Tag: Volkswagen

Risk Management Leadership Lesson: The Value of Trust in Operations

Risk Management Leadership Lesson: The Value of Trust in Operations

Risk Management Leadership Lesson: The Value of Trust in Operations

In business and life, we grow to expect certain things. Namely, our society expects companies to produce products that are safe and reliable. We go to Yelp and rail against restaurants that do not meet our expectation for service. However, large firms, when caught red-handed often have gotten by with a mere slap on the hand. When we see a firm misbehave or use a controversial advertisement, we see boycotts initiated and apologies extracted. What about more severe damages? How a firm operates is important in its success and in forming trust with its customers.

In the last few weeks, we have seen a couple of major developments in how firms have cheated and thus lost trust. Stewart Parnell, the former CEO of Peanut Corporation of America, was sentenced to 28 years in prison for knowingly selling and distributing peanut products containing salmonella. At least nine people are known to have died from these contaminated peanut products. It is a striking case, because we now have the science to keep food safe. We now have the science to find what has killed us and identify the source of that contamination. Yet, a firm and its executives decided to operate in a reckless manner. It is the first severe penalty levied on a food company for selling contaminated food. In the trial, former employees of the Peanut Corporation of America testified that the CEO and firm prioritized profits over safe operating conditions. Of course, the tragic deaths cannot be reversed with prison time or fines. The damage to the Peanut Corporation of America was self-inflicted. No competitor or market force did that to them. No surprise in the capital markets or fear of peanuts by consumers brought them harm. When firms cheat and do harm, they ultimately hurt themselves. This fraud is of course a major risk to shareholders, customers, markets, and, in this case, the health of people.

The recent EPA disclosures about how Volkswagen has more or less gamed its diesel engine systems to perform well on emissions tests (and only during tests) showcases yet another case of internal fraud. Attorneys General across the US are already calling for billions in damages from Volkswagen. The firm created an image for “clean diesel,” sold it to well-educated and wealthy Americans, who wanted an environmentally palatable vehicle, and they profited handsomely from it. Now the lies have been revealed. The fraud, again, is internal and self-inflected. No competitor, regulator, customer, or market force made Volkswagen do this. It is risk that now will harm shareholders, customers, the German economy, and the environment. And, let’s not forget about Toyota and its accelerator, GM and its ignition switches, and well… the list goes on and on. We lose trust in firms because of the harm they cause and because that is the result of internal risk taking and decision-making gone awry.

These two recent cases are largely about internal fraud. It is clear that the firms knew about their misdeeds and elected to operate in a reckless and harmful manner. We often think of internal fraud as a banker walking out of the vault with gold bars. Such fraud is far less likely to occur than that of an executive taking undue risk against the firm to meet short-term goals. With average CEO tenures on the order of 5 years, the pressure to preform is high and the window of opportunity is short. The threat of internal fraud is a risk that all firms must address.

The management of such risk falls under Operational Risk Management. Operational Risk and self-inflicted damages are the cause of the greatest reputational harm. Nobody forced BP, GM, Volkswagen, Toyota, or the Peanut Corporation of America to do what they did. Their executives elected to take risks (and dangerous ones). Trust requires operating successfully over many transactions and creating value for customers. Once that trust and reputation are damaged, the firm must work to change not only its image, but also its operation. The process to managing Operational Risk requires a treatment that addresses the organization, its culture, its management, and leadership. We will explore all of these topics in the upcoming course Operational Risk Master Class: Measurement, Management, and Leadership.

Join us!

About Russell Walker, Ph.D.

Professor Russell Walker helps companies develop strategies to manage risk and harness value through analytics and Big Data. He is Clinical Associate Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management of Northwestern University.

His most recent book, From Big Data to Big Profits: Success with Data and Analytics is published by Oxford University Press (2015), which explores how firms can best monetize Big Data. He is the author of the text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management through business case studies.

He  has advised many leading institutions on Operational and Reputational Risk Management, including: The World Bank, SEC, Genworth, Capital One Financial, Discover Financial, PNC, The Bank of England, and the US State Department, among others.

You can find him at @RussWalker1492 and russellwalkerphd.com

Advertisements
Risk Management Leadership Lessons – Operations Are Improved when Leaders Welcome Bad News

Risk Management Leadership Lessons – Operations Are Improved when Leaders Welcome Bad News

Risk Management Leadership Lessons – Operations Are Improved when Leaders Welcome Bad News

As the Volkswagen case unravels before our eyes, it plays out a familiar and repeated lesson on dealing with risk. This lesson is that early warning signs were available, but ignored. It appears that Bosch warned VW of the illegal diesel emissions as early as 2007.[1] It is not entirely surprising that VW and its executives ignored the warning. In fact, many of the great risk-driven crises involve firms that ignored early warning signs. Often early warning signs come as disconfirming information – or bad news – information that suggests the prevailing outlook on things is flawed and that a negative outcome is looming.

Let’s look at some other big failures in risk management and how the ignoring of early warning signs played a dangerous role. Evidence shows that BP had many test results, indicating that the critical pressure levels on the doomed Deepwater Horizon well were questionable. Toyota had the benefit of many years of excessively large numbers of customer complaints about accelerators. GM knew of the ignition problems. And, even famously, the NASA leadership team knew of the vulnerability of rubber O-rings in low temperatures (it was below freezing at Cape Canaveral the night before the launch in January, 1986). In all cases, the organizations ignored the information and elected to interpret it in a different manner. Why?

The answer is tied to how we develop our outlooks or hypotheses for the things around us. In these spectacular failures, the organizations and their leaders had early warning signs. Yet the early warning signs were ignored. As humans, we are predisposed to confirmation bias when confronted with new and disconfirming information. That is to say, when we see data that suggests our outlook is wrong, we first interpret the data in a way that still fits our rose-colored outlook. We attempt to discredit the data, the messenger, or the meaning of the data before we question our outlook and theory.

For instance, it results in the following claims: The drivers are the problem with Toyota automobiles, not the accelerators. Inconclusive pressure tests are common in oil well tests, as noted by BP. There is no statistically shown relationship between O-ring failure and temperature, as asserted by NASA before the Challenger explosion. And at VW, our engines are better, in spite of the data and warnings.

Overcoming these challenges is a fundamental one in the management of risk and decision-making. It involves organizational refocus and a diligent examination of disconfirming information or bad news. For the leader, it means opening your personal and professional network to the upward from of disconfirming information. That is not a one-time task, but a change in how you operate and do business.

How a firm operates and makes decisions is tied to how it manages internal decision-making processes. The management of such risk falls under Operational Risk Management. Operational Risk and self-inflicted damages are the cause of the greatest reputational harm. Through cases and simulations, we will explore all of these topics in the upcoming course Operational Risk Master Class: Measurement, Management, and Leadership.

Join us!

About Russell Walker, Ph.D.

Professor Russell Walker helps companies develop strategies to manage risk and harness value through analytics and Big Data. He is Clinical Associate Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management of Northwestern University.

books together from amazon

His most recent book, From Big Data to Big Profits: Success with Data and Analytics is published by Oxford University Press (2015), which explores how firms can best monetize Big Data. He is the author of the text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management through business case studies.

He has advised many leading institutions on Operational and Reputational Risk Management, including: The World Bank, SEC, Genworth, Capital One Financial, Discover Financial, PNC, The Bank of England, and the US State Department, among others.

You can find him at @RussWalker1492 and russellwalkerphd.com

The Value of Trust: Operating for Success

The Value of Trust: Operating for Success

The Value of Trust: Operating for Success

In business and life, we grow to expect certain things. Namely, our society expects companies to produce products that are safe and reliable. We go to Yelp and rail against restaurants that do not meet our expectation for service. However, large firms, when caught red-handed often have gotten by with a mere slap on the hand. When we see a firm misbehave or use a controversial advertisement, we see boycotts initiated and apologies extracted. What about more severe damages? How a firm operates is important in its success and in forming trust with its customers.

In the last few weeks, we have seen a couple of major developments in how firms have cheated and thus lost trust. Stewart Parnell, the former CEO of Peanut Corporation of America, was sentenced to 28 years in prison for knowingly selling and distributing peanut products containing salmonella. At least nine people are known to have died from these contaminated peanut products. It is a striking case, because we now have the science to keep food safe. We now have the science to find what has killed us and identify the source of that contamination. Yet, a firm and its executives decided to operate in a reckless manner. It is the first severe penalty levied on a food company for selling contaminated food. In the trial, former employees of the Peanut Corporation of America testified that the CEO and firm prioritized profits over safe operating conditions. Of course, the tragic deaths cannot be reversed with prison time or fines. The damage to the Peanut Corporation of America was self-inflicted. No competitor or market force did that to them. No surprise in the capital markets or fear of peanuts by consumers brought them harm. When firms cheat and do harm, they ultimately hurt themselves. This fraud is of course a major risk to shareholders, customers, markets, and, in this case, the health of people.

The recent EPA disclosures about how Volkswagen has more or less gamed its diesel engine systems to perform well on emissions tests (and only during tests) showcases yet another case of internal fraud. Attorneys General across the US are already calling for billions in damages from Volkswagen. The firm created an image for “clean diesel,” sold it to well-educated and wealthy Americans, who wanted an environmentally palatable vehicle, and they profited handsomely from it. Now the lies have been revealed. The fraud, again, is internal and self-inflected. No competitor, regulator, customer, or market force made Volkswagen do this. It is risk that now will harm shareholders, customers, the German economy, and the environment. And, let’s not forget about Toyota and its accelerator, GM and its ignition switches, and well… the list goes on and on. We lose trust in firms because of the harm they cause and because that is the result of internal risk taking and decision-making gone awry.

These two recent cases are largely about internal fraud. It is clear that the firms knew about their misdeeds and elected to operate in a reckless and harmful manner. We often think of internal fraud as a banker walking out of the vault with gold bars. Such fraud is far less likely to occur than that of an executive taking undue risk against the firm to meet short-term goals. With average CEO tenures on the order of 5 years, the pressure to preform is high and the window of opportunity is short. The threat of internal fraud is a risk that all firms must address.

The management of such risk falls under Operational Risk Management. Operational Risk and self-inflicted damages are the cause of the greatest reputational harm. Nobody forced BP, GM, Volkswagen, Toyota, or the Peanut Corporation of America to do what they did. Their executives elected to take risks (and dangerous ones). Trust requires operating successfully over many transactions and creating value for customers. Once that trust and reputation are damaged, the firm must work to change not only its image, but also its operation. The process to managing Operational Risk requires a treatment that addresses the organization, its culture, its management, and leadership. We will explore all of these topics in the upcoming course Operational Risk Master Class: Measurement, Management, and Leadership.

Join us!

About Russell Walker, Ph.D.

Professor Russell Walker helps companies develop strategies to manage risk and harness value through analytics and Big Data. He is Clinical Associate Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management of Northwestern University. His most recent book, From Big Data to Big Profits: Success with Data and Analytics is published by Oxford University Press (2015), which explores how firms can best monetize Big Data. He is the author of the text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management through business case studies.

books together from amazon

He  has advised many leading institutions on Operational and Reputational Risk Management, including: The World Bank, SEC, Genworth, Capital One Financial, Discover Financial, PNC, The Bank of England, and the US State Department, among others.

You can find him at @RussWalker1492 and russellwalkerphd.com