We live in a world that is becoming increasingly intertwined and interdependent which means that complex risks such as pandemics and cyber crime are here to stay. Consequently, the future of ERM will be concerned with building “whole of organization” approaches that meet specific opportunities or challenges with the end goal being the creation of shareable and scalable solutions.
“Economic change in all periods depends more than most economists think on what people believe.” - J. Mokyr, The Enlightened Economy. An Economic History of Britain, 1700-1850, p. 1 (2010) (emphasis added).
The preceding sections discussed the indispensability of senior leadership that helps their organizations build the necessary ERM infrastructure to pursue opportunities and absorb the shocks of doing business in an increasingly intertwined and interdependent world. Now we turn to the next subject which is how to make ERM a collective endeavor that elicits total engagement throughout the organization. Getting buy-in across an organization (i.e., a whole of organization response) brings to mind the story about the first faculty meeting of the University of Chicago in 1892. William Rainey Harper, the school’s first president, asked everyone to pursue the goal of “how to become one in spirit, not necessarily one in opinion.” (D. M. Randel, A University’s Lexicon, The University of Chicago Magazine, Vol 93, No. 2 (December 2000)).
ERM has been slow to gain traction in facilitating total engagement because too often it gets separated from the spirit of the organization and what drives and motivates people. For ERM to have value, it has to be perceived as being connected to doing real things that matter. Otherwise, ERM will be seen as an empty and useless abstraction - as just words. To avoid this perception, ERM needs to align with and support work that is viewed as having a specific and compelling purpose. What is regarded as specific and compelling is a matter of what people believe. Furthermore, whole of organization (i.e., enterprise wide) responses are not feasible unless the specific and compelling purpose is a shared belief.
An era in history that offers insight as to what we mean by the power of a shared belief is the Industrial Revolution that began in England in early to mid-18th century and would spread to the rest of the world. The question pondered by scholars is why England (and not France, the Netherlands, China, India or another country) was the first economy to shift away from a largely rural agrarian society in which work was performed by individuals and small workshops (e.g., individual spinners, weavers, and dyers). What caused English society - both the intellectual class and the working class - to support the creation of textile factories and mechanized production and other industries such as iron and steel production?
The leading hypothesis is attributed to Joel Mokyr, an economic historian that has taught at Northwestern University since 1974. In his book, The Enlightened Economy: An Economic History of Britain 1700 to 1850 (2010), Mokyr theorizes that the Industrial Revolution was a product of a change in the belief structures of the English people, not a change in their circumstances. More specifically, Mokyr suggests that two different ideas took hold in Britain. The first shift in British thinking was that acquiring knowledge through science and reason is a cumulative exercise that was as compelling as the pursuit of salvation. The second shift in British thinking was that advances in science and reasoning should be used to bring the greatest happiness to the greatest number of people. Accordingly, both the British elite and craftsmen with limited formal education were aligned on the application of science and knowledge to problems and the collective pursuit of technological improvements that would make life easier and better for all of British society. This led to a unique culture of experimentation and innovation to be contrasted with what Mokyr calls “rent-seeking” which he defines as the use of power to redistribute rather than create opportunity and wealth.
Mokyr’s thesis is relevant to the future of ERM - especially to what we call “positive risk” which is the effort made to increase the probability of magnitude of good things happening. To be relevant, ERM needs to encourage and support the organization’s engagement with positive risk which in practical terms mean people believing that they have the freedom to experiment and try new things. This requires the development of ERM structures and processes that are permissive and encouraging as opposed to being overly cautious and slow to make decisions. Permissive and encouraging structures yield a culture of innovation yet much of what happens in the name of risk management produces a culture that resists and impedes innovation.
What belief structures are integral to ERM supporting a culture of innovation? Matt Ridley’s latest book, How Innovation Works, and Why It Flourishes in Freedom (2020) offers a number of insights and recommendations. Ridley explains that innovation is different than invention in that innovation is the process of taking an idea and turning it into workable, affordable product or service that actually delivers benefits to people. Furthermore, innovation is not the work of a lonely genius sitting at the top of the organization but the product of a teamwork and collaboration at the bottom of the organization. It is a matter of unleashing the creative collaborative spirit of employees to do the 50,000 experiments that Edison said it took to develop the nickel-iron battery.
Ridley’s book offers a number of suggestions to keep in mind in designing and implementing an ERM system that fosters a culture of innovation:
The preceding sections discussed the indispensability of senior leadership that helps their organizations build the necessary ERM infrastructure to pursue opportunities and absorb the shocks of doing business in an increasingly intertwined and interdependent world. Now we turn to the next subject which is how to make ERM a collective endeavor that elicits total engagement throughout the organization. Getting buy-in across an organization (i.e., a whole of organization response) brings to mind the story about the first faculty meeting of the University of Chicago in 1892. William Rainey Harper, the school’s first president, asked everyone to pursue the goal of “how to become one in spirit, not necessarily one in opinion.” (D. M. Randel, A University’s Lexicon, The University of Chicago Magazine, Vol 93, No. 2 (December 2000)).
ERM has been slow to gain traction in facilitating total engagement because too often it gets separated from the spirit of the organization and what drives and motivates people. For ERM to have value, it has to be perceived as being connected to doing real things that matter. Otherwise, ERM will be seen as an empty and useless abstraction - as just words. To avoid this perception, ERM needs to align with and support work that is viewed as having a specific and compelling purpose. What is regarded as specific and compelling is a matter of what people believe. Furthermore, whole of organization (i.e., enterprise wide) responses are not feasible unless the specific and compelling purpose is a shared belief.
An era in history that offers insight as to what we mean by the power of a shared belief is the Industrial Revolution that began in England in early to mid-18th century and would spread to the rest of the world. The question pondered by scholars is why England (and not France, the Netherlands, China, India or another country) was the first economy to shift away from a largely rural agrarian society in which work was performed by individuals and small workshops (e.g., individual spinners, weavers, and dyers). What caused English society - both the intellectual class and the working class - to support the creation of textile factories and mechanized production and other industries such as iron and steel production?
The leading hypothesis is attributed to Joel Mokyr, an economic historian that has taught at Northwestern University since 1974. In his book, The Enlightened Economy: An Economic History of Britain 1700 to 1850 (2010), Mokyr theorizes that the Industrial Revolution was a product of a change in the belief structures of the English people, not a change in their circumstances. More specifically, Mokyr suggests that two different ideas took hold in Britain. The first shift in British thinking was that acquiring knowledge through science and reason is a cumulative exercise that was as compelling as the pursuit of salvation. The second shift in British thinking was that advances in science and reasoning should be used to bring the greatest happiness to the greatest number of people. Accordingly, both the British elite and craftsmen with limited formal education were aligned on the application of science and knowledge to problems and the collective pursuit of technological improvements that would make life easier and better for all of British society. This led to a unique culture of experimentation and innovation to be contrasted with what Mokyr calls “rent-seeking” which he defines as the use of power to redistribute rather than create opportunity and wealth.
Mokyr’s thesis is relevant to the future of ERM - especially to what we call “positive risk” which is the effort made to increase the probability of magnitude of good things happening. To be relevant, ERM needs to encourage and support the organization’s engagement with positive risk which in practical terms mean people believing that they have the freedom to experiment and try new things. This requires the development of ERM structures and processes that are permissive and encouraging as opposed to being overly cautious and slow to make decisions. Permissive and encouraging structures yield a culture of innovation yet much of what happens in the name of risk management produces a culture that resists and impedes innovation.
What belief structures are integral to ERM supporting a culture of innovation? Matt Ridley’s latest book, How Innovation Works, and Why It Flourishes in Freedom (2020) offers a number of insights and recommendations. Ridley explains that innovation is different than invention in that innovation is the process of taking an idea and turning it into workable, affordable product or service that actually delivers benefits to people. Furthermore, innovation is not the work of a lonely genius sitting at the top of the organization but the product of a teamwork and collaboration at the bottom of the organization. It is a matter of unleashing the creative collaborative spirit of employees to do the 50,000 experiments that Edison said it took to develop the nickel-iron battery.
Ridley’s book offers a number of suggestions to keep in mind in designing and implementing an ERM system that fosters a culture of innovation:
- Innovation is gradual. It is often a hard slog that requires years of experimentation and learning. Developing people who can find ways to drive down costs and simplify the product or service is essential.
- Innovation is recombinant. Ideas and technologies are a recombination of other ideas and other technologies. As such, diversity matters because people need the freedom to meet and exchange ideas and concepts.
- Innovation is often serendipitous and requires considerable trial and error. Tolerance of failure and error in an ERM model is a must in order to give people the opportunity and room to make the unexpected discoveries and then develop the stamina to gradually improve new ideas through experimentation.
- Innovation is a team sport and a collaborative phenomenon. One person comes up with the idea, another person designs the manufacturing process, and third figures out how to make the new product or service affordable.
- Innovation prefers fragmented governance. History teaches us that as organizations grow and central power begins to ossify, they become less efficient, less manageable, less frugal, and they resist novelty and eccentricity.
- Innovation requires more patience and less hype. Ridley believes that we expect too much of innovation in the first 10 years and too little in the first 20 years, but generally get it right looking 15 years ahead.
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