Control the Controllable: lessons from farmers for corporate leaders
“Corporate leaders – CEOs and boards – are often lulled into a false sense of security and do not realize they, too, face the reality of constant change.”
The phrase ‘risk management’ has become a mantra for enterprises large and small since 2008. Can risk be managed? We love to believe it can be identified and quantified and bucketed along with lots of other aspects of running a business, but we may be fooling ourselves.
The nature of the risks confronting us is constantly changing, putting a premium on accurate interpretation of the environment, and on agility of response to ensure resilience. Disaggregating the analysis of, and response to, perceived potential risks may in fact create further risk by creating the impression that risk factors can be separated and evaluated individually, when often adverse events arrive in related clusters.
Looking at the risks faced by farmers, where efforts to mitigate risk began, may be instructive. Farmers literally bet the ranch every day, laying out their capital, often all they have, in the face of a series of events they know they cannot control. While their liabilities for production, equipment and land costs are capital intensive and long term, their circumstances change daily. In the constant effort to manage first not to lose money and then to survive to fight another day, they make decisions, and more decisions, based on limited information, knowing many factors are beyond their control. They and their families have to live with the results, good or bad.
In addition to being dependent on unpredictable weather patterns, the farmer’s uncertainty is radically increased by legislators who no longer understand or value agriculture, and thus impose arbitrary and conflicting regulations upon the industry. The costs of the inputs to production are almost entirely independent of the value of the output created. Farmers are often dealing with negative public opinion and misinformation, shifting consumer demand patterns, and negotiating from the unpopular, minority position.
What are the lessons businesses can learn from farmers?
Corporate leaders – CEOs and boards – are often lulled into a false sense of security and do not realise they, too, face the reality of constant change. Like farmers, corporate leaders must constantly evaluate and re-evaluate opportunity and downside risk, and prepare the enterprise to respond. They must remember that no matter how large the revenue stream, how experienced the folks in the boardroom are, how strong the company’s franchise is, everything can change in the blink of an eye, and often does.
While the application of specialised skills to the analysis of various aspects of risk can generate important information, decisions regarding assumption of risks perceived to be significant cannot be delegated. It can be seductive to believe that analysing risk is tantamount to controlling it. Farmers, however, face constant reminders that they can never fully control risk. They focus their limited resources, therefore, on identifying the risks to the extent they can that can wipe them out, and doing what they can to mitigate the adverse effects of those. Because information available is typically centralised within a small group of people with authority to act, decisions can be made and remade as needed, and assets deployed in response.
Risk mitigation techniques vary as widely as the specific risks they are designed to address. There is no one size risk mitigation technique fits all. The simple message here is to start with an assessment of the particular risk, the impact negative outcomes can have, the tools available to mitigate that impact, and their costs, and the effect of all on the enterprise. It is too easy in a highly structured environment to be driven by the availability of the tool, while forgetting the nature of the risk. Just because an approach has worked in the past does not mean it will work in the future, so starting from a blank slate and rebuilding every assumption is an essential exercise.
Farmers don’t have risk management departments, though they glean information about the nature and possible impact of many types of risk from many sources. While such departments can be helpful to corporations and are often now required by regulators, their existence must be managed carefully, for fear of fostering the illusion that thinking about risk belongs only in that department. Like farmers, corporate leaders must remember and remind their organisations that recognising and identifying possible unanticipated outcomes is the job of every employee of the enterprise, high, low, far and wide.
Many farmers fail, as it is an inordinately complex job to produce profitable results from the earth. Those that succeed over a number of years, however, have developed some remarkable hallmarks. They are agile and their experience gives them the ability often to resolve unexpected difficulties quickly. They see problems in multiple dimensions and analyse and quantify impacts, outcomes and possible alternative solutions rapidly. Through accepting and assessing various risks every day, successful farmers develop that prized quality needed in our corporate leaders called judgment. Experience fighting with risk, sometimes winning and sometimes losing but winning more often not, breeds excellent seasoned judgment, a quality that is essential among our corporate leaders.
Finally, one last lesson – farmers today utilise technology extensively, and rely on ever more specialised machinery to run their operations. They can never, however, forget that their models, data and machines do not control the outcome. By virtue of the nature of their products, they know that the forces they are seeking to control with chemistry and machines are fundamentally driven by biology, and not by physics, and by forces of nature much bigger than they are. That humility, which translates into an openness to considering possible improvements from any source, is critically important to the corporate boardroom.
Deborah Hicks Midanek is an independent corporate director and president of Solon Group, Inc. She can be contacted on +1 (917) 853 3598 or by email: firstname.lastname@example.org.