Page 9 - Risk Management Bulletin Jan- Mar 2022

RMAI BULLETIN JANUARY - MARCH 2022

As these and hundreds of other examples illustrate, limited to pursuing only those with an auditing,
strategic missteps can often have dire consequences. accounting, or actuarial background (meaning finance
To some extent, this is the nature of business directors, for the most part).
competition and can never be eliminated, but
understanding the contributing factors in critically Causes of Corporate failures
failed strategies and recognizing the warning signs can
help companies spot flawed moves and attempt to
course correct before failures become fatal.

Not All Failures Are Created Equal

A sophisticated understanding of failure’s causes and
contexts will help to avoid the blame game and
institute an effective strategy for learning from failure.
Although an infinite number of things can go wrong in
organizations, mistakes fall into four broad categories.

Introduction 1. Strategic Failures
When companies fail, blame is usually laid squarely on
Until 2017, Carillion was one of the largest contractors
executives for making two common mistakes: First,
for U.K. government infrastructure projects, employing
they focused on the company’s historical performance
43,000 people worldwide. But despite such impressive
and ignored what was happening in the wider market;
figures, the report found that Carillion’s business
and second, they were reluctant to dump a strategy
model was an “unsustainable dash for cash” and that
that was not working until it was too late.
it deliberately used aggressive accounting policies to
present a rosier picture to the markets. Its cash flow, There are several other reasons that poor strategic
for example, relied on stringing suppliers along for direction is allowed to continue. In many cases,
months. A succession of directors maintained the companies fail to learn from the experiences of others.
image of a healthy and successful company by “Organizations tend to have this bizarre belief that the
increasing dividend payments year-over-year, same problems won’t hit them—especially if the
irrespective of company performance. In fact, more company is in a different industry sector—or that they
was paid out in dividends than the company generated are capable of dealing with them differently and
in cash. For years, the board helped maintain a successfully,” said Mark Brown, vice president and
“deluded” sense of optimism even though the senior risk practitioner at enterprise risk management
company was “crying out for help. software provider Sword Active Risk.
Executives also often fail to fully appreciate what risk
At the time of its collapse, Carillion left a pension
management can actually do. “Most organizations say
liability of around £2.6 billion (about $3.31 billion)
that they have an enterprise-wide risk management
and owed around £2 billion to its 30,000 suppliers,
system in operation, but relatively few have full
sub-contractors, and creditors. The company went
executive buy-in or an acceptance from boards that
into liquidation in January 2018 with liabilities of nearly
they are ultimately responsible for it,” Brown said. “As
£7 billion ($8.9 billion) and just £29 million ($37
a result, there is a disconnect about what executives
million) in cash. The subsequent furor prompted the
should be doing and a false view that the risk
U.K.’s corporate governance regulator, the Financial
management function prevents all risks.”
Reporting Council, to request greater powers to
investigate and prosecute all directors. Currently, it is Personality can also have a sizeable impact on the

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