Presentation • Enterprise Risk Leadership
Improving Risk Management • We need to understand: • How we know things. • How we decide. • How we learn to go outside the box.
Presentation • #1. Risk Management • Decision-making
Leadership Quote • “I used to say of Napoleon that his presence on the field made the difference of forty thousand men,” Duke of Wellington
Presentation • Facts and Beliefs
Starting Point • People approach decisions based upon: • Facts. Empirical data or observable phenomenon supported by evidence. • Beliefs. Combination of facts and interpretations of people and activities. • Feelings. Emotions that intensify or diminish facts or beliefs. • Opinions. Judgments masked as facts, beliefs, and feelings. • Assumptions. Beliefs without reflection. • Bias. A pre-judgment that interferes with an objective perspective.
Question (1) • Of beliefs, facts, feelings, opinions, and assumptions, which is the dominant factor in decision making?
Question (2) • Is a fact the basis for a belief?
Answer • A fact is something supported by evidence. • It can be the foundation for a belief. • It may or may not be true.
Question • What is the role of facts in reaching a conclusion?
Answer • Facts give people either: • A basis for reaching a conclusion. • A need to reach a conclusion. • An excuse to reach a conclusion. • A way to defend the wrong conclusion at a later time.
Question • What is the role of feelings in reaching conclusions?
Answer • Feelings distort beliefs and thus distort conclusions.
Question • What are the roles of opinions and assumptions in reaching conclusions?
Answer • Opinions and assumptions distort conclusions.
Bias • Bias is subjectivity where a person has a preference for an interpretation with or without evidence to support a belief. • It may be conscious or subconscious. • It leads the person to a conclusion that supports the belief.
Question • In 1994, Congress held a famous series of on the negative effect of smoking. • Four CEOs of tobacco companies testified. • They denied that they knew that cigarettes were addictive and were killing people. • They all claimed they did not believe their own evidence. • Was this behavior based on belief, facts, or something else?
Question • A small child asked, “Grandma, Who are you?” • She answered, “I am a Democrat, a Roman Catholic, and an atheist.” • How is that possible?
Question • A teenager asked, “What should I do in college?” Three people answered: • Uncle Pat: Take accounting. You’ll always have a job and you’ll make a lot of money • High School Teacher: Get a teaching certificate. You can always get a job. • Friend of the Family: It does not matter. Everything you need to know in life you learned in a sandbox with other kids. • Who is right?
Answer • Maybe the friend of the family. Did the person learn? • Play nice. • Never throw sand. • Nobody wants to play with mean kids. • No taking the buckets of others or destroying their sandcastles.
Question • What are the risk management lessons from Uncle Pat, the teacher, and the friend?
Answer • Risk management lessons are: • From Grandma. You don’t have to believe all the dogma or do everything required by the authorities. • From Uncle Pat and the Teacher. You have to be careful when asking for advice. • From the Friend of the Family. The lessons of life are really simple.
Presentation • Corporate Royalty
Question • A corporation can be described as a monarchy, an oligarchy, or a democracy. Which is most accurate?
Question • Royal families have titles. Governments have executive, legislative, and judicial branches. Companies have CEOs, officers, and boards. Are these parallel structures?
Answer (1) Rank the Following • British Royalty • King/Queen • Marquees • Duke/Duchess • Viscount • Baron • Prince/Princess • Earl/Countess Corporation CEO Division Manager COO Senior VP Vice President Executive VP Dept. Manager
Answer (2) Ranking • British Royalty • King/Queen • Prince/Princess • Duke/Duchess • Marquees • Earl/Countess • Viscount • Baron Corporation CEO COO Executive VP Senior VP Vice President Division Manager Dept. Manager
Categories of CEOs • One way to characterize the most powerful corporate person is: • All-powerful CEO. • Powerful CEO, Supporting Oligarchies. • Powerful Oligarchy, Influential CEO. • Oligarchy and CEO Wary of Outsider. • Ineffective Oligarchy or CEO.
More Categories • Another way to categorize CEOs is: • Absolute CEO. Stronger than the other oligarchs individually and combined. • Executive CEO. Has power that is carefully monitored by a board of directors. • Nominal CEO. This is the ranking oligarch by title but power is in the group.
Question • Who is someone today in a modern corporation who fits each of the following? • Absolute CEO. • Executive CEO. • Nominal CEO
Question • Which of the following fits your organization? • Monarchy. A king reigns. • • Democracy. Employees have an equal say in decision-making. • • Republic. The board restricts the actions of management. • • Anarchy. Individual managers manipulate people, assets, customers, and clients.
Presentation • Home Depot
Home Depot • Founded in 1978. • From zero to $40 billion in revenues in 20 years. • 1999: Growth and profits stalled.
Nardelli Management Style • Bob Nardelli became CEO in 2000. • Nardelli implemented a military-style management model. • 2002-2005: Half of newly-hired managers were previously military officers. • 2006: Over 100 former military officers were store managers.
Culture at Home Depot • Pre-2000: Store managers had enormous authority. • Instinct rather than analytics. • 2000-2005 All major decisions from the top. • Measure performance with new analytics: • Margins on products. • Number of customers greeted at the door.
Results 2000-2006 • Between 2000 and 2005 at Home Depot: • Sales rose 75%. • Profits doubled. • By 2006, world's third largest retailer.
Home Depot in 2006 • Fortune magazine Number One Most Admired Specialty Retailer for 2006. • April 2006: Model of corporate governance in an article in the Harvard Business Review .
ERM Concern? • Home Depot: • Stock price dropped 7%. • Lowe’s: • A major competitor. • Over 1200 stores (half the size of Home Depot). • Stock price rose by 210%.
Story One • Inventory was sluggish at Home Depot: • CEO focused on a single metric -- inventory turnover. • Store managers stopped ordering inventory. • Shelves were often empty of goods to sell.
Story Two • Home Depot cuts costs of staffing: • CEO ordered a reduction of full-time staffing. • Part-timers to make up half of the workforce. • Part-timers have no real commitment to the company.
Story Three • University of Michigan Customer Satisfaction Survey: • Company 2001 Score 2006 Score • Home Depot 75 67 • Lowe’s 75 78 • 2006 score of 67 was last place among all stores in the department store and discount store category.
Cultural Risk? • Full-timers describe a culture of fear. Cultural changes created some new language. What do you think each means? • “Aprons.” • “Bob’s Army.” • “Bobaganda.” • “Home Despot.”
Aprons • Store workers with orange aprons.
Bob’s Army • Store leadership program with half the individuals as former military.
Bobaganda • Company programming on TVs in employee break rooms with continuous play of tips, warnings, and executive messages.
Home Despot • The company itself to disgruntled employees.
Home Depot Finale • On January 2, 2007, Home Depot and Robert Nardelli mutually agreed on Nardelli's resignation as CEO after a six-year tenure. Nardelli resigned amid complaints over his heavy handed management and whether his pay package of $123.7 million, excluding stock option grants, over the past 5 years was excessive considering the stock's poor performance versus its competitor Lowes.
Epilogue • The story of Mr. Nardelli did not end when he left Home Depot. He became CEO of Chrysler Corporation. Although Mr. Nardelli did not get a full chance to turn around Chrysler, the Chrysler board made a calculated decision to appoint a CEO who was a crisis manager.
Presentation • Managers and Leaders