How to plan for the next crisis

This is an audio transcript of the Working It podcast episode: ‘How to plan for the next crisis’

Michael Skapinker
You do have to take a risk. Taking risks is part of business and you don’t want to be the kind of organisation that never does anything in case things go wrong. You couldn’t survive that way.

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Isabel Berwick
Hello and welcome to Working it from the Financial Times with me, Isabel Berwick. We seem to be living at a time of multiple crises — from bank collapses to business failures to social media storms, business leaders have to be able to deal with whatever is thrown at them. We just heard the FT’s contributing editor, Michael Skapinker, talking about how businesses should be preparing for potential crises, and there’ll be more from him later.

The recent collapse of Silicon Valley Bank left many tech businesses simply hoping for the best in a weekend of high tension before the US government stepped in. But why do so few people foresee the next crisis? And more importantly, why do they fail to prepare for it? Michael’s recently written for the FT about how managers can put organisations at risk when they fail to plan for the worst-case scenario. We’re also joined by John Mullins, a serial entrepreneur and associate professor of management practice at London Business School. He’s author of a new book called Break the Rules, and he joins us from the US. So welcome, both.

And I wanted to start by laying out the problem. Michael, I want to start with you. Why do so few leaders and managers fail to speak up about their business taking the wrong path or maybe not being strategically sensible about risk?

Michael Skapinker
I think what happens is businesses decide what they’re going to do. The executive committee decides what it’s going to do. It announces the strategy and people coalesce around it. There might be people who have doubts, but for quite complex reasons, people tend to still those doubts inside organisations.

Isabel Berwick
And John, you’re an entrepreneur yourself. Are there any differences in how start-up founders approach potential crises, or do they expect the worst while hoping for the best? Are they a little bit more ad hoc?

John Mullins
They know there’s technology risk — maybe what they’re trying to develop won’t actually work. There’s market risk — will somebody buy? There’s execution risk. You know, Tesla, for example, will they figure out how to actually build cars? None of them had ever done that before. So they’re acutely aware of risk.

Isabel Berwick
So they’re sort of closer to it. But Michael, in a sort of more established business, I mean, we can call Silicon Valley Bank that, perhaps. Could the bankers have seen this sort of very fast bank run that could happen to them?

Michael Skapinker
This was a very fast bank run, so it took a lot of regulators by surprise. After I wrote my article for the FT, I had some people saying to me, I did predict this was going to happen, providing evidence that they did foresee it. In my article, I quoted James Detert at the University of Virginia as saying we’re pretty much hard-wired not to deviate from our group. Historically, when you think back to the time when we were hunter-gatherers, there really was a penalty for being on your own. You couldn’t survive on your own. It’s only very special people or differently wired people who really like to stand out. Most people like to go along. If they have their doubts, they think, well, I’m only one person. I’m sure everybody else has thought of all of this. And why should I really sort of take the risk of going against everybody else? It’s quite uncomfortable to be the dissident. And then the other issue — and I think John might want to talk about this as well — is the whole question of incentives. The FT had a report saying that at Silicon Valley Bank, essentially the executive team were incentivised to maximise their returns and they got higher returns from long-dated bonds. So the incentive system is also important.

Isabel Berwick
John, how much do you think the incentive system leads to people taking bigger risks?

John Mullins
Well, it’s a big deal. I think one of Michael’s readers pointed out that incentives are driving the kind of behaviour we saw at Silicon Valley Bank, and it drives entrepreneurs. You know, they’re fighting against long odds and they know that. But if they’re successful in beating those odds, the returns for them and potentially for their investors can be enormous, as we’ve seen in the big successes. So incentives are a key part of what’s going on here.

Isabel Berwick
And I wanted to move on to something that’s happened here in the UK. We’ve recently had a big issue at the BBC, the national broadcaster, where its highest-paid presenter, a football commentator called Gary Lineker, was taken off the air for breaching impartiality guidelines in a tweet he put out that was criticising government policy on refugees. And then the BBC’s remaining sports presenters essentially went on strike, didn’t they? Mike, what do you take away from that as an example of a crisis, a very modern crisis actually around social media that people just don’t see coming?

Michael Skapinker
Well, I think we’re going to see a lot more of these crises as people, you know, use social media more. And also, this is part of the whole sort of bring your whole self to work idea, that you can express yourself. But the BBC is a bit of a puzzling one because that just seems to me a case of nobody really thinking this through. When they said we’re going to suspend Gary Lineker from presenting his football programme, Match of the Day, did they ask, OK, who is going to present it? Is it going to be one of those other former star footballers who played with him, who commentate with him? Are they really just going to be willing to step into his place? And they weren’t. They said, sorry, if you’re suspending Gary, we’re not doing the work either. So that just seems to me a case of not thinking it through. But once again, where were the people saying, hang on a second, let’s just think about what’s going to happen if we do this? And this just all brings us to the point of how you do these things, and are there ways in which you can basically make sure that these questions are asked? Because as I say, people don’t like to stand out from the crowd.

Isabel Berwick
So that’s two examples there where we’ve essentially got groupthink or tribalism in different areas. So it’s prevalent everywhere. Is that what you’re saying?

Michael Skapinker
It is prevalent everywhere. And the question of what to do about it, you need to have an institutional way of ensuring that you hear the alternative view. James Detert, who I quoted, said you should ask when you’re drawing up a strategy to task a team to develop an alternative strategy, and to bring that strategy and to present it so that we can look at, you know, what has gone wrong, what could possibly have gone wrong. One of the readers also brought up something which was championed by Daniel Kahneman, the Nobel Prize-winning behavioural economist and psychologist who talked about doing a pre-mortem and saying, let’s imagine that what we are going to do a year from now has gone wrong. Let’s think about what was it that could have gone wrong. So I think you really need to make this a formal process because it makes sure that you investigate this properly and also it depersonalises it. It means you’re not saying this particular person is always whingeing, always moaning, always objecting, we’ll stop listening to them. It means that you are actually properly considering your options.

Isabel Berwick
So Michael, there you mentioned some of the reader comments, and I’m gonna read out a couple now and perhaps ask you and John to comment on them. Our readers came up with some possible solutions for crisis planning. As ever with the Financial Times, they’ve got lots of ideas. Here’s one: “As someone who worked in a chief risk officer role for nearly 20 years, I can attest to the difficulty of the role. For most people, the personal risk/reward equation just doesn’t make sense. All your recommendations to make things safer involve sacrificing profitability in the near term and sometimes even the longer term when it comes to recurring infrastructure costs. That leaves you with the proverbial bull’s eye on your back if the CEO and or chief financial officer are of a more aggressive bent, therefore many CROs simply decide that sticking their neck out on strategic matters is not a good idea. It’s a fundamental issue that will keep resurfacing”. John, is that something that you’ve come across — the chief risk officer simply can’t take risk?

John Mullins
Well, you know, I study entrepreneurs and entrepreneurs don’t have chief risk officers. They have a founder, and the founder essentially is the chief risk officer. He or she is charged with getting to the promised land in spite of all the risks that surround what they’re trying to do. That’s their job. And they build a team that believes in the vision and they try and get everybody in the boat thinking the same way. And by God, we’re gonna conquer these risks and off we go. So, yeah, I think it rings true.

Isabel Berwick
Yes. As structures get bigger and more unwieldy, actually more risk can be built in, Mike.

Michael Skapinker
It can, and also you do have to take a risk. You know, taking risks is part of business and you don’t want to find yourselves in a situation where you’re in constant paralysis because you’re too afraid of what might happen. Things might go wrong. Things do go wrong in life; generally, in business, for all of us, things go wrong. The thing is, have you thought about it? Have you had a proper look at what the alternatives are? In the end, you’re going to take a risk and you don’t want to be the kind of organisation that never does anything in case things go wrong. You couldn’t survive that way.

Isabel Berwick
This is a good reader comment on that point: “There’s a fundamental flaw in thinking that failures can be predicted and anticipated. Risk specialists tend to be always looking at the downside and still miss many times. But you can’t run an organisation by focusing on the downside. You need to see the opportunities and have the confidence to believe your firm can profit from them”. I imagine a lot of the firms you study are like that, John?

John Mullins
Well, yeah, and I think it’s one of the reasons why the real innovations today are created not by big companies who perhaps could have created them. You know, why is Tesla a start-up? Why was it not developed by Renault or Toyota or somebody else? You know, Elon Musk has, I think, arguably single-handedly made electric vehicles relevant. Well, somebody else could have done that. The same is true of almost any start-up. You say, well, why couldn’t this other big business in that sector have done this? Well, the fact is, they don’t. And part of it, I think, is what Michael’s alluding to, is that it’s hard to get risky things done in big organisations. There ought to be processes to examine risk, but those processes mostly aren’t there and they aren’t gonna be there. But there are a lot of processes that slow things down and leave the field clear for innovative entrepreneurs.

Isabel Berwick
Michael, what tips do you have for leaders and managers in these difficult times? You know, on planning for the inevitable next crisis? We never think it’s coming, but somehow they always do.

Michael Skapinker
Yeah, and I think one of the problems is all of us like approval. All of us like applause. We all like to be told we’re doing a great job. And the kind of people who get to the top of organisations are arguably more susceptible to that than anybody else. They want to be told they’re doing fine and the people around them, as I alluded to earlier, there’s not much gain for them. There’s not much reward in saying, actually, boss, I think you’re wrong.

So what can you do if you’re the boss? Well, first of all, I suppose you’ve got to be the kind of person who thinks, could I be wrong? And that’s a personality issue. Always helpful to have an outside sounding board: a coach or a chairman who’s prepared to talk to you in those terms. And then also, as I say, if you institutionalise it, if you make it a practice that you want somebody to present the alternative view, you’ve given them license to actually say, I think you might be wrong.

But as John said, there’s no reward without risk and things are going to fail. I think you’ve got to sort of make sure there aren’t too many recriminations afterwards. If you’ve looked at everything and if you said, OK, we went ahead in good faith, we looked at everything that could go wrong, and they still did go wrong, but we had to do something — I think that’s fair enough. I suppose you need a different kind of personality and you need to be the kind of person who worries about the fact that things might go wrong. A lot of people who get to the top are supremely confident. That’s why they’ve got to the top.

Isabel Berwick
Yes, can be a worry. But, John, is there something we can all learn from the kind of risk-taking entrepreneurs that you deal with?

John Mullins
Yeah, I think there are some things we can learn. So I think what entrepreneurs have done — at least the best of breed have done — is they’ve developed what I call “counter-conventional mindsets”. They respond to opportunities that come their way in a very different way than people in big companies do. So, for example, Elon Musk, when he joined the Tesla founding team, said, well, let’s go see if we can sell some cars. And they sold 100 Tesla roadsters at $100,000 each — cash on the barrelhead before they built Roadster number one. Well, that’s $10mn in the bank with which they could set about building cars. And that pattern continued all the way through. Now, that’s the mindset that I call ask for the cash and ride the flow.

Phil Knight, when he started Nike many, many years ago thought very narrowly about the target market of people who could run a four-minute mile. Well, that’s the target market that no big company would ever target. But once you develop a platform and learn to build shoes and learn to source them in Asia, and once you learn to draw on athletes to help you design the shoes and then promote them, then you’ve learned some things that enable you to go to John McEnroe and do tennis and Michael Jordan and do basketball, and so on. There’s some fundamental things that entrepreneurs do that quite frankly, could be learned in big companies.

Isabel Berwick
I suppose, Michael, it’s different for large companies in some respects, isn’t it, that they have existing products, they have a big legacy business, you know. How could they be doing more and better scenario planning?

Michael Skapinker
Well, they can afford also to take more risks. They can do discreet things. For example, they don’t need to bet the bank, they don’t need to bet the whole company every time. They can set aside some money, they could set aside some people and say, let’s try this. In fact, they’re able to do it more easily. If you think about it, they’ve got more of a cushion, they’ve got bigger credit lines, they’ve got more ongoing sales. So they could do it. It’s a mindset, it’s a preparedness to let people be a bit different and preparedness to let them fail and they can take many more small bets than small companies can.

Isabel Berwick
I’m gonna finish up by asking both of you, what do you think the biggest risk on the horizon is? John, could I start with you?

John Mullins
I think the biggest risk facing the world that I study — the world of entrepreneurs — is that we’re gonna face a capital crisis where entrepreneurs aren’t gonna be able to raise the next round. And that’s gonna have knock-on effects on the ability of those businesses to continue to grow. I think that’s a big risk and we’re seeing it play out. It’s much, much harder to raise money today than it was a year ago.

Isabel Berwick
Michael, what do you think?

Michael Skapinker
I can’t remember a time, certainly in my lifetime, when the geopolitical risks have been as high as they are now. The Ukraine war has had a tremendously large impact on business and our way of life. A lot of countries at the moment are in a pretty febrile state. Look at France. Look at Israel. I suppose we should all be worried about something going wrong with China and Taiwan. As has been pointed out in the FT, Taiwan produces 60 per cent of the world’s semiconductors and 90 per cent of the world’s advanced semiconductors; does not require a wall, a blockade, some sort of disruption in the process. I think geopolitical risk is something that business leaders have got to be aware of in the way they just never were in the past.

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Isabel Berwick
It’s been so interesting talking about the differences between big companies and entrepreneurs and risk-takers. And there’s a lot that both sides I think can learn. And I think the difference with working in a big company is that can often be slow and sometimes that holds up decision-making, but it can also perhaps put a stop to some of the risks. But I’d be really interested to see what happens. You know, when Michael was talking about the geopolitical risks, how can we predict that? I think people have to spend a lot more time thinking about the downsides. And that’s hard because as humans were optimists, particularly people in business who always want the profits to be going up, for the outlook to be rosy. And we’re asking people to take a sort of fundamentally more pessimistic view of the outlook. And that’s really hard for us as people. So this has been a really illuminating episode. And thank you for listening.

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Thanks to Michael Skapinker and to John Mullins for taking part. If you’re enjoying the podcast, we’d really appreciate it if you left us a rating and review on Apple Podcasts and please get in touch. We’re at workingit@ft.com or I’m Isabel Berwick on LinkedIn. If you’re an FT subscriber, please sign up for our Working It newsletter. We’ve got the best workplace and management stories from across the FT. Sign up at ft.com/newsletters. This episode of Working It was produced by Manuela Saragosa and Audrey Tinline, with mix from Jake Fielding. Thanks for listening.