17.08.2015 : Thomas Hyde

Directors and the hierarchy of worry

There are ways to approach governance and decision making that enable directors to manage their business worries in a structured rather than knee jerk manner.

Who would want to be a company director?  You’ve seen the news, it doesn’t matter really where you are in the world, the heat on directors is getting hotter.  And as a director, I certainly feel the radiant glow on the back of my neck.  The fiscal and any other negligent failings of the world converge in your direction, and all that’s standing between you and a small room with metal bars for decoration, which is shared with an amorous bloke named Ralph you’d rather not be locked up with, is good corporate governance and a management team that hopefully knows what it’s doing.

And while the heat is getting hotter, the threats are getting, for want of a better word, threat-ier.  It used to be bad enough worrying about whether there was a business plan, and how your sales figures were tracking.  Now we need to worry about a whole globally integrated ecosystem of worries, for example: whether the whole global financial system is going to collapse (though to be fair that has happened from time to time throughout history); global pandemics (yes, ok that too, but planes get them to you faster); stateless terrorism (quite new), cyber attacks (relatively new and alarming), health and safety (not new but we’re more worried about it), digital disruption (Uber - thanks, Amazon), climate change, geopolitical instability, fraud, currency fluctuations, and the price of milk, just to name a few.  I’m getting cold sweats just writing this!

The Big Questions

So how does the budding director cope with this?  Put yourself in their shoes for a minute, and put aside the media debate about remuneration (i.e. the “surely they get paid enough to cope” debate)…there are three key questions a director needs to ask themselves: (1) Do I know what the things that should be happening in the business are? (2) Do I know what things that shouldn’t be aren’t? (3) Am I armed with the information I need to make informed decisions on behalf of the business?

Answering these questions is hard, especially in large complex businesses, and particularly when the director is not engaged in the day to day operation of the business.  It’s difficult enough when you are working in the business, as I am!  It’s difficult because businesses are often siloed and with multiple management layers, which makes it hard to get a clear picture of what is going on that is coherent and summarised without being over-filtered.  This business fragmentation and distance to power also means there are often competing and conflicting demands for decisions to be made, and it’s up to the Board to determine the relative priority and merits.

I will talk more about ways to tackle this complexity in future articles, but for now propose a 'Hierarchy of Worry' that I think provides a basis for directors to prioritise the portfolio of things that confront them and feel greater confidence to answer “yes” to the three questions. The 'Hierarchy of Worry' may also help people who have to work with Boards to understand why they tackle issues the way they do.

The Hierarchy of Worry

Level 1: Life Assurance (The "Keep me out of Prison" Worry)

This is the top of the pile, the business activities or decisions that have the potential to cause loss of life, and/or cause the business to go under.

Level 2: Business Continuity (The Keep me out of the 6 o’ clock News” Worry)

This is the next consequence of failure bucket, those things that stop the business working enough that it gets public attention, generally of an embarrassing nature, e.g. a critical piece of infrastructure failing when it shouldn’t.

Level 3: Business Future (The “Keep the shareholders off my back and keep my job” Worry)

This is in the crystal ball category, making decisions today that will keep or make the business strong in the future, taking into account the rich tapestry of threat and opportunity that lurks ahead.

Level 4: Business Performance (The “Keep the market happy and get my bonus” Worry)

This is the short term category, making decisions that improve cost and revenue performance and make sure plans are hit.

The Challenge

It’s not hard to see that having enough visibility of what is going on and making balanced decisions across all four worry levels is challenging, and with the tempo of change and disruption that all businesses are seeing to a greater or lesser extent today, it is likely to be even more so.  But all is not lost – there are ways to approach governance and decision making that enable directors to manage their business worries in a structured rather than knee jerk manner, and I will talk more about this in my next article 'The Hierarchy of Worry and Why Enterprise Risk Management is Your Friend' to follow.

About the Author

Thomas Hyde

Group Director - Defence and Advisory

Thomas has a doctorate in chemical engineering, and his insights and leadership have put Beca on the map in the areas of business performance, asset performance and applied technology. His strong business acumen has also seen him grow and lead the integration of all Defence activity across the group, with active involvement in defence industry in Australia and New Zealand.

He has also led the development of Beca’s strategic business consulting services, with a focus on helping clients exploit and adapt to technology-led disruption of their businesses. As CIO for Beca, Thomas engages with peers and industry leaders to stay abreast of and influence technology sector trends. 

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ADD A COMMENT
Shayne Blake · 24/08/2015 9:16:19 a.m.
Bang on the money, Thomas! I look forward to your next article about Enterprise Risk Management.