How to Strengthen Risk Management, Candidly Speaking

Organizational cultures that lack candor, Ferrazzi Greenlight CEO Keith Farrazzi tells us, endure longer cycle times, slow decision-making, unnecessarily iterative discussions and below-average financial performance.

Even worse, a lack of candor can dumb down a company's risk intelligence and, in some cases, lead to catastrophe.

In the January-February Harvard Business Review, Ferrazzi writes:
"My team interviewed executives at six top banks to gauge their teams' level of candor. We found that the teams that scored the lowest on candor saw the poorest financial returns among those banks during the recent global economic crisis. In contrast, groups that communicated candidly about risky securities, lending practices and other potential problems were able to preserve shareholder value."

This research immediately called to mind a chapter in Malcolm Gladwell's Outliers that examines the cultural causes of several commercial airplane crashes. Gladwell describes problems at Korean Air, which had one of the world's highest number of plane crashes in the 1990s. Gladwell argues that it was due to Korean Air's hierarchical culture – in which co-pilots were hesitant to draw attention to errors, even significant ones, committed by their pilots (their superiors). This Wall Street Journal piece builds on Gladwell's argument:

"There are, however, instances of similar failures to communicate important information among American pilots. In fact, crashes at U.S. airlines resulting from hierarchical cockpits and poor, stunted communication between crewmembers led to an entire science of ‘crew resource management.' Much of that research was spawned by a 1978 United Airlines DC-8 crash in Portland, Ore., after the plane circled for a long time waiting to land, just like the Avianca accident. The federal report on that crash noted that a contributing factor to the accident was the fact that two crewmembers failed to successfully communicate concerns to the captain that the plane was running low on fuel. They knew the plane would likely run out of fuel, but the captain didn't get clued in."

Ferrazzi maintains that organizations can avoid crashes of their own by making forthrightness an organizational requirement. He lays out several steps that can help elevate and sustain candor, including:

• Holding smaller meetings;
• Assigning candor-advocacy responsibility to one or two meeting participants; and
• Deploying "caring criticism."

The latter can be fostered through language. For example, phrases like "I might suggest" and "think about this" can lower the defenses of those on the receiving end of criticism. Smaller meetings, Ferrazzi explains, facilitates brainstorming and risk-taking, whereas larger meetings tend to be dominated by the most commanding voices and personalities.

Risk managers can also take an important step to boost forthrightness and sharpen their organization's risk intelligence: address what has traditionally (and to our collective detriment) been deemed "softer" factors, like candor, in formal risk management frameworks and processes. Those companies that fail to do so are more likely to endure hard landings, and worse.