Page 31 - Insurance Times March 2022

As these and hundreds of other examples illustrate, strategic Causes of Corporate failures
missteps can often have dire consequences. To some extent,
this is the nature of business competition and can never be
eliminated, but understanding the contributing factors in
critically 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.

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

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