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Knowledge@Wharton

 

December, 2007, Volume 12, Number 2

CONTENTS  

“IT’S ALL ABOUT COMMUNITY” A Conversation on Leadership with Wharton Dean Thomas Robertson
By Michael Useem  

WHARTON LEADERSHIP CONFERENCE: Emerging Trends in the Search for Leadership
Leadership Digest
Editor  

2007’S BEST LEADERS: U.S. News & World Report Showcases 18 Leaders
Leadership Digest
Editor 

FACE-TO-FACE LEADERSHIP: Why Coffee Solves Problems E-mail Can’t
By Major Douglas G. Luccio  

END OF A MONOPOLY: Are American Leaders Losing the Innovation Race?
By John Kao 

UPSIDE OF THE DOWNSIDE: Successfully Managing Enterprise Risk
By Mark Hanna
 

 

 
“IT’S ALL ABOUT COMMUNITY” A Conversation on Leadership with Wharton Dean Thomas Robertson

By Michael Useem

Four months into his new job as Dean of the Wharton School, Thomas Robertson a former Wharton faculty member is already committed to raising $550 million for the school, part of a university-wide effort to raise $3.5 billion total. At the same time, The Wharton School is facing key questions about how to respond to the need for high quality business education around the globe. Leadership Digest editor and Wharton management professor Michael Useem spoke with Robertson to ask him his leadership background, surprises on the job, and his vision for globalizing Wharton.

To play or download the audio version, click here.  

Michael Useem: You’ve been in a leadership role for many years in several different institutions, culminating now in your appointment recently as the dean of the Wharton School. Looking back on your career, what have been the most important formative experiences in the development of your own leadership prior to your arrival here?  

Tom Robertson: I have benefited from the privilege of being involved in other schools. Being involved at Wharton as a faculty member for a number of years was tremendously advantageous, as I arrived here and already knew a reasonable number of the faculty and staff. At Wharton I had served as vice dean of executive education, and, in that role, had brought about a lot of change in the way we thought about executive education. That was a meaningful experience, and I think a successful experience.  

I then went to London Business School, where I was deputy dean, with all of the school’s degree and non-degree programs reporting to me. I was developing capabilities in an international environment, in that only about 12 percent of London Business School students are British.  

Then I went to Emory and was dean of Emory’s Goizueta Business School for seven years, stepped down, and then headed international strategy for Emory University as a whole and founded the Institute for Developing Nations with President Jimmy Carter, the Carter Center being part of Emory University. In arriving at Wharton, what I bring to bear is a fair amount of management experience, international experience, and experience at the school level and at the university level, so not only at the subsidiary level but also at headquarters.  

Useem: Since your arrival here a couple months back, what have been the most vital aspects of your leadership in terms of taking charge? What have been the key personal capacities that have been vital to your own leadership of the school?  

Robertson: The first thing that helps is if you arrive with some level of legitimacy or credibility. Given that I had been a faculty member not only here, but also at a number of other institutions including Harvard and UCLA and the London Business School, I was not an alien being to our faculty or staff, but someone about whom, perhaps, they could think, “He’s done it and perhaps knows what he’s talking about.” You start off with a fair amount of goodwill. It is then up to you to prove you can indeed lead the school.  

For me it was then a matter, as soon as I arrived, of reaching out. I spent a fair amount of time at the cappuccino machine meeting faculty this summer and getting to know the staff and then, as students arrived, spending a lot of time with students. In this first semester at Wharton, a fair amount of my time has been spent internally getting to know members of the community. Only now am I spending more and more time on the road and reaching out to the broader community.  

I think if you’re going be successful in this role, you have to be ready for long hours, and you have to be ready for conflicting demands. It’s a large, complicated school, which is wonderful. It’s a fantastic school, and there are a lot of different constituencies and a lot of different demands, and sometimes you have to make judgments about what you can fulfill and what you cannot fulfill.  

In much of my life I’ve been involved in sales. I started out selling men’s clothes once upon a time, when I was in college, and also selling diamonds. It’s not that I’m necessarily now selling academics, but as I’m on the road cultivating donors and trying to raise money to benefit the school, it helps to have a little sales experience and to be willing to ask for the sale, which is not always true for some people.  

Useem: Let me ask about what every job has, which is a couple surprises and a couple challenges. In the months since taking charge here, what have been one or two of your bigger surprises, and what are a couple of the challenges you see ahead?  

Robertson: As I arrived there was an unusual situation: For a variety of reasons there was no one here in terms of the senior management team. So although I was supposed to be on vacation during July – I had accepted the job at the end of June – I spent most of August on the phone lining up a senior management team. That was probably the biggest surprise in getting started.  

Since then, the biggest surprise has just been the sheer involvement level that’s been necessary in the school; there are very, very many things going on at Wharton. We have 100 student conferences a year, or we’re hiring so many faculty, or you name it. We just do so many things, and everyday I learn something new in terms of activities at Wharton. Just getting up to speed on all of that and being able to contribute and help direct some of these efforts has been a wonderful challenge.  

Useem: I’m going shift gears here and ask you about some of the criticism that’s been leveled at American business schools recently. The health of business education in the U.S. is good, despite the fact that some critics of American business schools have suggested they have become too academic. Others have argued they’ve lost their intellectual edge. Still others worry that we tend to be focused too much on U.S. experience. What’s your own assessment?  

Robertson: This debate about whether we should be theoretical or applied has been going on for a very long time, so in a sense it’s nothing new. If we go back a number of years, to roughly around 1960, with the Ford and the Carnegie Foundation reports that were very critical of business schools at that time, much of the criticism was that business schools looked too much like trade schools and lacked scientific method, rigor and the pursuit of new knowledge.  

Beginning in the ‘60s, business schools changed fairly dramatically, and they brought in people from other disciplines. They adopted scientific methods and put a lot more emphasis on the creation of new knowledge rather than just telling war stories in class. I think all of that has been good.  

Then we get into the 2000s, and there are other criticisms. Have business schools gone too far? One of the criticisms is that we conduct research that is precise but precisely irrelevant. My feeling is if there’s any place in society that should be looking ahead toward meeting our long-term goals, it should be universities, it should be business schools. But that’s not to say our research is not relevant. Our research must be relevant to the business community. Otherwise, we should be in a department of sociology or psychology or whatever.   

We want our faculty to conduct rigorous research to advance knowledge to benefit the business community. We must create economic and social value. That doesn’t mean there’s a payoff from our research tomorrow or even six months out, but it does mean we have our eye on the future and the potential contribution to economic value in society and to a specific value for business firms.  

Useem: Given what you have just said, what do you see as the vision for the school?  What’s your strategy for getting us there? In particular, if you could offer your thoughts about what the school should be doing to build its global reach and its teaching and research in the areas of leadership and innovation, which are two priorities for the Wharton campaign, which is part of the Penn campaign to raise several billion dollars for the university.  

Robertson: Wharton has created a wonderful, wonderful brand. It’s our most prized asset. It’s certainly a billion dollar or multibillion dollar brand, but it’s not for sale. We very much want to nourish it and extend it and take it around the world and become the best-known brand in terms of business schools worldwide.  

We have strategies in place for doing that. Our Knowledge@Wharton reaches over a million subscribers now and is translated into four languages. We’re designing a high school version, and we’re looking at expanding into other languages. That’s part of what we do. Another part of what we do internationally is run international forums for our alumni and others; this year we’re in Vietnam, Peru, and South Africa.   

If you look at the Wharton School on an inbound basis, we look very international. Forty percent of our MBAs are international, as are 17 percent of our undergraduates. We have the Lauder Institute, a wonderful program focused not only on business but also on arts and sciences, with an emphasis on language, and many of our students choose to work overseas. So inbound we look strong.  

Outbound, we have been instrumental in setting up and helping to design other business schools, including the Indian School of Business in Hyderabad, Sasin Business School, part of Chulalongkorn University in Bangkok, and Singapore Management University. We have not put our names on those schools as they’ve been designed, and a debate among our faculty, which will continue over the next few months, is whether we should put the Wharton name in another part of the world.  

I think the answer is, we will certainly put points of presence in other parts of the world. We’ll encourage research in other parts of the world. Whether we will offer teaching programs or degree programs is another matter. Business schools are actually fairly small. We’re a relatively large one, and we only have a couple hundred faculty. It would be exceedingly difficult to send our faculty to teach, let’s say, in India or China. Should we create a second faculty in one of these countries? That’s one of the questions our faculty is looking at. It is very much an open question, and we’re looking at it very carefully.  

We will develop the brand name. We will encourage research internationally. It’s debatable whether we will actually offer a degree program in other parts of the world. Now we are doing non-degree programs. We are doing executive education in China and in India and in other parts of the world, but the whole question is, would we do a degree program?  

Useem: Two of the priorities of the school going forward are leadership and innovation. How do you see the next three or maybe even four or five years playing out as we seek to strengthen those areas?   

Robertson: Let me start with innovation. As our students arrive, one of the first things we tell them is they’re going to work in industries and technologies and product categories that don’t yet exist. It’s very important that our students be involved in the development and commercialization of new technologies.  

So we are working with the engineering school. We’re working with the medical school. We’re working with life sciences. The idea is that technology or innovation will come out of those domains, and our students are helping to develop business plans and helping in the commercialization of those technologies. The diffusion of innovation and the commercialization of innovation is critically important, and that must be a very, very important part of what this school does. We have significant resources devoted to that, as well as the Mack Center.   

When it comes to leadership, we pride ourselves on leadership. This is part of the admissions process. As a starting point we are trying to bring in people who are going to be future leaders; we’re not interested only in bringing in analysts. We have major initiatives focused on leadership for our students, as well as research underway on leadership. As part of the campaign we have going on, we very much want to find the funding to take our initiatives, which are presently on the premises, and turn those into a Global Leadership Institute.    

Useem: Let me ask you about one of the hallmarks of your administration’s view of the world, and what business schools – and what we in particular – ought to be doing. You have used the phrase, “We want to become a force for good in the world.” What are the steps you’re taking to help this school play a bigger role in that arena?  

Robertson: That’s a good question. Actually, in five minutes, I’m meeting with a set of students and faculty and the topic is social impact, which is a little bit broader than being a force for good in the world. The Wharton School is highly involved in different parts of the world, starting in West Philadelphia, in trying to take business ideas and turn them to the benefit of society.  

We work with the School of Social Policy on campus. We work on a program in nonprofits, which is part of that. We have faculty who are working in other countries of the world on social entrepreneurship. Next year our students are hosting the Net Impact conference on campus, so we’ll have 2,000 students here from around the world interested in corporate social responsibility and business ethics.  

There’s a lot going on. It’s an area we want to invest in. It’s not something all of our faculty are necessarily interested in, but it’s an area where I think business schools can make a major contribution.  

I would like to talk just briefly about developing economies. My experience in the last couple years, coming out of Emory and the Institute for Developing Nations, as well as after spending time in Africa, is that the problems of developing countries aren’t necessarily monetary problems. One example was Ethiopia, where they were using maybe 30 percent of the funds awarded to them by USAID, the British government, the Scandinavian government, the United Nations and the NGOs that were operating there.   

Now some of that’s a problem with the NGOs and the United Nations. They want to give money for specific purposes, which may or may not be in line with what the objectives in Ethiopia are. But more than anything, the reason they couldn’t use the money given to them was they didn’t have the management capability. They didn’t have the management systems, and they didn’t have the sense of entrepreneurship in order to use the money and benefit the economy.  

What some of our faculty are doing is pursuing the notion of building capabilities in other countries. It’s perhaps a little trite, the notion that you don’t give someone who’s hungry a fish; you teach that person how to fish. But I think that’s what we’re about. We are about developing management capabilities, teaching entrepreneurship, and helping developing countries to stand on their own two feet.  

Useem: Leadership is often described as a team sport, with great teams vital to any individual’s leadership. Thinking about the teams you have around you – students, faculty, staff, alumni, employees, the broader community – how can they best work with you to achieve your vision for the school?  

Robertson: It is how they can best work with me, and how I can best work with them. It is all about community and valuing every member of this community, and it is about building consensus. As a leader I can go running ahead and hope people will follow me, and some will, but most won’t. It is a matter of me understanding what the priorities of the community are.  

I can create a vision, but that vision really emanates from this faculty and this community. More than anything I must understand the community. I must understand our faculty and their objectives, and be the leader of helping provide the resources to let the faculty, the staff, and the students pursue the goals they are committed to.  

Useem: A personal question here at the very end. From your own experience, as you’ve moved into a succession of leadership positions in the university, what would be one piece of advice you would offer somebody who’s about to move into a senior leadership position at a university here or elsewhere?  

Robertson: Most of my life has been spent in academia, and I very much believe in the model of the best and the brightest. We can talk about strategic ideas all we want, but as a leader of this institution for the next seven years I will succeed or fail based on how brilliant the faculty are, how brilliant the students are, and how brilliant the staff are. It is all about the best athletes and having the ability to bring in the best students and faculty and staff and giving them the resources to succeed.  

Implementation of course then gets more involved. How do you compete against a limited number of other schools for faculty? Yes, we want very good students, but we want a diversity of students, and sometimes that costs money. Where do we get the money to bring in diversity from throughout the world and from throughout our own society? How do we get the best staff when we’re very often competing with the private sector?  

But at the end of the day, I can’t do anything on my own. It’s all through our faculty and our staff and our students, who do a tremendous amount at the Wharton School. We have over 100 clubs. They run over 100 conferences, and there’s a lot of entrepreneurial effort at the level of the student body.  

Useem: Let me thank you on behalf of our listeners and our readers for walking through the areas of your own leadership, the leadership of the school, and beyond.
 

WHARTON LEADERSHIP CONFERENCE: Emerging Trends in the Search for Leadership

Leadership Digest Editor 

Register now for the 12th Annual Wharton Leadership Summit, to be held on June 18, 2008 at The Wharton School in Philadelphia. Confirmed speakers include Colleen Barrett of Southwest Airlines, David Gergen of the Center for Public Leadership, S.A. Ibrahim of Radian Group, and William Weldon of Johnson & Johnson. We look forward to seeing you in June.  


2007’S BEST LEADERS: U.S. News & World Report Praises 18 Leaders

Leadership Digest Editor 

In collaboration with Harvard University’s Center for Public Leadership, U.S. News & World Report and an independent selection committee, which included Digest editor Michael Useem, last month selected 18 outstanding leaders for recognition in fields ranging from opinion journalism to basketball coaching to investment banking. "America's Best Leaders" for 2007 include:

James Baker and Lee H. Hamilton, Chairmen, Iraq Study Group, 9/11 Commission
Kenneth Chenault, Chairman and CEO, American Express Company
Kenneth Fisher, Chairman, and CEO, The Fisher House Foundation
Dr. William H. Foege, Senior Medical Advisor, Bill and Melinda Gates Foundation
Michael J. Fox, Founder, The Michael J. Fox Foundation for Parkinson's Research
Mary Houghton and Ron Grzywinski, Cofounders, ShoreBank Corp.
Andrea Jung, Chairman and CEO, Avon
Nicholas Kristof, Columnist, The New York Times
Fred Krupp, President, Environmental Defense
Yo-Yo Ma, Founder and Artistic Director, The Silk Road Project
Nancy Pelosi, Speaker, U.S. House of Representatives
Arnold Schwarzenegger, Governor, State of California
Ruth J. Simmons, President, Brown University
Pat Summit, Head of Women's Basketball Coach, University of Tennessee
Shirley M. Tilghman, President, Princeton University
Dr. Harold Varmus, President and CEO, Memorial Sloan-Kettering Cancer Center
 

FACE-TO-FACE LEADERSHIP: Why Coffee Solves Problems E-mail Can’t

By Major Douglas G. Luccio  

In a world of near limitless communication options, both business and military leaders can get their jobs done more accurately and quickly than ever before imaginable. With a simple “reply all” on an e-mail, you can execute a decision, mobilize key colleagues, and share essential information. While our new technological abilities are undoubtedly a blessing, they can also, unwittingly, dull our abilities in another sphere that of human connections. Technology may be fast, but it is not always effective. My suggestion for reviving the lost art of personalizing your message? Drinking other people’s coffee. 

Problems That Need Resolving 

Let me share an experience from a few years ago with you. As a logistics officer of a Marine Corps artillery battalion, I was responsible for the supply, maintenance and support of trucks and weapons for the 500-man unit stationed outside San Diego. This job, for which I had not been specifically trained, included exercising fiscal oversight for the entire battalion. Since my background was operations, I have never paid much attention to logistics and supply. My attitude was, “Just get me what I need.” What I needed always managed to show up, so I didn’t stop to think about how it got to me. Now, however, I had to look under the hood and figure out exactly how it all got done.   

When I took charge of the battalion’s logistics, I learned, to my distress, that the battalion was seriously in the red. Mike, my supply officer, a bright, young Ivy League-trained Marine, explained to me that the battalion was actually in the black, but because we had not yet been credited for several cancelled orders, we appeared, on paper at least, to be in debt. Mike expressed the urgency of needing to square our accounts. The fiscal year close-out was one week away, and we didn’t want to put ourselves in jeopardy by not being able to balance the books in time.

I questioned Mike, and he reported sending one or two e-mails a week to the chief warrant officer, who was responsible for crediting us for the orders we had cancelled, to no avail.  

“They haven’t returned any of my emails,” he told me. 

 “Have you called them?” I asked. 

“Occasionally, but I prefer email, since with phone calls I have no record of what I say and how they responded.”  

Mike’s point was a good one, and it explains why many of us prefer e-mail over phone calls or face-to-face contact; e-mail provides an easy and instant record of every communication. Yet it was equally obvious that, in this case, e-mails and even phone calls were not getting the job done. In his zeal for good record keeping, Mike had overlooked the human element.  

I told Mike we were going on a short field trip, and that he should bring all the documentation on the case. When we arrived at the Supply Management Unit, a quick 10-minute drive away, we asked to see the chief warrant officer.  

“He’s busy right now, but I’d be glad to take those documents for you,” said the young sergeant who was his gatekeeper. 

“We’ll just wait here until he’s available; we’re in no hurry,” I replied. “Do you have any coffee?” 

The sergeant brought us coffee, but we had clearly violated his comfort zone. He was used to running interference for his busy boss, and he didn’t seem used to having people simply camp out in the office. The sergeant explained to a superior, his staff sergeant, that we were waiting for the chief warrant officer. The staff sergeant also tried to relieve of us of our documents and send us on our way with reassurances.  

 “No, thank you, I’m not in a hurry. I just want to make sure that I’m the one that briefs him,” I said as I sipped my coffee.  

A few minutes later, another senior Marine appeared, this time a master sergeant.  

            “Sir, the Chief Warrant Officer is in a meeting. Can I take care of this for you?” 

I thought about it. “Do you have final authority over our discussion?” 

“No sir,” he said, “but the OIC (officer in charge) usually goes with my recommendation.”

“Thank you, Master Sergeant, but I think we’ll just wait. My lieutenant has worked hard for the last month to fix this, and since it’s now my issue I’d rather leave here knowing the final outcome.” 

When the chief warrant officer finally returned, he was met by a flurry of staff telling them about this captain and lieutenant who were just sitting around, drinking coffee. The officer, pressed by his staff, regarded us for a moment. While he might have been able to strong arm a freshly minted lieutenant, he wouldn’t be able to do the same thing with a captain. We watched as he ordered his entire staff to quit what there were doing and get our problem taken care of right away. He even apologized to us numerous times for our long wait.  

We left the office with our problem solved and our battalion in the black. The benefits, however, did not end there. Mike and I had developed a new ally, one that was more than just an email address. Like most people, the chief warrant officer was eager to help once he had made a real connection with us.  

It’s easy to ignore an email, or tell your subordinates to take a message for you, but it is pretty hard to resist helping someone who is waiting patiently for you in your office. Since that first sit-in with Mike, I’ve dropped in to say hi to the warrant officer from time to time, so he knows I don’t just come by when I need something. When it comes time to square our accounts, those five-minute visits go a long way in smoothing the process. 

So yes, go ahead and send that e-mail, make that phone call, but don’t forget to swing by sometimes to drink someone else’s coffee.  

Author’s Note: Major Douglas G. “Lucky” Luccio most recently served as the operations officer for the U.S Marine Corps Officer Candidates School in Quantico, Virginia, and he holds a Masters in Leadership from the McDonough School of Business at Georgetown University.  Major Luccio will be deployed to Iraq as a military advisor for seven-month tour beginning in February, 2008 and can be reached at dgl4@georgetown.edu.
 

END OF A MONOPOLY: Are American Leaders Losing the Innovation Race?

By John Kao 

A leading expert on innovation, John Kao has taught a popular course on the subject at the Harvard Business School for fourteen years, in addition to teaching at the MIT Media Lab and U.S. Naval Postgraduate School in Monterey, California. Kao is founder and CEO of Kao & Company, which advises top-tier Fortune 500 business leaders as well as government leaders around the world, and specializes in instructing organizations in the methods for making innovation happen. In his new book, Innovation Nation: How America Is Losing its Innovation Edge, Why It Matters, and How We Can Get it Back, many leaders, both national and international, “have a dangerously limited understanding” of what innovation is. Below is an excerpt from his book.

Innovation is always in a state of evolution, with the nature of its practice evolving along with our ideas about the desired future. That is why innovation has meant different things at different periods in our nation’s history, a state of flux that has made it difficult to fashion a consensus around any one meaning of innovation itself. 

Version 1.0 of our national innovation capability, for instance, featured individual visionary inventors. Central casting gave us Benjamin Franklin and his kite, what we might call the artisanal model of innovation. 

Geniuses in their workshops and garages, men like Thomas Edison and Henry Ford, later came up with inventions that inspired large-scale enterprises, ushering in Version 2.0 –the industrial model of innovation. Business requirements gave rise to mammoth, centralized corporate research groups that reached their zenith in such venerable institutions as Bell Labs, HP Labs, and the Xerox Palo Alto Research Center (PARC). 

In the days before CEOs obsessed about shareholder value and financial metrics, some of these centers were true hotbeds of innovative R&D. Engineers and scientists were encouraged to follow their instincts, budgets were loosely scrutinized, and indulgent managers protected talented visionaries from cost-cutting bean counters. A story told of Bill Hewlett who, along with Dave Packard, founded Hewlett-Packard describes the creative atmosphere that once prevailed. Upon finding a locked storeroom at HP Labs, Hewlett is said to have returned with bolt cutters to destroy the lock. He wanted his engineers to be able to wander at will and make serendipitous discoveries, no authorization and voluminous forms needed. 

In the public sector, the move to large-scale, organized innovation was expressed by the creation of the National Science Foundation, the National Institutes of Health, and other centralized edifices of government that provided national funding and administrative functions. 

Version 3.0 deinstitutionalized innovation and featured the innovator-entrepreneur, financed by venture capital and devoted to the “just-in-time” organization. In this world, while corporate giant Xerox PARC developed the graphical user interface, upstart Apple Computer commercialized it. Big pharmaceutical companies got out of basic research, preferring to innovate by buying upstart biotech companies with valuable technology. In other words, it was innovation by merger and acquisition, not by R&D. And in another twist, Procter & Gamble, historically a bastion of proprietary knowledge, announced a plan to find the majority of its innovations from outside its corporate walls. More recently, Version 3.0 has seen the rise of entrepreneurial communities and open networks enabled by the Internet and new kinds of digital collaboration tools, such as Groove, MySpace, and the explosive expanse of social networking in all its forms. 

Version 4.0, where we are today, is fast evolving – in beta, as techies are fond of saying. Many of the most important contributors to the process, however, reside outside the United States. Indeed, 4.0 is fundamentally about adapting to new innovation business models that may originate anywhere. It is driven by a global diffusion of innovation capability that has ended America’s monopoly. For China, the key innovation model today may be a kind of brute force that comes from increasingly sophisticated massed minds working together. For Singapore, it is competitive specialization – for now in biotech, digital media, and environmental technology – as its vehicle to ride the rising tides of globalization. For India, it is building on the booming outsourcing industry. And oil-rich nations have a time-limited opportunity to buy into the game.  

Countries everywhere are seeking their own sources of comparative advantage in the innovation landscape. And the logic of self-interest is clear. Robert Solow won the Nobel Prize in economics for, among other things, demonstrating that as much as 80 percent of GDP growth comes through the introduction of new technologies. And the Boston Consulting Group, in a study conducted for BusinessWeek, concluded that innovative companies achieved median profit margin growth of 3.4 percent as compared with 0.4 percent for the median S & P Global 1200. Furthermore their annualized stock returns of 14.3 percent were a full 3 percent better than the S & P 1200 over the same decade. So innovation pays.

Note: This article is excerpted from Innovation Nation, © 2007 by John Kao. Reprinted by permission of Free Press, a Division of Simon & Schuster, Inc.


UPSIDE OF THE DOWNSIDE: Successfully Managing Enterprise Risk

By Mark Hanna 

Warren Buffet once observed that “Risk comes from not knowing what you’re doing.”  

Recent events in the U.S. and global credit markets have clearly demonstrated that some business firms have better risk management practices than others. In effect, they have a better sense of what they are doing. Faced with the same economic landscape and the same set of investment options, for example, one key U.S. financial services firm, Goldman Sachs, has prospered while others have floundered. Since August of this year, a time of increasing stress in the credit markets, Goldman Sachs’ share prices have been trending upwards while those of Citigroup, Merrill Lynch, and Bear Stearns have been in steep decline.  

If there is an upside to these turbulent times, it is that more and more firms are taking a comprehensive look at their total risk profile and developing systemic approaches to handling those risks—a process known as “enterprise risk management” or ERM. In September 2007, The Conference Board released a report titled Risky Business: Is Enterprise Risk Management Losing Ground?, which documents the progress of enterprise risk management in recent years and offers helpful suggestions on current ERM best practices.  

What follows here is a brief overview of that report and some of its key findings, along with implications for leadership. 

The Progress of a Concept 

The 65-page report, authored by Ellen S. Hexter, director of The Conference Board’s Integrated Risk Management Center of Excellence, begins by covering the who, what, and why of enterprise risk management. The second half of the report, titled “Where to Start,” is a useful compendium of information for companies wanting to improve their risk management practices, including ERM communication, ERM integration, risk appetite, risk quantification, and implementation challenges. The appendix contains a helpful example of an annual report section on risk management, complete with an informative graphic illustrating how to convey the impact and likelihood of gross and net risks. 

One of the many valuable aspects of the report is that it compares and contrasts a 2006 ERM survey with another conducted in 2004. The more recent survey was sent via e-mail to risk, audit, and finance executives, with 200 companies responding as of February 1, 2007. The 2004 study was a series of telephone interviews with 271 executives on risk management practices. 

Regarding the 2006 survey demographics, most respondents’ headquarters were in North America (70 percent) and Europe (22 percent). The sizes of the companies varied from 22 percent of the respondents with less than $1 billion to 14 percent of respondents with more than $20 billion of annual revenues. The 2006 survey respondents were primarily finance or risk executives (93 percent). 

A Few Key Findings 

So, is enterprise risk management losing ground?  Overall, the answer is a resounding “No.” The main finding is that since the 2004 study there has been “observable progress in driving ERM into corporate practices and culture.” Writes Hexter: “Boards of directors show increased involvement in enterprise risk management today versus our study in 2004.”  

Executives in the 2006 study reported that 34 percent of their corporate boards “believe that ERM is significant or highly significant in carrying out their stewardship roles.” That number shows a five-point increase over 2004, when 29 percent of executive said the same thing. “Almost universally, our study shows that there is a greater awareness of risk across companies,” writes Hexter. “Two thirds of the respondents say that individual risks in their companies have individual owners.” 

Although the 2006 survey shows good progress in ERM practices, there is still room for improvement. “Few of the surveyed companies have attained an ‘advanced’ ERM status, based on the degree of ERM integration into business processes, the use of quantitative techniques, and the effects of risk management on business outcomes,” reports Hexter.  

Some differences were regional, with companies headquartered outside North America developing processes “at a faster pace,” with more that are already “up and running.” The maturity of ERM across industries was also variable, with financial services, energy and utilities having “more developed ERM processes than other industries.” In sum, writes Hexter, “While companies report progress with ERM, it has yet to become embedded in most companies’ day-to-day activities and cultures. Progress has occurred in early stage efforts, such as creating a risk inventory and assessment practices.” 

Probably one of the biggest indicators that there is room for improvement is that the financial services industry is considered to have more developed risk management processes than other industries, and yet this industry has suffered some of the most visible and public risk failures. 

Leadership Implications 

As recent headlines demonstrate, it is better to have a good set of proactive enterprise risk management practices than a set of reactive, expensive bailouts and embarrassing CEO dismissals.  

Consider the following facts and resulting leadership outcomes. In 2006, Goldman Sachs, led by Lloyd C. Blankfein, had the good sense to go bearish on the risky subprime-based securities that Citigroup, Merrill Lynch, J.P. Morgan, and Bear Stearns kept holding and promoting. Since the meltdown of the subprime mortgage market earlier this summer, Citigroup’s Charles O. Prince III and Merrill Lynch’s E. Stanley O’Neal lost their top leadership jobs. Citigroup required a huge $7.5 billion cash infusion from a sovereign fund in Abu Dhabi. Merrill Lynch had an eye-popping $8.4 billion write-down in the third quarter of 2007 and is hoping that its new CEO, John A. Thain, former head of the New York Stock Exchange as well as a former co-president of Goldman Sachs, can bail it out. Morgan Stanley’s co-president, Zoe Cruz, lost her job because of a $3.7 billion write-down related to the subprime fallout, and internal memos faulted her for not having enough risk managers. Bear Stearns CEO James E. Cayne kept his job but faced the very public humiliation of having two of his hedge funds invested heavily in subprime mortgage-related securities virtually wiped out earlier in the summer.  

According to a November 19th New York Times article, “Goldman Sachs Rakes in Profit in the Credit Crisis,” the company’s “secret sauce” is “high octane business acumen, tempered with paranoia and institutionally encouraged—though not always observed—humility.” More tellingly, the same article quotes Guy Moszkowski, an analyst at Merrill Lynch as saying of Goldman Sachs’ risk practices, “The risk controllers are taken very seriously…. They have a level of authority and power that is, on balance, equivalent to the people running the cash registers. It’s not as clear that that happens everywhere.” 

In other words, the top leadership of Goldman Sachs knows what it is doing. In the meantime, those who wish to follow in the steps of firms likely to survive and thrive would do well to follow the risk management prescriptions of The Conference Board. 

Author’s Note:  Mark Hanna is a freelance business researcher and writer based in Cedar Rapids, Iowa. He can be reached at markhanna@mchsi.com.
 

Copyright 1996-2007, Wharton Center for Leadership and Change Management
 University of Pennsylvania

Photo credit: Thomas Robertson by Candace diCarlo

 

 
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