The Entrepreneur: Margaret Heffernan

Your book Uncharted discusses risks that are “generally certain but specifically ambiguous”. Does COVID-19 fit this description?

It’s a perfect description for the coronavirus pandemic. The phrase describes, among other things, all epidemics: they are generally certain, in the sense that epidemics have always happened, and there’s no reason to believe they will stop happening; they are specifically ambiguous, because there is no profile of an epidemic. They are inherently unpredictable. We don’t know when they will break out, where they will break out, or what the disease will be.

How can organisations respond to this kind of uncertainty?

If you can’t plan for it, you have to think about how to prepare for it. We’ve seen in the news recently that many countries, notably the US and the UK, had preparedness documents and strategies which, tragically, were overlooked, or not implemented or funded, or – in the case of the US – actually disbanded. What those examples show is that it is possible to prepare. It’s possible to ask the question, ‘If this comes to pass, what will we wish we had been doing before?’ – and start doing it.

You criticise efficient ‘just-in-time’ corporate models. Do you think the pandemic will lead to changes in the way supply chains and globalised businesses are run, to make them more resilient against sudden disruption?

I’ve seen a change already. I’ve talked to business leaders who are seriously discussing among themselves about how to create a measure of resilience and put that on the balance sheet. The idea that such preparation should be part of officially required regulated reporting, in order to it be a level playing field, is gaining traction.

Going forward, we will have to think about resilience in a more sophisticated way, and I’m confident it can be done. It is something all stakeholders have a right to expect: shareholders, employees, communities, trading partners and suppliers. Do I want to do business with this company if it isn’t resilient? Do I want to invest time effort and money doing business with a company that isn’t prepared for the future in a professional and sane way? This is a conversation that has already begun.

The book highlights the problems with computer-driven risk models. What are the key flaws, and what can humans do that machines cannot?

The single biggest problem with models is the tendency to mistake them for reality. It is in the nature of models that they leave a lot out; they have to, otherwise they would be as big as the thing they model. The difficulty comes from the fact models contain value judgements about what’s important and what isn’t. Some of the things that come into models may be objective, but many will not be – the model might reflect a view profit margins matter more than turnover, for example: that’s a value judgement.

How do the flaws in models affect decision-making?

People in government, people in decision-making positions in corporations, want levels of certainty that models purport to provide. The problem is that all of the real risk, the systemic risk, appears to go away, and the possibility of picture-perfect decisions starts to feel available. The truth is since every single forecast can only have probabilities attached to it – and those probabilities will always be under 100 per cent – the opportunity to make the perfect decision is always elusive. We have to make trade-offs and try to make the best decisions we can in light of the information we have, but that information will keep changing, and very few models can keep up with that pace of change.

You argue scenario planning can be a good way to manage risk under conditions of uncertainty – why is this technique effective?

Companies do scenario planning for two reasons. One is it is a very chastening reminder of uncertainty in everything we do. It’s a profoundly effective way of surfacing possibilities that can’t be seen any other way. The other reason is that the act of doing it liberates a lot of intellectual energy that otherwise lies latent within the organisation. Every business leader I work with wishes the quality of debate within their organisation were higher. One of the unexpected by-products of scenario planning is it throws off a far higher quality of informed debate; it is not just a swapping of opinions.

The book explores the success of ‘cathedral projects’ such as the European Organisation for Nuclear Research (CERN). What can they teach us about risk management?

One of the things they teach us is that many organisations fail to be genuinely ambitious. They have become so wedded to precision planning – which is intellectually constraining – that they become reluctant to have a bigger idea for the corporation. Cathedral projects show us that ambitious guiding principles can organise good choices and preparedness and planning.

What’s interesting is that this was really the original intent of the discussion around ‘purpose’ in organisations: the notion we need to have a big ambitious idea about why this company has a vital contribution to make to society, and how. What’s really disillusioning is to see how this concept of purpose has been dragged, hijacked and instantly devalued into sloppy taglines that mean nothing. It’s the fastest example I’ve come across of an idea that has been turned into cynical slogans.

How can we devise a more valuable idea of corporate purpose?

There’s a fundamental thing here, which is that no organisation in the world can function without society. We need educated people; we need roads and energy and light; the rule of law; health; clean air. These sorts of things are not optional extras. Every corporation exists within an ecosystem, and the corporation can only be as resilient as the society that it inhabits. The health of the organisation depends on the health of the ecosystem, and the health of the ecosystem depends on the health of each individual company. Serving both is what purpose is meant to be about.

Cathedral projects prove you can do this long term, without becoming slack about operational excellence or indeed financial probity. In the last 20 years, we’ve become very small-minded about what success looks like, and the consequences are all around for us to see. Filthy air. Frightening climate. Huge volatility in the economic system. Significant volatility in the social system. Generalised anxiety about how we tackle these issues.