove them all. I make a mental note to more frequently check for nests and recruit family members to assist me in that task. Awareness about the existence of wasps in my neighbourhood is now on my family’s radar.

I suggest you walk through this story again, but substitute the wasps’ nest with a risk your organisation now faces, and replace family with employees. You will notice the process makes perfect sense. Basically what I did was apply awareness (notice it); exposure assessment (conduct a location analysis); measurements (verify its size and amount of activity); monitoring (frequently check on it); empowerment and engagement (get others involved); scenario planning (foreseeing that children might disturb it); alternative identification; mitigation (use of smoke, pesticide and destruction of all nests); and increased diligence (family follow-up monitoring and greater awareness).

When you perform risk management you are doing the same thing: making choices, assessing and proactively removing the peril while looking for related perils. Compare my thought process to the map of a simple and effective risk management programme shown in Figure 10-1:

Can you do it? Of course you can and so can your employees and fellow managers. That is the beauty of formal risk management. It is something a thoughtful, caring and concerned human like you do all the time.

Onward

Now that you know how to implement a firmwide risk management plan, I urge you to follow the advice of the fictional Capt. Picard of the USS Enterprise: “Make it so!”

“Courageous risks are life-giving, they help you grow, make you brave, and better than you think you are.” Joan L. Curcio