FT SPECIAL REPORT Risk Management People

Monday November 9 2015 www.ft.com/reports | @ftreports

Inside

How ‘every little helps’ To err is bosses humbled Tesco Hubris of competitive culture led to profit warning shock human, but Page 2 Top talent tantrums tests TV managers Jeremy Clarkson shows can bring how people can flip from being an asset to liability catastrophe Page 2

When therapy is the best mental medicine Support for staff can Fat fingers, fraud and sometimes fists are common improve productivity but factors in corporate disaster, writes Brian Groom Emission test failure: Greenpeace protesters outside Volkswagen’s German headquarters in September — Krisztian Bocsi/Bloomberg its provision is patchy Page 3 t the root of most of the Banking has been hit by a series of organisationsaregettingmorecomplex, vulnerabilities they were facing or that Companies are putting effort into growing list of corporate scandals, from mis-selling of insurance more global and changing more rap- they had already been holed below the systemsandprocessestoprotectagainst disasters in recent years products to attempts to rig the interna- idly,” says John Hurrell, chief executive waterline. Either it didn’t get to the risks. There is now a global standard for Taking the panic out of lies a common factor — tional loan and currency markets, but it of Airmic, a UK association of corporate boardoritgotignored,”MrHurrellsays. riskmanagement,ISO31000,providing threat of pandemics A people. Companies are is far from alone. The BBC, already risk managers. “The business models Individual failures seem inextricably principles and generic guidelines. Many The lessons that can creating ever more sophisticated under fire for a lax culture that allowed are changing, use of technology is bound up with a company’sculture and companies have adopted systems of systems to protect themselves against the late disc jockey Jimmy Savile to get changing, supply chains are changing. the quality of leadership. Problems can “enterprise risk management”,or ERM, be learnt from Ebola risks, yet the hardest thing to cope with away with sexual assaults on children, It’s amplifying a built-in potential for arise if the board does not fully which offers a framework for identify- Page 4 remains the unpredictability of human this year parted company with Top Gear failure.” understand the risks in an organisation ing, analysing, responding to and behaviour. presenter Jeremy Clarkson, one of its Cass Business School studied 18 orseniormanagementturnsablindeye, reducingrisks. Reminders of the human element leading assets, after he verbally and corporate crises on behalf of Airmic at or if policies and processes are poorly These have grown in popularity since Learning from occur regularly,whether it is the rigging physicallyattackedaproducer. companies including Enron, Arthur communicated. regulators and debt rating agencies the Bard of emissions tests by Volkswagen engi- People risk can range from simple Andersen, BP, Airbus, AIG and Société “If you have a strong chief executive increased their scrutiny of risk manage- Companies must neers, failed defences against cyber mistakes, such as staff clicking on a Générale, some of which destroyed the officer who won’t listen to anybody, mentprocesses,notablywhenStandard avoid King attacks at telecoms company TalkTalk, virus-infected email, to lack of vital businessconcerned.Thisstudy,Roadsto then that person can risk the whole sur- & Poor’s included evaluation of ERM in a $6bn “fat finger” slip-up at Deutsche skills, poor succession planning, strate- Ruin, found that people failures lay at vival of the company,” says Paul Hop- itscreditratingprotocol. Lear re-runs Bank or the suicidal Germanwings co- gic miscalculations, lax safety rules and therootofvirtuallyallofthem. kin, technical director at the Institute of Mr Hopkin warns: “Standards are all in leadership pilot who crashed his aircraft into the deliberateactsofsabotageorfraud. “In almost every case, quite serious Risk Management, which has members well and good, but businesses develop handovers FrenchAlps. “It’s getting more frequent because peoplewithintheorganisationknewthe inmorethan100countries. Continuedonpage3 Page 4 Regulatory pressure leaves directors exposed on costs

Insurance O cover often “wouldn’t respond at the pointtheindividualsfeeltheyneedlegal advice”. Employers’ willingness to “Therecanbeproblemswiththeindi- launch internal probes to vidual enforcing their right to have the head off punitive fines is companypaytheexpenses.” Theproblemarisesbecausetheinsur- creating holes in insurance ance tends to “trigger”, or begin paying cover, writes Alistair Gray out, when an external body takes action againstanindividual,forexamplewhen a regulator issues a director with a sub- Executives and directors accused of poenatoprovidetestimony. wrongdoing are in danger of being left Now, however, individuals are more without insurance to fund some of their likely to be investigated by their defence, brokers and lawyers have employer before an outside investiga- warned. Changes to the investigation of tionorprosecutionbegins. misconduct allegations put senior cor- “We’re seeing an increased emphasis porate staff, who can be held personally on whistleblowing and self-reporting,” responsible,atriskofhavingtomeetthe MsKurshansays.“Regulatorsareunder coststhemselves. pressuretoholdwrongdoerstoaccount, As a result of pressure from regula- so they’re in turn putting companies tors, companies are tending to probe Leslie Kurshan of Marsh under pressure to conduct investiga- staff internally before outside bodies tionsofwrongdoingwithintheirorgani- launchformalinquiriesorprosecutions. bly less litigious, is far smaller at less sation.” Thismayopenupholesintheinsurance than €2bn, although brokers say An example of such pressure came in thatsupposedlycoversdefencecosts. demandisalsogrowingthere. September in a memo to American “For directors and officers caught in On both sides of the Atlantic, direc- attorneys from Sally Yates, the US dep- this, it can be personally catastrophic,” tors at large organisations increasingly uty attorney-general. “One of the most says James Wing, chair of the American consider D & O insurance to be so effective ways to combat corporate mis- Bar Association’s director and officer important they will refuse to serve on conduct is by seeking accountability liabilityinsurancesubcommittee.“It’sa boards unless the company buys it for from the individuals who perpetrated veryrealproblem.” them. Without cover, their personal the wrongdoing,” she wrote. She added Directorsandofficers(D&O)liability assetscouldbeontheline. that if companies wanted to continue to insurance is designed to cover expenses In the second quarter of this year, benefit from co-operating with the if they face external investigation by actions by regulators — as opposed to authorities — such as receiving dis- regulators, or are sued by disgruntled shareholders — were by far the largest counts from fines — they would need to parties such as shareholders, creditors source of D & O “loss events” in the US, meetstringentcriteria. or suppliers. Demand for the insurance accounting for almost two-thirds of the To earn “co-operation credit”, she policies has grown as more directors total, Advisen says. Securities class wrote, companies must “identify all and officers insist their employer takes actions — cases brought by private par- individuals involved in, or responsible outtheinsuranceontheirbehalf. ties alleging negligence, fraud or other for, the misconduct at issue, regardless Whetheritisadisputeoveranalleged violation of rules that govern financial oftheirposition,statusorseniority”. misrepresentation in an initial public markets — accounted for only about 14 Mr Wing says it is part of a “co-opera- offering prospectus, failure to comply tionrevolution”andtheUSDepartment with environmental protection stand- of Justice will give companies “no credit ards or a breach in health and safety unless they pull out all the stops — and rules, corporate leaders can be targeted ‘The real need of executives turnontheirownemployees”. forallsortsofsupposedshortcomings. for defence costs is before Hesaysoftheinsuranceimplications: The risks have become more acute “The real need of executives for defence sincethefinancialcrisisasauthoritiesin anyone is charged. That is costsisbeforeanyoneischarged.Thatis several jurisdictions have sought to the gap in cover’ the gap in cover.”He adds the insurance make managers and board members market is beginning to launch products more individually accountable. Corpo- per cent, while merger objections thatfillthegap. rate executives must comply with a accountedfor13percent. As Francis Kean, a D & O insurance range of recently toughened rules and Insurance brokers and lawyers say expert at insurance broker Willis, puts regulations, from bribery laws to finan- they have come across several cases in it: “Once you’ve been formally targeted cialdisclosurerequirements. which the policies have failed to bytheregulator,mostD&Opolicieswill The market in the US for D & O insur- respondascompanybossesexpected. provide you with cover. But what we’re ancewasworth$9.2bninpremiumslast Leslie Kurshan, head of product talking about here is the pre-investiga- year,accordingtoAdvisen,thedatapro- developmentinthefinancialandprofes- tion, pre-claim phase. By the time there vider — up 13 per cent since 2011. The sional practice at Marsh, an insurance isaformalclaimorinvestigation,itmay market in Europe, which is considera- broker,says providers of traditional D & betoolate.” 2 ★ FINANCIALTIMES Monday 9 November 2015 Risk Management People Embarrassment awaits when top talent becomes the problem

Broadcasting Handling star performers can prove to be a minefield for managers, says Henry Mance

ever work with children Walley, managing director of Decipher, pay too much to star performers. The The BBC Trust, the broadcaster’s a reported £150,000 as presenter of the On your bike: and animals, they say. In a media strategy consultancy. The BBC’s pay to “top end talent” — those oversightbody,islookingatwhetherMr arts series, Imagine. Newspapers regu- Top Gear host the television industry, incident with the producer “was used as earning more than £100,000 a year — Yentob compromised the BBC’s edito- larly report on his expense claims, Jeremy Clarkson however, there is one group an excuse to take a decision that they’d has fallen 29 per cent in the past five rial independence by speaking to jour- whicharepubliclyavailable. after his sacking N that you cannot avoid previouslyshunned”. years thanks to a “considerable cultural nalists who were reporting on Kids “He is the worst example of the enti- by the BBC working with — the talent. The proof of In the aftermath of this outcome, change”, according to a report by Company’s collapse. The broadcaster tlementcultureinsidetheBBC,”saysMr Justin Tallis/AFP/Getty Images this can be found in the fact that two of some commentators argued a number consultantsOliver&Ohlbaum. has said he is entitled to speak to Walley, of consultants Decipher. “His the BBC’s big name talents have ended ofpoints:thatMrClarksonwasaone-off MrYentob’sposition,incontrast,con- journalists as a representative of the address book has value, but at some upinhotwaterthisyear. talent; that the BBC had failed to man- tinuestobeasorepointfortheBBC.The charity. point the trade-off with his toxicity First,JeremyClarkson,leadpresenter age his eccentricities correctly; and that 68-year-old is one of the corporation’s Mr Yentob’s defence of Kids Com- takesover.” ofmotoringshowTopGear,verballyand the corporation would struggle to stalwarts.Hejoinedasatrainee47years pany’s management has placed him in WhetherMrYentobfollowsMrClark- physically abused a producer. Then replace the revenues from Top Gear, agoandhasbuiltupstrongrelationships the public eye. He told a select commit- sonoutoftheBBCremainstobeseen.In AlanYentob,thecreativedirectorofthe whichisoneofitsmostprofitableshows withactorsandwriterseversince. tee of MPs that accountants PwC had some ways, the differing tribulations of BBC, hit the headlines for his dealings internationally. At a tribute dinner last year, the jour- found there was “not much substance” the two men are noteworthy because of outside the corporation as chair of In retrospect, Mr Clarkson’s exit has nalist turned celebrity cook Nigella in allegations made against Kids Com- their rarity. Gone are the days went collapsedcharityKidsCompany. had benefits for both sides. He and his Lawson described him as “the last intel- panybyformeremployees. actors and presenters regularly For the BBC — Britain’s public broad- co-presenters, Richard Hammond and lectual at the BBC”. Mark Thompson, The story has run since August, appeareddrunkonlivetelevision.Some caster, already battling political scepti- James May, are set to multiply their the former director-general of the BBC, Gone are occupying Mr Yentob, who is meant to see increased risk aversion at the BBC, cism — the events have been an unwel- earningsaspartofa$250mdealtomake said that Mr Yentob was one of the few the days be a key figure in negotiations over the which was badly burnt by an inflamma- come reminder of the risks of employ- programmesforAmazon. executives who did not disappear in a renewal of the BBC’scharter and licence tory 2008 prank involving presenter ing some of the UK’s most mercurial “It looks like he’s going to earn more crisis. when fee funding. “It is difficult to see how he JonathanRossandcomicRussellBrand. characters. money from that punch than Evander But events at Kids Company have actors and can focus, given the real questions over Forthosewithaloveofmischief,how- The Clarkson episode proved the eas- Holyfield [former world heavyweight raised many questions for Mr Yentob, a his management and the personal diffi- ever, there is some hope. Mr Clarkson’s ier to resolve. The presenter, who had boxing champion] made from most of director of the charity since 2003. Kids presenters culties of being scrutinised in his role at replacement, Chris Evans, is himself a already been given a final warning, was his,”says Mr Walley of Mr Clarkson exit Company, which ran outreach centres regularly the Kids Company,” says Claire Enders, maverick who was sacked from a com- told in March that his contract would fromthecorporation. for deprived children in London and amediaanalyst. mercial show after failing to turn up for not be renewed. “There was a sense that For the BBC, that is not wholly incon- Bristol, closed its doors in April, despite appeared That is particularly crucial given Mr five consecutive days. Fittingly, he he’d come to the end of his road at the venient. It helps the corporation’s argu- receiving a £3m grant from the drunk on TV Yentob’s salary. He earns £168,300 as startedplanningforhisTopGearshowin BBC for several reasons,” says Nigel mentthatitdoesnot—ascriticsclaim— governmentdaysearlier. theBBC’screativedirector;healsoearns apub. Cultural pressure at Investors look beyond top executives Tesco to over-reach to guard against ‘known’ unknowns

This reporting obligation does not year, New York activist hedge fund Elli- caused crisis Corporate governance mean that accounting and fraud scan- ott forced Alliance Trust, the Scottish dals such as that which engulfed Enron, investmentgroup,toappointnewboard Diversity of thought among the former US energy and services members. Elliott, the largest single board members is essential group founded by Kenneth Lay which shareholder in Alliance Trust, felt per- Retailing In 2009, Tesco announced record crashed into bankruptcy in 2001, or the formance of the Dundee-based group annualprofitsofmorethan£3bn. to achieving company problems over carbon dioxide emis- was poor,while costs and remuneration The most audacious move came in success, says David Oakley sions at VW, the German car manufac- weretoohigh. Hubris of never-ending ‘can- 2006, when it announced it would open turer, would have been spotted in It also felt the executive team, led by do-it-better’ attitude helped a chain of stores in the US. A year later, advance. But investors say it can put Katherine Garrett-Cox, was not being lead to overstatement shock, Sir Terry opened Fresh & Easy, a small From Enron more than a decade ago to extra pressure on boards to challenge challenged strongly enough on strategy store that was part neighbourhood Volkswagen this year, investors are executives on strategy, auditing and andpolicybytheboard.MsGarrett-Cox explains Andrea Felsted supermarket, part discount chain and often thrown by what some call “out of othercontentiousissues. has since stepped down as group chief partconveniencestore. the blue” and “black swan” risks, or Mr Copnell thinks UK guidelines executive but remains at the company Tesco cast aside many of the strate- Former Tesco boss Sir Terry Leahy unexpected events that destroy share- introduced in September will make it aschiefexecutiveofitsinvestmentarm. Tesco’s admission of an overstatement giespreviouslyusedtomanagetherisks holdervalue. more important for a company to James Maltin, investment director at ofprofitbyatleast£260mplungedBrit- associated with new ventures. Rather of their goods or to pay for special offers Some investors say these unforeseen appoint the right people to their boards, wealth manager Rathbones, says: ain’s biggest retailer into the most seri- than acquiring a business, as it had in andpromotions. events highlight the importance of non- and to ensure there is diversity in terms “Although the problems at Alliance ous crisis in its almost 100-year South Korea, it started the operation One symptom of the growing reliance executive directors in their role as risk ofexperience,genderandbackground. Trust were a lot to do with performance history. But it was also a salutary lesson fromscratch.Anditignoredlocaltastes, on suppliers is that the number of prod- managers in the policing of company “Boards need greater diversity, and costs, you do need a board that in managing risk — particularly in a despite carrying out extensive research. uctssoldincreasedby30percentunder policyandstrategy. including more women, and ever more challenges executives and makes company that had grown to dominate It stocked Fresh & Easy branded prod- Mr Clarke as Tesco received fees for Timothy Copnell, chairman of the variedexperienceinareassuchascyber sure risks are being monitored and itsmarkets. ucts as opposed to the big, well-known stockingmoreproducts. Audit Committee Institute, which is security and emerging markets,” he understood.” The debacle sparked a series of consumer brands desired by American Tesco has since cut the number of sponsoredbyprofessionalservicescom- says. “But even more importantly, you Mr Copnell thinks that boards and, as inquiries, including one by the Serious shoppers. It also stocked few frozen product lines by 15 per cent and over- pany KPMG, says: “It has become need a diversity of thinking. You need a result, company performances gener- Fraud Office, and a number of lawsuits linesandpre-packagedfruitandvegeta- hauledthewayitdealswithsuppliers. harder for companies to manage risk as people who are prepared to get into the ally have improved in recent years. againstthecompany. bles, even though US shoppers like to It is simplifying deals with suppliers, news moves so fast. If you make a mis- details and who know the right “Intuitively, I would say companies are Insiders say the seeds of the crisis touchandfeeltheirproduce. by agreeing a price upfront and sticking take today, it is in the media very questionstoask.” betterrunthantheywere.Thishasbeen were sown in the final years of the reign As Tesco grappled with the US, condi- toit.Inthepastitwouldsettleonaprice quicklyandthesharepricecansuffer. Roger Steare, corporate philosopher helped by the higher quality of non-ex- of Sir Terry Leahy, the Liverpool-born tionsinitshomemarketdeteriorated. but request myriad other payments to “It puts non-executives under greater in residence at Cass Business School, ecutive directors on the company marketingmanagerwhorosetobecome Philip Clarke, the Tesco lifer who had get a better deal. It is also simplifying its pressure to make sure they are on top of who advises companies on ethics and board,”hesays.“Therearealwaysthose chief executive. In his 14 years at the succeeded Sir Terry in March 2011, was standard payment times for specific potential risks or news that can damage management, says: “Aboard needs peo- ‘unknown’ unknowns, and managers helm of Tesco, he transformed a strug- facing twin threats — from Waitrose at productcategories. thecompany.” plewithdiversityofthoughtandanabil- and non-executives will still make mis- gling domestic grocer to a powerful the top of the market and German According to Mr Hyman, one of the JohnRoe,headofmulti-assetfundsat ity to adapt to their environment. This takes,buttherearemoreriskcontrolsin internationalbrand. discounters Aldi and Lidl at the bottom. lessons from the Tesco debacle is that Legal & General Investment Manage- helpsacompanysucceed.” place today, which should help But,theysuggest,therewasagrowing slavishly striving to meet one target can ment, agrees. “It can be difficult to fore- Headds:“Itisnotjustabouttheboard companyperformance.” schism between the performance of the leadtounintendedconsequences. see things as bad news can come out of when it comes to risk management. A company and the health of Tesco — “This is about leadership,”he says, “If the blue and surprise markets and company also needs the right culture. A financiallyandculturally. Slavishly striving to meet you foster a culture where you are investors. But a good board can make a business where people are unafraid to Kenneth Lay, In the mid-1990s, Tesco overtook one target can lead to driven to delivering certain perform- bigdifference,”hesays.“Astrongboard, speak out is more likely to manage Enron’s now market leader and rival J Sainsbury. ance indicators it is going to lead to dis- which is challenging the executives and risksmoreeffectively.” deceased Richard Hyman, the independent retail unintended consequences aster.Itisjustamatteroftime.” is on top of the possible risks faced by Clive Martin, partner at EY, a con- founder, facing analyst, says part of Tesco’s success was It is a point recently accepted by Dave that company, will help a company sultancy, says: “Culture, ethics, behav- trial for fraud thatitstillactedliketheunderdog. Despite this, Mr Clarke sought to con- Lewis, who took on the role as Tesco’s producebetterreturns.” iour and corporate integrity go to the in 2006 “Even when Tesco was the number tinuetomaintainTesco’sprofits. would-be rescuer with his appointment Anumberofcountrieshaveraisedthe heart of building a good business and one, everyone in food retailing, includ- The exact cause of the profit over- aschiefexecutivelastSeptember. bar for risk management. In the UK, this is relevant on the board and every ing Tesco, thought Sainsbury was the statement is still under investigation, “Commercial income driven by a boards of listed companies must now levelatacompany.” betterretailer,”hesays. including by the SFO. What is clear, profit focus had clouded our purpose,” include a “viability statement” in their Sometimes investors can “Farfrombeingnegative,itwasapos- however, is that Mr Clarke and the MrLewissaid. reports to investors. This provides a decide to put pressure on itive, because a central part of Tesco’s senior UK team were under immense Samuel Johar, chairman of head- broader assessment of long-term sol- companies to shake culture was being more thrusting, more pressure to deliver the results hunter Buchanan Harvey, says the tone vencyandliquidity. up boards that are driven and more ambitious and self- demanded by London’s financial inves- and culture of an organisation is set at In essence, it means a company must perceivedasfailing challenging. However we do it now, we tors. the top and, to mitigate risk, chief exec- state clearly that it is confident it will to challenge the candoitbetter.” Tesco said the profit overstatement utives must lead staff in the right direc- still be in business in three or five years’ executive team But, over the following years, the was caused by counting the money it tion. time, taking into account its main risks over performance Tescojuggernautrolledintoeverything, received from suppliers too early.Tesco “If the tone set is a bad one, then this and financial health. The board must and risk manage- from clothing, telecoms and banking to receives this so-called “commercial can lead to all sorts of problems lower also make clear that it understands the ment. gardencentres. income” from suppliers for selling more down,”MrJoharsays. risksofthebusiness. Earlier this Monday 9 November 2015 ★ FINANCIALTIMES 3 Risk Management People Bankers on the verge of a nervous breakdown

Mental health Support But, despite successive attempts to although employers recognise the need mental health problems being tackled remove the stigma around mental ill- for an “open culture” so that mental effectively. “As a nation we’re getting for finance employees health, comprehensive services such as health matters can be discussed, they better at opening up the conversation those provided by the big banks and oftenfailtodeliverinpractice. aroundmentalhealth,butthereisstilla and the wider workforce consultingfirmsremainararity. Bupafoundthatalthoughthree-quar- longwaytogo,”hesays. is still patchy, according The cost to business of failing to take ters of business leaders believed they In most cases the causes of poor men- the issue seriously in lost working days had encouraged managers to address tal health tend to be a combination of to Gill Plimmer andlowerproductivityisimmense. and support employees’ mental health, problemsatandawayfromwork. A UK government report in 2014 only a third of staff agreed their organi- If the employee can approach a man- calculated 70m days a year are lost due sations had effective support systems. ager, a strategy can be devised such as a t the Bank of England, the to stress, depression and other mental “There is a clear disconnect between temporary reduction in hours, or flexi- UK’scentral bank, employ- healthconditions. what leaders believe they are doing time if someone has a problem outside ees have access to an on- The cost to the country’s economy is about mental health in the workplace work,suchasarelationshipbreakdown. sitecounsellor.AtGoldman estimated to be £70bn-£100bn annu- versus how employees feel,” says Mr Alternatively it might involve discus- A Sachs, the investment ally, equivalent to 4.5 per cent of GDP. Watt. sions around how to deal with a spiral- bank, psychotherapy is available, as is a The effects are likely to be much larger, Despite—orperhapsbecauseof—the lingworkloadorachangetotheirwork. crisis management team that will take given that most staff with poor mental increase in publicity given to mental Aside from the extreme of suicide action should an employee feel they are health continue to work but may be less health disorders, the number of risk, the impact of poor mental health onthevergeofamentalbreakdown. productive, struggling to concentrate or reportedcasesisrising,accordingtothe can be more attritional. Ultimately, Meanwhile, the tax and auditing firm providegoodservice. Chartered Institute of Personnel and stress at work can reduce life expect- Deloitte UK has established a network Judith Mohring, lead consultant psy- big leap” to offer psychiatric services, One step at a time: stressed workers Development (CIPD).It says more than ancybyuptothreeyears,accordingtoa of “mental health champions” who are chiatrist at the Priory Wellbeing Centre sheadds. may be less productive 40 per cent of employers have noticed a study by Harvard Business School and available for informal chats as well as a intheCityofLondon,saysthatalthough At Priory’s clinic in the City of riseinreportedmentalhealthproblems StanfordUniversity. number of training programmes to help it is “now accepted that you don’t have London she sees problems such as among employees in the past year. It Additionally, people who had spent line managers identify the early stages to be mad to see a psychiatrist,”there is anxiety, substance misuse, stress, alsofoundtheprivatesectorwaspartic- less than 12 years in education were ofmentalill-healthordepression. no consistent approach among compa- depression and personality difficulties. ularly poor at supporting employees more likely have jobs with unhealthy Mental health issues are being taken nies. “It varies from employer to “TheCityhasalwaysbeenstressful,”she ‘It is now accepted that with mental health problems. About a workplace practices and were most more seriously, with celebrities includ- employer and really depends on who is says, but globalisation has added to the you don’t have to be mad thirdofferedacounsellingservice,com- affected by stress. Unsurprisingly,those ing Ruby Wax, the comedian, launching incharge,”shesays. stress, with the internet eroding bound- pared with 70 per cent of public sector with the highest educational levels yet another campaign this month for For the big companies that already ariesbetweenworkandhomelife. to see a psychiatrist’ organisations. tended to be better equipped to cope psychological problems to receive the offerpersonaldevelopmentcoursesand Patrick Watt, corporate director at Dr Judith Mohring Ben Willmott, head of policy at the with workplace stress and often benefit sameattentionasotherillnesses. careercoachingtoemployees,itis“nota Bupa, a healthcare company, says CIPD, says early intervention is key to fromlessstressfulenvironments. To err is human, but can bring catastrophe

Continuedfrompage1 and markets change so rapidly that companies have to look at their regula- tory obligations and work out the answers for themselves.” Mr Hurrell says processes can be a “cop-out for the board”iftheyjustinvolvetickingboxes. Cranfield School of Management, on behalfofAirmic,studiedeightorganisa- thinkit’severabattlethatyouwin.”She tions regarded as having effective risk adds that changes in working patterns, management practices, including Inter- such as flexible working use of social national Hotels Group, Jaguar Land media, make it harder for employers to Rover, Virgin Atlantic and Zurich, an exercisethecontrolstheyusedtohave. insurer. The research identified five Acommonpatternincorporatecrises principles needed to achieve resilience: is “normalisation” of misbehaviour: an ability to anticipate problems; staff find they can reach their targets adequateresourcestorespondtochang- only by bending the rules, but nobody ing conditions; free flow of information blows the whistle and senior managers right up to board level; capacity to do not intervene. Rogue traders, for respondquicklytoanincident;andwill- example,areoftenseenasstarperform- ingnesstolearnfromexperience. ersuntiltheirtradesgowrong. For boards, the report said, the incen- One answer for organisations may be tive went well beyond avoiding disaster. to ensure people are encouraged to “Companies that are confident in their challengeestablishedpractices. risk management have the confidence Tony Powis, chief executive of Willis Employee Benefits, also identifies a gap in the way employee risk is handled: “You get risk managers believing that ‘Risk managers believe that human resources are taking care of it, human resources are taking while HR probably believes the risk managersaredoingthat.” care of it, while HR believes Safety issues, where failures can risk managers are’ result in death or injury and large fines, are being taken increasingly seriously, to be more enterprising and entrepre- according to Marc Spurling, UK head of neurial, thereby not only identifying workforce strategies at Marsh, an insur- risksbutalsoseizingopportunities.” ance broker. But, he adds: “There Onedifficultyisthatmanycompanies remain a number of challenges, largely now directly control only a minority of around employee behaviour. The next staff,asmanyfunctionsareoutsourced. step for organisations is linked to safety International Hotels Group, for exam- behaviourandsafetyculture.” ple, owns only nine of the 4,600 hotels Cyber security is increasingly a that operate under its brand, but it has concern after a series of breaches, to ensure that its processes and risk including that at TalkTalk. “People is awarenessextendacrossallthehotels. the element that is often understated Mr Hurrell cites airline Virgin Atlan- and missed,”says George Quigley, part- tic,whichrealisedthatpeopleemployed ner at KPMG. Innocent people can be a by contractors were not passing on weak spot in a company’s defences, things they saw that could help to often unwittingly clicking on links that improve safety. It removed penalty canleadtoabreachorusingacomputer clauses in contracts that seemed to be memory stick found in the car park, inhibiting them and was rewarded with whichhasbeendeliberatelydroppedby anavalancheofinformation. a hacker looking to gain access. Then Karen Seward, partner at law firm there is the danger of sabotage by dis- Allen & Overy, says: “For many busi- gruntledemployees. nessesnow,peopleareakeyasset—and Ultimately, argues Mr Powis: “It often the only asset. They are, however, comes down to leadership in a company unpredictable. To some extent they are and having a vision and the actions to outside the control of the employer. put people right at the centre, because Although you can control risk, I don’t withoutpeople,youhavenothing.”

Contributors

Brian Groom Michael Kavanagh Former UK business/employment editor Commissioning editor

Alistair Gray Steven Bird Insurance correspondent Designer

Andrea Felsted Andy Mears Retail correspondent Picture Editor

Henry Mance For advertising details, contact: Media correspondent Peter Cammidge, +44 (0) 20 7775 6321, [email protected], or your usual FT David Oakley representative. Investment correspondent All FT Reports are available on FT.com at Gill Plimmer ft.com/reports Companies reporter All editorial content in this report is Andrew Ward produced by the FT. Our advertisers have Pharmaceutical correspondent no influence over articles. 4 ★ FINANCIALTIMES Monday 9 November 2015 Risk Management People

Gates warns over risk of pandemic precipice

Cleaning up: 10m people around the world, the most The danger of business paralysis dur- killed between 50m and 100m, or 3-5 and meetings, increasing physical space Public health The world Korean workers likely is an epidemic stemming from ing a pandemic became clear at the per cent of the world’s population. between employees in the workplace is less prepared for disinfecting a eithernaturalcausesorbioterrorism.” heightoftheEbolaoutbreakwhensome Today, according to the World Bank, a andallowingpeopletoworkfromhome. subway train Hispaperwentontosetoutproposals iron ore mines — an important part of similarly infectious and deadly virus IT systems should be checked to make illness and disease than — Kim Hong-Ji/Reuters for a “global warning and response sys- thewestAfricaneconomy—ceasedpro- wouldkill33mpeoplein250days. sure they are robust enough to support war, reports Andrew tem” for pandemics and warned that duction, and farming and trade were So what measures should companies largenumbersofremoteusers. Ebola had exposed glaring deficiencies disrupted. have in place to protect their businesses Screening of employees when they Ward in preparedness. His recommendations Mr Gates warns that future pandem- and employees? Recommendations arrive for work should also be consid- were aimed primarily at policymakers. icscouldspreadmuchmorequicklyand issued by the US Centers for Disease ered and people with symptoms of flu ill Gates says there could be But his broader point on the need for widely than Ebola. “Other disease ControlandPreventionduringthe2009 sentbackhome. one benefit from the Ebola readinessshouldalsoresonateinboard- agents — measles and influenza, for H1N1 swine flu outbreak provide some Close communication with employ- epidemicthathaskilledmore rooms and human resources depart- example — are far more infectious pointers. ees,businesspartnersandlocalauthori- than 11,000 people in west mentsacrossthecorporatesector. because they can be spread through the Tobeginwith,businessesshouldstart ties would be crucial. A clear plan B Africa since 2014. “It may In the event of a pandemic, private air, rather than requiring direct con- with a good understanding of their should be in place before an epidemic serve as a wake-up call,”says the Micro- sector employers would be on the front tact,” he says. “People may not even be normal seasonal absenteeism. Every eruptsandexercisescarriedouttotestit soft founder. “We must prepare for line of the battle to contain its spread aware that they are infected or infec- winter, nearly 111m workdays in the US forflaws. future epidemics of diseases that may and their businesses would be highly tious. Since a person carrying one of are lost due to flu, according to the CDC. Mr Gates says the world’s readiness spreadmoreeffectivelythanEbola.” exposedtodisruption. these pathogens can infect many stran- Identifying when the usual level of foranepidemiccomparesunfavourably His charitable foundation, the Bill & The economic case for preparedness gers in a marketplace or on an airplane, infection and illness becomes A clear plan with its preparedness for other strategic Melinda Gates Foundation, has been at is clear. According to the World Bank, a the number of cases can escalate very something more unusual is an threats such as war. “NATO countries theheartoftheglobalfightagainstslow- severe pandemic could reduce global quickly.” importantfirststep. should be in participate in joint exercises in which er-burning health scourges such as HIV wealth by $4tn, or 5 per cent of gross Public awareness of the risk has Much of the CDC’s advice involves place before they work out logistics such as how fuel andmalaria.However,fewthingsworry domestic product. But the importance increased in recent years. Between 1997 commonsense measures little different and food will be provided, what lan- him as much as the risk of a sudden of ensuring business continuity goes and 2009,six major outbreaks of highly to best practice during the regular flu an epidemic guage they will speak and what radio globalinfectiousdiseaseoutbreak. beyond the need to minimise lost reve- fatal zoonoses — animal-borne diseases season. Sick employees must stay at erupts - and frequencies will be used. Few, if any, “There is a significant chance that an nues. It would also be crucial to broader thatcanbetransmittedtohumans,such home, with plentiful supplies of soap, such measures are in place for response epidemic of a substantially more infec- efforts to keep the economy and society as Ebola, Sars, avian and H1N1 flu — water and hand rubs provided in the exercises toanepidemic.” tious disease [than Ebola] will occur functioning. causedanestimated$80bnineconomic workplacetopromotegoodhygiene. carried out The absence of this kind of planning sometime in the next 20 years,” he Some 85 per cent of critical US infra- losses,accordingtotheWorldBank. Other recommendations are more caused delays in the world’sresponse to wrote in a paper in the New England structure resides in the private sector, Yet none of these was anywhere close specific to a severe pandemic. These to test it for Ebola, says Mr Gates. “In the next epi- JournalofMedicineearlierthisyear.“Of according to the Department for Home- in scale to the 1918 Spanish flu pan- include “social distancing” strategies, flaws demic, such delays could result in a glo- all the things that could kill more than landSecurity. demic,whichinfected500mpeopleand such as banning non-essential travel baldisaster.” Shakespeare’s King Lear is a dramatic example of tragic succession planning

Executive selection devastating. Strategy&’s 2014 study of matic business leader being struck have become synonymous with their theworld’s2,500largestquotedcompa- down by the unexpected to create businesses is particularly fraught. It has niesfoundthatthosethathadfiredtheir drama. become the abiding concern for inves- Clear processes for chief executives had lost an average of Even before the recent scandal over tors in global advertising empire WPP, nurturing and selecting $1.8bn in shareholder value compared US emission tests at Volkswagen, the which has been led by its 70-year-old leadership talent can pay with businesses that had planned suc- motor manufacturer had been thrown founder Sir Martin Sorrell since 1986. cessfullyahead. into turmoil by the abrupt resignation WPP is a prime example of a company dividends, says Kate Burgess Worse,MrKarlssonwarnscompanies in April of Ferdinand Piëch, VW’s with a huge amount of key person risk, “get into a vicious circle”. Those per- chairman, who had more than 20 years the National Association of Pension Succession planning has provided forming badly tend to force out their atthetopandwasamemberofthefam- Fundssaidrecently. dramatic material for playwrights even chief executives and hire replacements ilyowningamajoritystakeinthegroup. Standard Life Investors has been out- before Shakespeare penned King Lear. from outside. Shareholder returns can Mr Piëch, whose departure followed a spoken in stating that the first priority Now regulators are looking at succes- drop further, the outsiders disappoint row with Martin Winterkorn, the of Roberto Quarta, WPP’s new chair- sion planning in a corporate context, andareinturnforcedout,hesays. group’s ambitious chief executive, had man, should be dealing with the group’s albeitlesspoetically. Succession planning has been tested noobvioussuccessor. “successionelephant”. Last month, the UK’s Financial thisyearacrossthebankingsector,both Within five months Mr Winterkorn Headhunters advise companies to Reporting Council (FRC) issued a at Goldman Sachs, where chief execu- was also out of a job, following revela- make succession planning an integral discussionpapertolookatdefiningbest tive Lloyd Blankfein has revealed that tions that VW had systematically partofthechiefexecutive’sjob.Thefirst practice in succession planning for top he has a form of “curable” cancer, and cheatedonUSemissionstests. task for any new boss should be to line directors. then at Standard Chartered and Replacingentrenchedexecutiveswho up potential replacements. Best prac- “It is clear from our research the Deutsche Bank, both of which have tice suggests good leaders foster absence of strategic, thoughtful and replacedtheirchiefexecutives. talent and ensure someone can step up practical succession planning can be a Successionisalsoclearlyontheminds inanemergency. substantial risk to long-term success,” of Morgan Stanley’s board. It recently However some suggest leaders can said the FRC, echoing the concerns of put two rising stars — Edward Pick and instead use such a process to identify many investors, lenders, regulators and Daniel Simkowitz — on a top operating rivals and eliminate future competition creditratingagencies. committee. The duo are widely seen as in the manner of the emperors of In essence, lack of planning and a fail- potential replacements for James Gor- ancientRomeortheOttomansultans. ure to develop executive strength man,thebank’schiefexecutive. “Conflicts of interest are obvious,” undermines corporate culture, while Barclays’ planning looks less adroit says Mr Karlsson. The board rather well thought out succession is a weapon after its new chairman ousted Antony than chief executives should control the against “group think” and the compla- Jenkins, chief executive for three years, process of picking successors, warn cencythatledtothebankingcrisis. and then had to cast about for a replace- many shareholders. The temptation for The arrival of a new boss can harm ment from JPMorgan in the shape of Jes mostincumbentswillbetoanointsuc- shareholder returns, explains Per-Ola Staley. cessors who will protect their lega- Karlsson, a partner of Strategy&, part of It is easier to point to examples of cies. consultancyPwC. poor planning than good ones. When That was the fear when Steve Jobs’ Change at the top prompts executives transitions work smoothly, they rolewenttoAppleinsiderTimCook. toquestionprioritiesandstrategies,and generate less attention. There is noth- To mitigate against companies tak- to worry about their jobs. Too often ing like a boardroom bust-up, a top ing the in-house route merely out businesses lose momentum, Mr Karls- executivequittingforarival,oracharis- ofconvenience,allline-upsshould son says, even when appointments are include an external candidate to carefully organised. But when planning Lessons from the Bard can act as a benchmark, says head- is poor, the effect on returns can be help avoid misfortune hunterHeidrick&Struggles.