Silo-based processes, a hyper focus on numbers, and confusing terminology often produce lots of activity with no real management of risk. This article introduces business leaders to a simple framework for helping their organizations manage risk.
Part one of this article defined risk management as: A Framework for Learning to Thrive in a World of Uncertainty.
Our focus is on the phrase “learning to thrive” which is the purpose of risk management. In our view, the best place to start in studying this concept is the work of Arie de Geus, a retired Dutch business executive who was the head of Royal Dutch Shell’s Strategic Planning Group.
In 1983, de Geus and his colleagues at Shell started researching the concept of corporate longevity – a concept borrowed from biology to measure the life expectancy of a company which, at bottom, is a community of human beings. Their research showed that most companies die young and that the average corporate life span barely exceeds ten years. To better understand how to improve corporate life expectancy – or what we might call “learning to thrive”, de Geus analyzed enduring companies that shared three characteristics: (i) their corporate age exceeded 100 years; (ii) they remained an industry leader; and (iii) they had strong corporate identities. Not surprisingly, much like the average human centurion who develops lifelong habits of learning, abstinence and moderation, so it is with companies.
What then is the secret to extending corporate life and reversing the excessive rate of preventable death in corporations? De Geus believes the key is to realize that there is more to companies (again a community of human beings) than capital and making money. According to de Geus’s research, a company should be viewed as a living being and the decisions this being makes result from a learning process which is the sum of the skills, capabilities and knowledge of the people that comprise the company. De Geus believes developing and promoting the learning process within companies is especially critical today when capital since World War II is no longer scarce as it was during the previous 500 years (i.e., The Industrial or Capitalist Era). Today, knowledge, not capital, is the scarce production factor and those “that have access to knowledge and know how to use it will be the New Rich, and those who have not will be the New Poor.”
If knowledge is the most important production factor, the role of business leaders should be focused on shaping the company as a “living work community” and creating the conditions for the maximum use of the available brain capacity within the community. To explain this concept, de Geus cites the research of evolutionary biologists who believe that prevailing species are better at learning and developing new skills than their peers (e.g., birds that flock learn faster than territorial birds). Likewise, those companies which have an ability to learn faster than their competitors will enjoy a competitive advantage.
The implications of de Geus’s research for business leaders and the field of risk management are clear. Whether a business is continually focused on “learning to thrive” will depend on mindset. Do leaders see themselves as finding and using people as a “cog in the wheel” of production (the old model) or are they recruiting members of a living work community. In the latter, the mindset is that of a living company built around trust; the individuals understand that in exchange for effort and commitment, the company will help them develop their potential. Realization of individual potential, in turn, leads to realization of corporate potential through maximum use of the combined intelligence of the community members.
To learn more about de Geus’ research, consult his book entitled: The Living Company: Habits for Survival in a Turbulent Business Environment (1997). In the meantime, we leave you with these words from de Geus:
- Lower levels of learning in the post-industrial society reduce a company’s life expectancy in a world in which success depends on the ability to maximize the use of the available brain capacity. On the other hand, creating the conditions of mobility, the space for innovation, and an effective system of social propagation – recruiting with cohesion and continuity in mind and developing the ultimate potential of the community’s members – creates the conditions for faster institutional learning in the New Economy in which success depends on that learning.
Every management team has a choice.