Reprinted from Britten Coyne Partners Strategic Risk Blog
In the process of evolution that has driven human progress across the ages, there three core performance metrics that apply to all organisms and organizations:
- Effectiveness: Achieving the goals that are required to ensure continued survival.
- Efficiency: Achieving those goals while using as few resources as possible.
- Adaptability: The extent to which effectiveness and efficiency are maintained in the face of changing external conditions.
There are inescapable trade-offs between these three metrics. For example, maximizing efficiency often eliminates the slack resources that are critical to adaptability.
The three major “direction setting” functions in modern organizations generally align with these three evolutionary metrics.
Strategy’s core challenge is effectiveness. Management’s is efficiency. And leadership’s is adaptability.
In this post, I’ll take a closer look at risk through each of these three lenses.
We define strategy as “a causal theory of success that exploits one or more decisive asymmetries to achieve an organization’s most important goals with limited resources, in the face of uncertainty, constraints, and opposition.” If they are achieved, these goals will, at minimum, enable the organization to survive as independent entity, and ideally generate substantial value for its stakeholders.
In this context, critical risks include failing to accurately anticipate and assess emerging threats and opportunities in the external environment, setting the wrong goals, and pursuing a strategy for achieving them that doesn’t work.
The core challenge of management is translating the organization’s strategy into detailed objectives, and devising plans, processes, systems, budgets and organization structures that enable objectives to be met with scarce resources. Management also involves monitoring implementation of these plans and the evaluation of their results.
Risk in this context is well-captured by the concept of enterprise risk management, which seeks to identify, quantify, and integrate an organization’s exposure to a range of hazard, operational, and financial risks.
The fundamental challenges of leadership include aligning employees and other stakeholders around an organization’s purpose and strategic agenda; recruiting talented employees and developing them into a high-performance team; and facilitating the organization’s continuing adaptation to its changing competitive environment.
Risk in this context is, in my experience, often the most critical and also the most overlooked because of its ambiguous nature. The best strategy and most competent management in the world are all-too-easily undermined by poor leadership and a toxic culture. More importantly, metastasizing leadership and culture risk are root causes that usually precede the appearance of management and strategic risk.
For these reasons, it is critical for board directors to constantly look for signs of emerging leadership and cultural risks. While there are multiple warning indicators to monitor, over the years I’ve found two to be particularly useful. The first is the extent of blaming that you observe in an organization. The second is how difficult decisions and high consequence uncertainties are discussed. Is there a healthy exchange of different views? How is conflict managed, or is it absent?
More broadly, sustained leadership emerges from the interaction of integrity, competence, and empathy. Leadership risk is present whenever one or more of these is missing.
In sum, risk looks very different when viewed through the lens of strategy, management, or leadership. All of them are critical, and successfully addressing their different risks requires multiple approaches and skills.
At Britten Coyne Partners, our focus is on strategic and leadership risk. We offer both education and consulting services to help our clients meet these challenges.