Historically, the corporate risk management department has been based on the partnership engagement model in that the department was viewed as an adjunct function that supplied ancillary services to the core business. A core tenet to this approach is the mindset that the sole purpose of risk management is to prevent bad things from happening and to address the financial consequences of bad things happening, usually through insurance. This article explores how this model can be improved upon and, more importantly, how corporate risk management departments can become an indispensable partner that contributes to the success and productivity of the organization.
“To me, there are four central aspects of culture that support effective risk management: learning, listening, helping and speaking up. In a learning culture, we think about and plan for what might happen. And we learn from experience what went well and what didn’t so we can improve for next time. In a listening culture, we seek advice, appreciate a fresh perspective, and are open to other’s strengths, and helping when we have an opportunity. And in a speaking up culture, we let our colleagues know when see a problem or after something goes wrong so that we can get started fixing it. Risk management is a creative, social process. It is a way of thinking, doing and interacting.”
Joshua Rosenberg, Chief Risk Officer of the Federal Reserve Bank of New York
Oct. 21, 2022 Remarks at the Central Bank of Nigeria’s Second National Risk Management Conference
Before getting to the historical reasons underpinning the “failure mindset,” let’s review the lessons from the previous section. There, we traced the progression of humanity through several stages of evolution: (i) hunter-gather; (ii) tribally organized communities; (iii) communities governed by rule by law; and (iv) communities governed by rule of law. We used the term community broadly to encompass all types of organizations including political and business organizations. Furthermore, we explained that the rule of law approach (which incepted in the 17th century) enables organizations to perpetuate themselves through a growth mindset fueled by the unleashing the full range of capabilities of each individual within the organization. Lastly, we pointed out that the risk management profession could help the c-suite in this effort through the promotion and endorsement of decisions and behaviors that enlist people in the pursuit of noble causes worthy of their trust and dedication. That, in turn, requires the risk management profession to become a place that helps business leaders learn how to lead with moral authority and how to generate respect and influence by trusting people with the truth.
Social scientists teach us that three major forces make a difference in whether organizations can become generative through widespread adoption of a growth mindset. The first force is the amount of social capital in the organization, a term intended to capture the degree of trust within and between the various social networks that comprise an organization. The second force is related to the first one – it looks at the quality and durability of the institutions within an organization. Shared stories represent the third force. For now, let’s focus on the shared stories and come back to social capital and institution building in the next section.
If there is one belief that underlies stories told by ancient and modern thinkers, philosophers, and social scientists, it is that humans are bad. This belief helps explain why a rule by law approach has prevailed for centuries. Such an approach is necessary if we believe that we live in a dog-eat-dog world in which only the fittest survive. If humans are innately selfish and motivated primarily by self-interest, then it makes sense that we must devise authoritarian and hierarchical systems to hold our beastly natures in check. The point is that the stories we tell ourselves about humanity influence the way society functions including the work of the risk management profession. When we think the worst of people, it will skew how we approach and manage uncertainty.
What is fascinating is that the people who tend to be most pessimistic about their fellow human beings are not the working class but the people who lead our organizations and who tend to be the most educated and affluent. Why is negativity so deeply ingrained in the leadership class? Part of it is evolution which designed humans to pay special attention to threats and part of is the stories we tell ourselves that make us fearful or angry. Rutger Bregman, a Dutch historian, engaged in a study of historical events, scientific studies and philosophical argumentation for the purpose of helping us understand how leaders throughout history developed a tendency to believe stories that embraced a negative worldview.
To illustrate this historical tendency, Bregman cites a modern example of how Hitler and Churchill were both influenced by the same book: The Psychology of the Masses by the French author Gustave Le Bon. Le Bon believed that in crises like war, the masses panic and gradually regress to their true nature, which is violent and selfish. Le Bon’s ideas influenced Hitler to bomb London, hoping to induce panic and surrender, and the same ideas influenced Churchill and the British leadership to build emergency psychiatric wards. To the surprise of Hitler, Churchill and the world, the psychiatric wards remained empty and the rates of substance abuse and suicide in Britain declined. Of course, there was widespread grief and mourning, but the British people (much like the Ukrainians today) didn’t panic or surrender. Instead, they became more altruistic and helped each other out far more they did under normal circumstances, so much so that after Germany’s defeat, many Londoners missed the increased camaraderie and solidarity they had enjoyed during wartime.
For students of risk management, Bregman’s study looks at two relevant questions – do humans tend toward good or evil and what is the influence of social systems and leadership? As to the first question, Bregman explains that contrary to the stories passed down through the ages, human evolution isn’t about survival of the fittest, it’s about survival of the friendliest. For example, anthropologists studying the hunter-gather phase have concluded that violence among groups of wandering hunter-gathers rarely occurred. Instead, these groups worked together and learned from each other and those that excelled at collaboration achieved the highest rate of survival. Nature favored the most cooperative (not the strongest or most selfish) so much so that human facial features became softer, rounder and friendlier. In fact, in the animal kingdom, humans are unique for prominently showing the whites of their eyes, allowing others to see where our attention is directed, thereby enabling trust and cooperation among people.
Having determined that the Hobbesian worldview of human nature (humanity is not a matter of survival of fittest or the most evil and corrupt) is mistaken, Bregman turns to the second question which addresses the impact of civilization and social hierarchy. Sedentary societies emerged about 10,000 years ago, leading to the concept of private property which, in turn, led to systems of inheritance and generational accumulation of wealth. Accumulation of wealth, in turn, provided justification for hierarchical leadership and the means for protecting wealth and prestige, including the use of war.
Bregman doesn’t advocate that we return to hunter-gather communities in order to improve the way we manage uncertainty. By any objective measure, the current world is a huge improvement over what came before. For example, the murder rate of medieval Europe was more than 30 times than what it is today and wars between developed countries have all but vanished. Even in the developing world, warfare is substantially declining. Moreover, much of the world has unparalleled higher standards of living and modern conveniences that have dramatically reduced disease and significantly increased human life expectancy.
Instead, Bregman challenges us, particularly those in positions of leadership, to develop a more accurate and realistic view of humanity that allows us to better manage uncertainty and improve our subjective standard of living. Put differently, what can we do to lessen distrust and decrease the fraying of social bonds which impedes social learning that is critical to continued human progress? We will address this question and the role of senior leadership in the next section.