Failure of organizations to identify, assess and quantify potential risks and then take action to mitigate the risks can lead to situations that can result in their significant or catastrophic failure, harm to their reputation and possible injury/death. Sometimes the causes of the problems are faulty processes or equipment, managers/employees that make bad decisions or that take excessive risks, suppliers that do not perform or customers that misuse products. Sometimes risks come from external sources. Often unethical behavior and/or poor judgment are at the center of the risks. Many of the types of risks are common to all industries and to government.
With few exceptions, c-suite executives and Boards are to blame for not identifying and dealing with risks. Often they create the culture and make the decisions that cause the failures. It is very common to be complacent or to ignore risks. CEO’s are busy and typically rely on other senior leaders to identify and deal with risks. Some of these directly-responsible leaders are arrogant and/or ignorant regarding identifying and dealing with important risks.
Prior to Arthur Andersen’s failure, there is no way that their then CEO or anyone else would have thought that the firm’s failure was possible and that the firm would fail soon. Likewise, in 2012 shortly before the JPMorgan Chase London Whale trading losses surfaced, it is inconceivable that CEO and Chairman Jamie Dimon or his Board would have thought such a trading loss was possible. After all, they had sophisticates risk software and enterprise risk management processes in place with a large staff and a supposedly competent senior manager in place protecting the Bank against such rogue trades.
In some cases government regulations come into play. Regulations don’t work when regulators are ineffective and people do an end-run around the regulations.
Think about the following failures and why they happened:
- MF Global failure
- BP Gulf oil spill
- Kodak failure to adapt (they invented digital photography in the 1970’s)
- Borders Books failure to adapt
- Lehman Brothers/AIG/Bear Stearns failures
- 2008 financial collapse
- Fannie Mae and Freddie Mac bankruptcies
- 9/11 attack intelligence/security failure
- Iraq war based on faulty intelligence and political/financial agendas
- 2000 Presidential election ballot/vote count controversy (poorly designed ballot, Supreme Court stopped the vote count before completion)
- Massey Energy mine explosion
- I-35W Bridge collapse in Minneapolis (people died, hurt the local economy and significantly inconvenienced drivers while rebuilding the bridge – U.S. has over $2 trillion deficit in infrastructure spending to bring bridges, roads, airports, tunnels, etc. up to current safety standards)
- Tyco/Enron/Worldcom failures (ethics, leadership, leverage, greed, ineffective auditors and regulators)
- Arthur Andersen failure (they were supposed to be the “trusted” auditors)
- Medical errors – Over 100,000 people die each year in the U.S. because of medical errors made by doctors, nurses and other medical professionals and many others are seriously injured
- New Coke failure
- Space Shuttle Challenger O-Ring failure
- Madoff fraud (failure of SEC and other regulators, whistle blowers were ignored)
- Dysfunctional U.S. Congress (Congress is a team sport, all that matters is scoring points for the party, getting elected and reelected…to hell with the country)
- Sex abuse scandals in the Catholic Church and at Penn State (abuse, denial, failure of leadership, ethics)
- Hacking of U.S. computers from China (potentially one of the U.S.’s greatest risks)
- Circuit City and Linens N Things failures
- Toys with leaded paint from China
Rogue traders (it keeps happening - the following is a partial list)
- JPMorgan Chase’s London Whale (Bruno Iksil) –estimated $6.2 billion trading loss and over $1 billion in fines thus far
- Nick Leeson – 1995 – £827 million leading to bank failure – Barings Bank
- Toshihide Iguchi – 1995 – $1.1 billion – Resona Holdings
- Yasuo Hamanaka – 1996- $2.6 billion – Sumitomo Corporation
- John Rusnak – 2002 – $691 million – Allied Irish Banks
- Jérôme Kerviel 2006–2008 – €4.9 billion - Societe Generale
- Boris Picano-Nacci – 2008 - €751 million - Groupe Caisse d’Epargne
- Kweku Adoboli – 2011 - $2.3 billion – UBS
Key questions for you:
- Is your organization assessing and managing risks effectively? How do you know?
- Is your organization at risk of a significant risk incident or catastrophic organizational failure? How do you know?
- Does your organization conduct a comprehensive annual Enterprise Risk Survey to identify and quantify potential risks across the organization, including a broad assessment of internal and external risks?