In the worlds of business strategy, leadership, and management, “agility” is all the rage. As the Fourth Industrial Revolution barrels forward and the pace of change accelerates, this quality has become widely viewed as a key to long-term survival, performance, and relevance for any organization.
Until recently, however, the desire of corporate and military leaders to foster agility faced a formidable challenge: in business, government, and warfare, agility has been merely a buzzword. There has been no common understanding of what it means, or of what it takes for an organization to be agile.
We have long believed that the concept of agility can be formally defined, deconstructed, and operationalized. To us, agility is the capacity to detect, assess, and respond to environmental changes in ways that are purposeful, decisive, and grounded in the will to win. Agility is not some mystical innate quality borne out of fast reflexes and superior intuition, but rather a core competency that can be deliberately developed and relentlessly nurtured at any organization.
Institutional investors and leaders of financial institutions involved in the complex global economic and financial environment — with its rapid pace of change, unexpected disruptions, and cascading second- and third-order effects — have the same challenges as top corporate leaders and military commanders. In managing portfolios and balance sheets, they, too, need to quickly recognize threats and opportunities, shape timely responses, decisively execute, and do so consistently as environments change.
This mandate is even more urgent given the concern that the global economy is overdue for a recession or a dislocation of some kind. Institutional and individual investors — and the world of finance at large — must understand the fundamental nature of agility and turn it into a leadership practice.
In this regard, we are often asked if companies and investors are better prepared to deal with the next crisis than the last time around. The prism of organizational agility — a quality grounded in risk intelligence — has proven uniquely useful in answering this important question. When viewed through the lens of risk, there are three common types of financial failures. We think of them as a zoology of endangered corporate species, and far too many institutional investors, financial institutions, and companies still fall into these categories.
We fly blind when we do not fully understand our portfolio of risks, its role in our business model, or its connection to our operating landscape. We may be simply unaware of certain risks faced by our investment portfolio, balance sheet, or enterprise. For the risks that have been identified, we may misjudge their likelihoods and consequences — in general and in relation to our risk-bearing capacity. Or companies may fail to meaningfully aggregate disparate risks into a holistic picture or connect them to the relevant changes in the environment.
Deer in headlights
Even when companies and investors fully understand their portfolios of risks, we have all witnessed how a leadership team can become paralyzed in the face of an impending danger (or an opportunity). Diffusion of responsibility, lack of accountability, and misaligned incentives all play a role, but so do a lack of moral fortitude to make hard decisions and a lack of trust that undermines cohesion and a unity of effort.
In addition to risk intelligence, agility is grounded in a special quality – decisiveness – which we define as the bias for deliberate action. Decisiveness plays a critically important dual role. First, it is an antidote to our innate reluctance to make decisions that can lead to regret or loss. Second, it helps leaders and teams avoid making decisions based on overconfidence and gut reactions, replacing it with methodical intelligence gathering, rigorous analysis, and evidence-based debate that takes place in a setting we call the Forum of Truth.
It’s quite common for an organization to effectively identify and assess a risk it is facing but then deem it “inherent in its nature of business” and leave it unmanaged. Such practices — or static business models — leave organizations at the mercy of external forces, making them proverbial sitting ducks.
For example, football player concussions have been long considered the nature of business of the NFL. Diagnosed incidents seemed acceptable to the individual teams and the league as a whole. All of this changed as the increasing numbers of retired NFL players developed major cognitive and memory problems and the NFL was hit with multi-billion-dollar class action lawsuits. Today, the League is actively managing concussion risk using a number of protective and preventive strategies.
In both business and finance, static business models almost always involve systematic risks. Since these risks fluctuate with economic cycles and other macroeconomic forces, the financial performance of such companies and investment managers tends to be volatile and cyclical. Worse yet, static business models are antithetical to agility because they make companies and investors especially vulnerable to the vicious cycles that have been prominently on display over the past 30 years.
During long economic expansions, periods of loose monetary policies, or market bubbles, compensation for bearing risk declines.
During long economic expansions, periods of loose monetary policies, or market bubbles, compensation for bearing risk declines. Almost invariably, firms and investors with static business models respond to earnings pressures by increasing existing risks or taking on unfamiliar, seemingly diversified risks. Thus, a vicious cycle ensues. Greater risk-taking en-masse further compresses the market compensation for risk. In turn, to keep up with their peers and earnings targets, players increase leverage and risk, and so on.
Having responded to earnings pressures through blind risk-taking, sitting ducks find themselves at the mercy of forces beyond their control when the music invariably stops. As the crisis starts to unfold, risk aversion spikes and fight-or-flight responses displace deliberate action. Prices of financial assets drop while credit defaults start to increase. When sitting ducks are forced to deleverage, they try to sell assets only to discover an absence of buyers. Access to funding and capital dries up even for well-known and stable firms. Contagion spreads across financial markets, rendering “diversification” strategies ineffective.
Far too many institutional investors, financial institutions, and companies still fall into these categories of endangered corporate species.
In our experience, far too many institutional investors, financial institutions, and companies still fall into these categories of endangered corporate species. They are blind to a number of significant risks and uncertainties. They are incapable of creating a holistic and actionable enterprise-wide picture of risk, which causes them to fly blind and prevents them from aligning their goals with risk and resources. They over-rely on their so-called “fortress” balance sheets, underestimating the need for decisive and well-considered action in times of crisis. Last, they often misunderstand the dangers of static business models that first suck them into excessive risk-taking, and then turn them into sitting ducks.
All of this should warrant concern for leaders and other key stakeholders. While many organizations are not prepared for the next crisis, the good news is that the perspective of agility — and its underlying processes and capabilities that are now much better understood — can improve organizations and investment processes. This will come handy in helping mitigate threats and capture opportunities when the next crisis inevitably arrives.
Adapted with permission from Agility: How to Navigate the Unknown and Seize Opportunity in a World of Disruption by Leo M. Tilman and General Charles Jacoby (Ret.). (Missionday 2019)