You cannot cover all the risks, can you?

A conversation on risk: part four

You cannot cover all the risks, can you?

Managing and prioritizing risk is a constant struggle not only for a Grand Prix racing team but for business globally. Prioritizing risk can be difficult and at McLaren Honda the approach has to be based on current success.

Jonathan

No, you can’t (cover all the risks).

Given that we’re a team on the move at the moment, and while we are in recovery, we are inclined to take a different kind of risk profile to a race. We can split strategies. We’ll go for performance over reliability because we know we can always earn our way to reliability. Given the business context and what’s at stake, we’ll put a different emphasis on things, take a different set of decisions. As we work our way back into the rarefied air where there is only 0.15 per cent difference among the top five cars, then at that point there’s a subtle shift in the way in which we execute. Our attitude to some risks will be different at that point.

You can become more risk averse as you get more things in your favour – Mark Barnett

Mark

Yeah, that’s true. You try to balance. You can become more risk averse as you get more things in your favour. So you have more to lose, but you’re also happier with where you currently are. You don’t need to risk as much to gain that one extra position.

Jane

Not all risks are equal. With our clients, the aim is not how to eliminate risk; that would essentially paralyze their business. Rather, we want to support our clients to manage risks in a way that allows them to achieve their business goals and strategies. As clients pass through different cycles of their development and growth, they have varying degrees of tolerance for risk.

We want to support our clients to manage risks in a way that allows them to achieve their business goals and strategies – Jane Caskey

One comment that comes back to me repeatedly, from GCs and heads of risk, is that they do not appreciate lawyers who come to them and merely identify risks without solutions, or lawyers who see everything as a material risk. That is not acceptable. For them such an approach is completely meaningless and unhelpful.

Once you’ve defined the risks, you have to assist the client to prioritize. There could be a risk that involves devastating consequences, but the likelihood of it happening is not high. It’s actually a matrix. It’s not just, ‘Is there a risk?’ It’s ‘What is the risk?’ ,‘What is the probability of that risk coming to pass?’, ‘What are the consequences?’, ‘Does it get a red, amber or green light in terms of degree of material consequence?’

Finally, where we find we can add real value as advisors to clients, is identifying issues that the clients haven’t yet seen and suggesting a path to address and mitigate those issues. For example, emerging trends or changes on the horizon that will impact the business. Often our clients do not have the time for horizon-scanning.

Jonathan

Safety will always be top of the list - there is no compromise. We accept, to a fashion, that there is inherent risk in putting somebody into a car that’s going to travel that fast and put it round with other people all trying to compete for the same space at the same time.

Nevertheless, as we demonstrated as a team very well, in Melbourne - when Fernando had a huge crash - with the care, the attention, the effort, the rigorous process and the uncompromising attitude to our car design, there are no shortcuts taken. You can walk away. We still feel it was fortunate that Fernando did walk away from that crash; there were a lot of things that could have gone further wrong. But the product that we designed wasn’t designed on the bare minimum from a safety point of view.

We don’t have the same attitude to all risks: some are more important than others.

 

What risks are at the bottom of the pile?

Mark

The risks at the bottom of the heap - that’s an interesting one, because you never think about it from that perspective. You definitely prioritise them but there are some risks that just aren’t worth addressing. If we become overly focused on the negative race strategy risks, then we would essentially underperform compared to our optimum at every race, because we’d be covering all of those and we’d be missing opportunities.

We could cover a scenario where you perhaps had two punctures or a pit lane was closed: well, they virtually never happen, and if I wanted to cover those then I could miss passing one more car via an earlier pit stop or something, and we’d finish further down. So we try not to overly focus on that type of thing.

If we become overly focused on the negative race strategy risks, then we would essentially underperform compared to our optimum at every race – Mark Barnett

Jane

There are so many factors involved in assessing a range of risks, that it really depends on that business itself. It needs to be a tailored analysis specific to that client. Whether the organization is a public or private company, how it has evolved, its market share, the regulation of that industry, and the risk culture…there are so many factors.

Often, the things that give rise to reputational harm, financial exposure or sanctions - and any individual or criminal exposure for management - those bubble up as the most significant risks. The risks with less tangible consequences tend not to float up as high.

You have to be realistic. You can’t do everything with a particular budget or within a certain corporate culture, so you have to prioritize.

But organizations must do the analysis and must stay current - there may be something a little outside of the box or something that is more relevant today than you might have said last week or two years ago. For example, even those of us based outside the UK are all closely monitoring the polls in the UK with respect to the vote on whether the UK will exit or remain in the EU. This is a current illustration of how political issues can dramatically change an organization’s entire risk assessment and, as their advisors; we need to be agile and ready to respond. So even though the UK may not leave the EU, we and our clients do not have the luxury of assuming that - we have prepared and that “readiness” is critical to effectively managing such changes in the risk landscape. A risk analysis done six months or a year ago that did not appreciate the implication of an exit vote would render an organization vulnerable and not ready to manage these new risks, should they materialize.

 

Part one: I am #RiskReady. Are you?

Part two: Are your employees #RiskReady?

Part three: Is speed the biggest risk?

Part five: Compliance and regulation

Part six: Social media