Connect the Dots: Risk Management Leads to Growth Opportunities
Sustainable growth can happen only if you manage the risks in your business first. Private company leadership frequently wants to sustain the company for generations. This long-term goal encourages tempering change in preference for stability and relying on trusted contributors. If a board member or trusted employee in a private company sticks their hand up with an idea, they will usually be asked to implement it. A new employee suggesting the same idea will more likely be brushed aside until they prove the benefits outweigh the costs of the proposal. Having someone on the board who understands how to manage risk and identify growth opportunities can help management achieve its desired longevity.
Mellody Hobson is such a risk manager on several boards. During the tenth annual JP Morgan Board Summit, two of the company’s board members spoke about risk management. Hobson, JPM board member and president and co-CEO of Ariel Investments, explained that the essence of risk management is to “simplify complexity.” She has used this mantra to make sure she knows what the company is doing, which in turn minimizes surprises. To simplify complexity means to be able to explain a particular risk in layman’s turns and to show clarity of thought. Clearly, board members will never know all of the processes and decisions management engages in, but when looking at core issues, Hobson likes to do her homework. If she does not understand something, Mellody will ask a person from management to “talk me through this.” Both the board and management learn that the explanation and even the particular process can be simplified once the message becomes clear and understood.
Her board colleague Ginni Rometty, former chair, CEO, and president of IBM, added, “Issues are not static.” She agreed you must first make sure there is a process to deal with certain essential risks, such as cybersecurity and disruption of business. Disruption is so clear in the technology world and can happen much faster in this industry. Cybersecurity is a major risk for all boards.
To manage this risk, listen to your customers, who often know more about the market place and their lack of protection or old technology still in use. The company can then develop key performance indicators (KPIs) to track improvement and investments in information systems to prevent a cyberattack. Studies show the most common method for perpetrators to attack a company is through a phishing email which should not be opened. So, employees must be trained and reminded of the risks. I have learned that once risks are under control, the next step is to focus on growing your revenue. Having a process to understand what your competitors are doing is essential. If your competitor is a private company, it may be harder to find data and financial results. But there are always ways to find out certain metrics based on government filings and news articles. Perhaps the board needs to list what public companies could be considered competition. Use their information to benchmark your own results. You will find opportunities, even if you just read the 10-K and proxy statement. The risk factors in the SEC filings each quarter will also be a conversation starter for a private company to identify the top risks and opportunities to improve processes.
One of my favorite private companies to follow is SC Johnson. The company, founded in 1886, has grown to 13,000 employees with operations in 70 countries. With such a wide reach, they must confront many different risks in many different cultures. I reached out to a former employee Lee Eisenstaedt who worked at SC Johnson for 23 years both in the United States and in France. He was a finance director and vice president of finance Europe for the SC Johnson outdoors business during the middle of 1990s. He founded the Leading with Courage Academy, leveraging some of the insights he developed during his time at SC Johnson. One of his key messages is that board members gain a broader understanding of context and improve their decisions by working outside their home country. “One board member worked extensively in Central Europe and in South America with Colgate. You want dramatic cost savings? Have someone from a hyper-inflationary country on your team and you will manage the balance sheet in a new way.” He learned to connect the dots and realized everyday you must both control risks and develop opportunity to experience revenue growth.
Blythe J. McGarvie has served as a member of the board of privately held Wawa for 23 years and publicly held Apple Hospitality REIT, LQK Corp., and Sonoco Products Co. She has authored two books, including the best-selling Shaking the Globe: Courageous Decision-Making in a Changing World.