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Reputability LLP are pioneers and leaders globally in the field of reputational risk and its root causes, behavioural risk and organisational risk. We help business leaders to find these widespread but hidden risks that regularly cause reputational disasters. We also teach leaders and risk teams about these risks. Here are our thoughts, and the thoughts of our guest bloggers, on some recent stories which have captured our attention. We are always interested to know what you think too.

Sunday, 15 March 2015

Latency in Systemic Risks

Most behavioural, organisational and process risks typically lie latent for years to decades before they erupt to cause a serious accident or reputational damage.  This is the finding of the latest analysis from Reputability.

We analysed two sets of data to ascertain how long the root cause lay latent before it caused harm or damage.

The first set of data was taken from 24 accidents and crises analysed in 'Roads to Ruin' the Cass business School  report for Airmic.  Almost all the events analysed occurred between 1999 and 2009 and almost all had their origins in what we now call behavioural and organisational risks. 

To this we added a set of 12 major UK accidents analysed by Turner and Pigeon in their seminal book "Man-made Disasters" (1997).  These occurred between 1966 and 1975 and included the Aberfan disaster, the Coldharbour Hospital fire,  the Hixon Level Crossing disaster, the Summerland Night Club disaster, the 1973 London Smallpox outbreak and the Flixborough fire all of which counted behavioural or organisational risks among their root causes.

Since accidents and disasters rarly have a single cause, we and Turner and Pigeon considered when the root causes began to develop and accumulate, un-recognised by those in authority.  This inevitably involves estimates.  Turner and Pigeon analysed their series of accidents into a series of bands ranging from "less than one month" through "3 to 8 years" to "about 80 years".  We did likewise.

The graph below does not show the last two categories, of incidents where the root causes had been at work for more than 20 years.  Thus the graph ends with 94% of events having emerged after 20 years.

Cumulative percentage emerged by N months


The results show:
  • Only 45% of crises had manifested within 3 years;
  • 30% emerged within 3 to 8 years;
  • 25% took longer than 8 years to emerge and
  • 6% had yet to emerge after 20 years' incubation.


These very long incubation periods for what are mainly, possibly all, unrecognised behavioural and organisational risks have three important implications for risk mangers and boards.

First, the long delay before emergence of damage from these slowly incubating risks allows an organisation to appear successful for long periods whilst unknown knowns are harboured in its midst.  The unfortunate truth is that the organisation is suffering from the delusion that all is well because nothing yet appears to have gone badly wrong.  Boards and risk managers should avoid the risk of complacency that our recent research has illustrated by searching systematically for these unknown knowns.

The emergence of child abuse in churches and other respected institutions around the world, countless banking scandals involving banks previously respected as well as despised and the Deepwater Horizon explosion are more recent examples of the delusion that all is well and under control when in fact the organisation is sitting on a powder keg. Since this was originally written, Volkswagen has provided yet another textbook example of understandable but dangerous complacency, with top leaders apparently unaware of longstanding misbehaviour by their staff.

Second, this long latency period has implications for how incentives, particularly so-called long term incentives, are structured.  We have discussed that problem here.

Finally, what of the allegedly widespread leadership thought that 'it won't happen on my watch'?  For a CEO hoping to stay in post for five years, a crude analysis of this data suggests there is a roughly evens chance of having to deal with one of these crises.  About half the risk comes from the current leader and half from the ancien regime.  And if the crisis goes badly, that will be the ignominious end of a career.


Anthony Fitzsimmons
Reputablity LLP
London
www.reputability.co.uk




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