Risk Blindness – why boards just don’t see it

Risk Blindness – why boards just don’t see it

We’re proud to be able to publish excerpts from SAMI Associate Garry Honey’s new book, “Navigating Uncertainty” over the next few weeks. Navigating Uncertainty is designed for leadership teams to understand, get comfortable with, and mitigate business risk – and is equally applicable, whichever type of organisation you lead.

Risk monitoring has been part of good governance now for over 30 years, yet we still see spectacular corporate failures on a regular basis. Is this a failure at system or operator level? Either a risk was not foreseen or it was on the radar yet considered tolerable. Hindsight is a wonderful thing: it is worth reading Nassim Taleb’s ‘Black Swan’ or Michele Wucker’s ‘Gray Rhino’ to explain why we don’t see things we really should and the names we give certain types of risk blindness.

With due credit to Margaret Heffernan’s book ‘Wilful Blindness’ my own work on reputation risk over the past 20 years suggests that there are basically two types of blindness: accidental and deliberate, each with subtle subsets. While accidental blindness can be forgiven, deliberate risk blindness cannot. I am also indebted to a book by Hertwig & Engel called ‘Deliberate Ignorance – Choosing not to know’ which explores this mentality from a psychological angle.

Accidental Risk Blindness

  • Not on the register or radar – A lack of imagination or foresight and restricted view of risk so blind to new risks or sources of hazards and threats.
  • Information overload – TMI or cockpit confusion with too many signals and too little time to distinguish urgent from important.
  • Cognitive bias – Group mindset among the board members, dissonance reduction, consensus seeking and sunk costs mean risks are not seen.
  • Downgraded risks – identified risks downgraded by superiors on grounds of cost or higher priority as either not significant or acceptable.

Deliberate  Risk Blindness

  • Corporate culture – refusal to recognise risk that is counter-cultural. Pressure to repel or rubbish disconfirming data – eg Brexit risk in UK politics.
  • Risk denial – Refusal to recognise the source as any valid authority. Known as the ‘Semmelweis reflex’ – the man who cut hospital deaths through hygiene.
  • Hubris – boards believe they know better than the experts. Ignorance breeds confidence more than knowledge. Known as the ‘Dunning-Kruger’ effect.
  • Deliberate ignorance – A determination not to seek or collect information in the belief that it will be unhelpful. A desire not to know – eg Covid outbreaks.

The challenge for an effective board is to guard against risk blindness despite at least eight different types, so what can be done and how do you prevent something in the future that you cannot imagine or envisage? The first step is to stop relying on your risk register or risk committee to be the arbiter of what is and is not a risk to your organisation. Every board member has a view on a future outcome that might prove detrimental to the organisation. It is the duty of the board to debate and deliberate on potential risks. I cannot stress how important this debate is. Board consensus reached too easily can indicate that impact of a decision has not been fully appreciated. ‘If you don’t see the risk then you haven’t looked hard enough’.

Alfred P Sloan Jr, the General Motors veteran, when informed that his management committee were all in complete agreement on a decision, postponed further discussion on the matter until the next meeting. This was to provide time for members to develop disagreement and more understanding of what the decision was all about. As Peter Drucker, the management guru said: ‘First rule in decision-making: one should not make a decision without disagreement’.

In order to avoid risk blindness your board should be wary of experts who claim to understand risk better than you. If you use a matrix with only the determinants of severity and impact you are taking a snapshot of risk in your organisation but not to navigate or reduce risk. For that you need to look at other more useful  relevant determinants: how easy the risk is for you to control and how easy it is for you to predict. In this way you as a board can tackle risk in a useful way to inform strategy and any future allocation of resources.

It is worth at this point remembering why boards should spend time on risk issues. There are two good reasons, firstly because it is like strategy an imagined future that requires some foresight and envisioning, a mental exercise that some board members find frustrating because there are no right or wrong answers. The second reason is because risk understanding is essential to achieving better decisions and good judgement. Board decisions about the future should be made with the best possible knowledge and information at the time and risk assessment is always a prediction.

There is often merit in deferring board decisions pending newer or more accurate information, yet some boards make decisions in order to demonstrate progress and management acumen. Sometimes it is better to defer decisions while data is gathered or a sub-committee appointed to address gaps in knowledge required for a more confident decision. Many risk case studies highlight decisions taken with imperfect knowledge or rushed to complete a meeting agenda timetable or issue a press release. Sometimes a more prudent approach is a better call.

Taking risk is necessary in order to make progress, it is not possible to run any organisation by eliminating all risk, the challenge for boards is to make informed decisions about which risks to take and when to take them. Risk aversion might be a default but it is a hindrance to progress. Information is key to navigating uncertainty.

Written by Garry Honey, SAMI Associate and founder of Chiron Risk and first published Autumn 2023.

 The views expressed are those of the author(s) and not necessarily of SAMI Consulting.

SAMI Consulting was founded in 1989 by Shell and St Andrews University. They have undertaken scenario planning projects for a wide range of UK and international organisations. Their core skill is providing the link between futures research and strategy.

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Featured image by Mohamed Hassan from Pixabay

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