BUS 599 The Dark Side of Leadership : Catastrophic Failure [[[***** 1 Pages + APA Format *****]]]
BUS 599 The Dark Side of Leadership-Catastrophic Failure
The Dark Side of Leadership: Catastrophic Failure
The Dark Side of Leadership: Catastrophic Failure
At times leaders fail.It’s inevitable. Some fail morally, damaging their reputations and depriving their organizations of their expertise and leadership. Former President Bill Clinton, former New York Governor Elliot Spitzer, and former Hewlett Packard CEO Mark Hurd are all examples of this type of failure. Others fail operationally,unable to lead their organizations to the level of performance required by stakeholders. Former Apple CEO John Sculley and former Home Depot CEO Bob Nardelli are both examples of this failure. Yet still others fail to protect their stakeholders from catastrophic disaster. These leaders fail to anticipate future unknown events or prepare for potential catastrophes that can be anticipated. Such catastrophic failures can result in the loss of billions of dollars of investment capital, thousands of jobs, and even the loss of life. The failures of Ken Lay, former CEO of Enron, Rick Wagoner,former CEO of General Motors, and Dick Fuld, former Lehman Brothers CEOall fall into this category. Failures of this nature not only impact the leader’s organization and stakeholders, but can affect whole industries and economies on a global basis. Therefore, today’s leaders areresponsiblenot only for providing a vision of the future and the plans to achieve it, but for protecting their organizations and their followers from catastrophic failures. The recognition and fulfillment of this responsibilityis of critical importance to the long-term success and viability of global leaders and their organizations.
Failure to Recognize Catastrophic Risks
All organizations face risk: market risk, operating risk, financial risk and strategic risk. To address and manage these risks most organizations have a risk management function.However, this risk management function typically addresses the “known” operational, financial and strategic risks through various techniques such as insurance, in-house risk-reduction programs, risk transference, and risk hedging. In addition, various tools and techniques are used to identify these known risks, assess their potential financial impact, and assess the potential probability of the risk event occurring. This function is usually delegated to subordinate leaders within finance or human resources. However, while significant effort is expended to mitigate these “known” risks, little effort is expended with respect to “unknown” risks, including strategic and catastrophic risks.
Acknowledging Potential Unknown Risks
Statistical researchers Spyros Makridakis, Robin Hogarth and Anil Gaba, in their article, Forecasting and Uncertainty in the Economic and Business World, address the issue of business forecasting and planning and the need for a framework that allows leaders to face the future with greater insight.They make several observations that support the hypothesis that “accurate forecasting in the economic and business world is usually not possible.”Most importantly, they observe that practically all business and economic endeavors are subject to significantuncertainty, since they are subject to events that are not able to be predicted.
The second type of uncertainty, theunknown uncertainty,is that which may be identified in advance but is rare and unexpected, with critical consequence, and unable to be predicted with reasonable probability.Little effort is expended in attempting to manage this type of risk principally because the magnitude of the risk and its probability are considered difficult or impossible to measure, or even to conceive.
The Black Swan
Denial of Risk and Peril
Enhancing Catastrophic Risk Recognition
The Acid Test
In light of the above recommendations, leaders and their organizations will still be challenged withtwo overriding questions: 1) how can an unknown catastrophic risk event be identified; and 2) how can the probability of such an unknown event be estimated? A simple yet effective approach is to start by defining the potential risk event as being totally catastrophic, e.g., total loss of all assets, total collapse of the business model, andtotal failure of the organization’s vision. With this definition in mind, leaders can conduct the following exercise with a leadership team, or groups of followers:
This simple exercise will provide leaders with added insight into their organization’s potential to encounter a Black Swan or Predictable Surprise.
One Final Step: Effective Organizational Design
Leaders are ultimately responsible for the well-being of their organizations. However, they cannot do it alone. Their ability to protect the human and financial resources of their organizations from the catastrophic effects of Black Swans and Predictable Surprises will be dependent upon the leaders’ ability to engage the entire organization to accomplish this critical task. Catastrophic failures are usually exacerbated by organizational design failures, and thus are another indication of the failure of leadership.
To ensure effective organizational design, Jay Galbraith’s “Star Model” provides an appropriate framework for implementing the various recommendations made above. The principle facets of the Star Model are: 1) strategy (the direction of the organization); 2) structure (the distribution of authority); 3) processes (the flow of information or decision-making activities); 4) rewards (the basis of motivation); and 5) people (the required skills, knowledge and mindsets).. All organizations possess these five basic facets of organizational design, whether intentionally or by accident. With proper alignment, an organization can be designed to facilitate variety, change, speed and integration – the sources of competitive advantage in both today and tomorrow’s environments..Furthermore, in tandem with Bazerman and Watkins’ observations on the contribution of organizational failures to catastrophic potential, it is apparent that proper organizational design and alignment is a significant factor in avoiding such failures. Using Galbraith’s “Star Model”as a framework for organizational design, a leader can minimize the probability of catastrophic loss by:
Proper organizational design can provide leaders with the appropriate alignment of human and financial resources to avoid, orat least minimize, the impact of a catastrophic event.
Avoiding Catastrophic Failure
Recent history provides us with numerous examples of leadership and organizational failures caused by Black Swans or Predictable Surprises. However, these failures and there often devastating consequences can be minimized or even avoided, by the awareness of their potential and by taking timely and appropriate action. To enhance awareness, leaders must understand the nature of the environment in which they lead, and the psychological and organizational vulnerabilities which threaten their ability to appropriately recognize and react to potential threats. Further, leaders must design, align and manage organizations that can function effectively in an environment of “hyper-turbulence.” With enhanced awareness and organizational capacity, leaders will be positioned to grow and sustain their organizations in the presence of catastrophic risk.
Michael Petty is the managing partner of North Star Partners. North Star Partners assists organizations in the areas of leadership development, strategic thought and application, and financial stewardship.