Understanding Risk Culture

Attitude is everything when it comes to managing risk effectively. “If a company doesn’t have a positive culture you can have as many rules as you like, but in that moment of truth when people are under pressure, they will tend to do the wrong things,” says John Shelley, Chief Risk Officer at RBS Asia Pacific.

Creating the right mindset in a global business is a difficult undertaking. The emissions testing scandal in the automotive industry and the discovery of slave labour in the supply chain of food companies reinforce why serious attention has to be paid to risk.

Rules and regulations, combined with integrity around remuneration and bonuses, will provide a framework for making good decisions, but senior executive and non-executive directors need to understand that governance won’t be enough.

“Risk needs to be a responsibility of everyone in the organisation and the board needs to test that there is a strategy and direction in place, monitoring and reporting against key measures and indicators, and a culture of awareness and ownership,” says Lucy Dimes, Non-executive Director at European textile service business Berendsen and former COO of Equiniti.

Charlie Wagstaff, Managing Director at Criticaleye, says: “To manage risk across a global organisation there must be an operational framework that is consistent with the organisation’s values. This needs to be wide-ranging and sensitive to all situations encountered.

“Transparency and openness are also key, so that any outcome is readily apparent. There should be no opportunity to hide or conceal anything.”

Criticaleye looks at the questions boards should ask in order to assess their company’s risk culture:

What do customers think about our company? 

Customers can give you an entirely different perspective from those within the business. Jim Meredith, Chairman at hazardous waste management company Augean, says they can “tell you whether management… understand and deal with them appropriately”.

Realistically, not all non-executives will have the time to interact with customers, so Jim promotes the idea of having a “mini customer conference” during which NEDs and others can hear their candid feedback.

Do we have a whistleblowing system? Is it effective? 

Employees must be able to raise concerns without fear of losing their job or damaging their career.

Andrew Heath, CEO of Alent a global supplier of surface treatment plating chemicals and electronics assembly materials and Independent Non-executive Director at Imagination Technologies Group, comments: “We look at the whistleblower statistics at every board meeting at Alent. I report on it because the only way you can get the right culture is by people telling you the truth, otherwise you live in a bit of a bubble.”

It’s a case of the board asking simple, direct questions. “Is there a whistleblowing line?” asks Lucy. “Is it anonymous? Does it allow employees to flag concerns and risks against a clearly communicated set of values and tolerances? Is speaking up valued or discouraged?”

Andrew agrees: “You’ve got to have various channels, such as employee helplines and whistleblower facilities whereby people can independently flag things without going through the chain of command.

“People have a duty to flag concerns, especially when it comes to reputational risks such as things to do with ethics, bribery, corruption and bullying.”

Where have we had near misses? 

Consider those close shaves and what they say about your organisation.

John from RBS comments: “We have a system of notifying senior management about things that nearly went wrong. Think about the airlines reporting near misses and then put that into the context of your company… Getting information about them is more valuable than going on a witch hunt to see who almost messed up.

“We want to know if our process, or something we did or didn’t do, almost resulted in an error. When these things happen we need them to be reported so we can learn from them.”

For David Gooding, Group IT Director at waste management company Biffa, health and safety is critical. “The waste industry, after agriculture, is the most dangerous industry to work in. So, this has been a primary focus for us,” he explains.

This kind of reporting has been an important part of Biffa’s process for a while but is something they have recently pushed further. “In the last four years we’ve had a double digit decrease in our incident frequency – we’ve done that by really pushing the reporting of potential hazards and near misses,” he adds.

What tone does the board set?

Respect for risk management has to start in the boardroom. Andrew Allner, Chairman at the Go-Ahead Group, says: “That is where the tone and culture are set. If the board takes risk seriously then the organisation will naturally follow that lead.”

Samantha Barber, Non-executive Director at Spanish utility company Iberdrola, agrees: “A strong risk culture also requires trust, transparency and challenge within the boardroom between executive and non-executive directors.

“Effectively managing risk is far more about culture and leadership, than it is about filling in a matrix.”

According to Deepika Bal, Managing Director and Head of Risk Architecture for Asia Pacific at Citibank: “The foundational elements of a strong risk culture include, among others, a common purpose and mission, clear goal-setting, fair and transparent rewards mechanisms, ethics policies and whistleblower protection.

“Most importantly, there has to be a culture of learning and self-improvement. Most large companies do have many of these elements in place. However, boards should focus on the efficacy of these measures in embedding a strong risk culture. Beyond these policies and controls, boards are in a unique position to set the tone at the top.”

 

By Dawn Murden, Editor, Advisory

Do you agree with the questions posed above? Would you ask something different? If you have an opinion you’d like to share, please email Dawn at: dawn@criticaleye.com

Find out more about how to embed a positive risk culture across an organisation at our Hong Kong-based Discussion Group, with John Shelley, Chief Risk Officer at RBS Asia Pacific. 

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Is Your Risk Culture Fit for Purpose?

While developing a robust approach to risk may begin with the board, it’s up to the CEO and senior executive team to lead by example so that policies and behaviours are both consistent and joined-up. Unfortunately, this is something that many organisations struggle to get right, which results in a disturbing lack of clarity about how to report on and effectively manage the multiple risks every business faces.

Paul Cardoen, Managing Director at the Bank of Tokyo-Mitsubishi, says that “it’s not the policies and rules that create prudent risk behaviours, it’s the culture in which people operate,” and firms struggle when there is no alignment between the two. He explains: “You can say: ‘This is the risk tolerance we have,’ but if you then heavily incentivise the same person to rapidly expand the business and double the budget, you will sooner or later face an issue.

“Risk is not just about putting up a framework of rules, it’s about having a communication and leadership style that creates appropriate behaviours which are embedded in the culture.”

A framework should be used to identify, manage and communicate risks, but it needs to be linked from the top to the bottom of an organisation. Ruth Murray-Webster, Director for Risk in the Boardroom at KPMG, comments: “Risk appetite should be expressed in the units of measurement used for normal performance tracking – it then becomes much clearer what the risks are and which ones it is important to focus on.

“For risk management to really work it needs to be aligned with business objectives and performance management… Organisations that only think about frameworks tend to be… very good at doing analysis and understanding the potential risks, but are not actually doing anything about them.”

A CEO needs to have the assurance that the people are in place to act when necessary. Steven Cooper, CEO of Personal Banking at Barclays, says: “Ultimately I’m accountable for the risk of the business, but that doesn’t mean I have to run the risk function.

“But I want the Chief Risk Officer… to sit on my executive committee. I want them to inform and educate the rest of the executive committee [about] the importance of risk and what the risk position is, and to help the business grow but in a controlled way.”

John Shelley, Chief Risk Officer of RBS, Asia Pacific, comments: “I believe the Chief Risk Officer’s job is to… call it out if it’s not happening, but it’s a CEO’s job to own risk. If it’s not something they live and breathe, then it won’t be part of the culture for that organisation.

“It’s all very well for the CEO, board of directors and the executive committee to say: ‘Right, we’re this kind of organisation, we operate this way,’ but do their people in the field actually act like that?”

It’s fundamental that risks are identified and that the policies in place clearly reflect the company’s standpoint. “Helping people avoid risk is our first approach, but… there have to be sanctions, people need to know that if they cross these lines there will be consequences,” John says.

“For example in a bank trading room… the severity of a risk breach will be assessed at level one, two or three… Everybody gets it wrong now and again, but if you have a couple of level ones in close succession then we’ll be looking very closely; if you’re level two or three, then we’d probably be into formal disciplinary proceedings.”

Stay in touch 

The flow of information across a company should be transparent, so employees feel they can provide feedback on where they believe unnecessary risks are being taken. John Kinirons, Chief Industrial Safety Officer at EDF Energy, comments: “The employees on the frontline… have a part to play, not only in recognising what the company is trying to achieve, but also the sanctions or consequences of not achieving those. [Then they need] to understand what support mechanisms are in place and what they can report on.”

It’s something that ultimately has to come from the top. Heather Benjamin, Non-executive Director at Portsmouth Water, says: “The key people should drive this by demonstrating that it’s not just something that they say, but something they do. And making sure it’s [seen] at all levels of the organisation.”

Paul says: “It’s about leadership, communication, and transforming good risk management into good business practice… It needs to become an automatic discussion at every contact point in the lifecycle of a firm. It starts [during] recruitment, and that… continues with evaluation, it’s in the writing of a policy, it’s in the CEO’s speech; it’s in the values set by the board.”

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

Leading a Digital Culture

Comm update_14 JanuaryAs new technology continues to turn traditional business models upside down, the onus is on executive teams to embrace change while encouraging employees to think and act differently. It means challenging conventional approaches, testing ideas and creating a ‘digital culture’ within an organisation which is attuned to and reflective of changing customer expectations. It’s inevitable that the companies that fail to adapt will struggle to compete effectively.

For large, well-established organisations, deep-rooted changes are required. Julian Payne, Line of Business Director for Solutions at De La Rue, a supplier of identity and product authentication services to governments and multinationals, says: “If you’re a first-generation digital start-up business or technology company, you don’t have to think about digital culture, you just have it. You have an agile development team… and you are open to change.

“Whereas if you’re working in a bigger business or a business with a significant non-digital legacy… you’ve got to think about the DNA of the culture that you want to create… It means thinking about what’s happening in the wider context around everything from hosting, to the cloud and big data analytics.”

Laura Haynes, Chairman of brand consultancy Appetite, explains that digital needs to be part of the core business: “People think about digital as being something outside their regular business issues, but it is time to think differently and recognise that the first way to reap the benefits of a digital culture is to break down silos and integrate digital thinking and processes throughout the business.

“Sure, there will be parts of digital that may need new technical expertise, but there is the opportunity to explore the potential to improve processes and communications, but this means embracing digital.”

It’s about connecting the established practices with the new, and reaching a balance which allows digital to enhance or adapt the traditional offering. Bal Samra, BBC Commercial Director and Managing Director of BBC Television, who is leading major digital projects such as BBC3 Online, the iPlayer and BBC Store, comments: “Our values at the BBC are always going to be the same… but we are in a different world – it feels like everything is speeding up… You need to create a culture in your organisation to evolve from the old to the new.”

Executives on point 

Senior executives in an organisation need to take the lead on digital. Bal says: “The CEO has to set the pace of the vision… So that means constantly talking about the world around us and how it’s changing, and moving that from being scary to being an opportunity.”

Leaders need to be open-minded. Laura says: “The challenges are understandable because if you take a lot of senior leadership, they’re having to relearn a way of thinking that doesn’t come naturally… it’s not just about learning techniques; it’s about learning to think differently about processes, about truly interactive and real-time communications, about the utilisation of information and how to analyse what’s in front of us, as well as new media.”

Julian says you have to “remove fear and de-risk digital” through experimentation and education: “Get them to play at home more. Ask them to use some of the modern apps that, frankly, kids are using.

“You need an interpreter role, it might be your CTO or it might be head of R&D. Someone who can take relatively complex concepts of digital and introduce them to a board… [Crucially] you have to be really clear about where the customer value lies, the cost to achieve it and the steps to take.”

Younger employees are increasingly being turned in order to share their digital expertise, acting as reverse mentors for an older generation. Paul Brennan, Chairman of cloud infrastructure software provider OnApp, comments: “You need to utilise younger people who are going to be the consumers of your products and services in ten years’ time, to understand how they want to communicate with you.”

Allied to this, employees should be allowed to experiment and test ideas. “You fail fast and learn,” says Bal. “What you want is an innovation kind of culture which says if you fail… and if something doesn’t work, you move on. You’ve got to create a culture that allows people to challenge the conventions.”

For this ‘digital culture’ to be meaningful, it has to be joined-up with how the information generated by technology is being used to bring about collaboration, experimentation and to inform decision-making. “New technologies enable us to act in a very different way,” says Emma Cooper, Managing Director of UK Health and Public Sector, and Organisational Change Lead for the UK and Ireland, at Accenture.

“They allow us to tap into workers anytime, anywhere… Digital is changing organisations, silos and hierarchies.”

Helen Murray, Chief Customer Solutions Officer at Webhelp UK, a company that provides outsource customer services, says: “Huge insights can be gained from analysing conversations, utilising voice and text analytics, to truly understand customers’ emotions, frustrations and behaviours, and combining that with more traditional, structured data analytics… You need to ensure all customer engagements consistently reflect and represent the brand.”

In order to fully endorse digital, leaders have to understand the tangible business benefits. Paul comments: “A lack of awareness of the value proposition means you could miss opportunities, so education is important for senior executives to fully embrace digital. You need to understand the benefit to your organisation.”

At the very least, they have to be honest about where gaps in knowledge and expertise may lie. Mike Greene, Chairman of pharmaceutical and consumer healthcare company WinchPharma Group, says: “Boards need a diverse mix of experience, energy and ambition… If they haven’t got someone who’s digitally savvy and digitally confident then their board is missing something, but unfortunately they often recruit in their own image.”

Helen comments: “Digital is so critical to businesses… It’s essential that digital is in its DNA, not a separate operating unit; not an adjunct… It needs to interface seamlessly with the rest of the organisation.”

Large corporates may struggle to embrace a truly digital culture, but senior executives must rise to the challenge. Ultimately, leaders need to ensure they are open-minded and willing to learn, while utilising new technologies and data in order to empower employees to meet changing customer demand.

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

5 Tips for Leading a Global Team

Comm update_9 July (1)

Managing a globally dispersed team is a tricky proposition. First and foremost, you have to ensure people are collaborating, sharing knowledge and working together in order to achieve clearly defined objectives. To do this, you will need to be sensitive to other cultures, have a system which accounts for working across different time zones, and be relentless in how you communicate in order to avoid misunderstandings.

It presents a personal challenge because as a global leader you have to deal with complex operational issues and maintain your energy and enthusiasm despite the long, unsociable hours and endless travelling. Criticaleye spoke to a range of executives to get their views on how to overcome these hurdles and successfully lead a team that is spread around the world:

1) Set Clear Targets 

The team has to understand what they’re aiming for and how they’re supposed to get there. Anne Stevens, Vice President for People and Organisation at mining company Rio Tinto Copper, says: “The most important thing is achieving alignment within the team and with the business. Set specific goals at the individual level but also for the team, with clear roles and accountabilities.”

Ian McCubbin, SVP for North America, Japan & Global Pharma Supply at GlaxoSmithKline, comments: “We use quite a rigorous personal development and objectives planning process… and share that openly with the team. We try and get people to work together making one of the objectives a joint objective, for example with somebody in Japan and somebody in North America, because you want to encourage collaboration.”

2) Be Flexible With Time 

A common mistake is to operate in such a way that virtual meetings and calls are scheduled to suit ‘HQ time’, which often results in employees from ‘other’ offices having to work an unfair number of unsociable hours.

Anne says: “I’m not sure if you can ever make it completely fair in a truly global environment because it is virtually impossible to meet everybody’s needs but it is critical that everybody is flexible and adaptable to make this work well. We alternate calls on a regular basis from southern hemisphere to northern hemisphere so that people do an early or a late stretch, on a rotational basis.”

According to Els Vandecandelaere, Vice President of HR at pharmaceutical company Janssen, if organised in the right way the differences in working hours can be used positively. “Sometimes working in global teams is seen as a hurdle. However I’ve been in teams where they take advantage of the different time zones, whereby the person on the West Coast [of America] would work and then, at the end of their day, pass over to the Asian team, almost like the project follows the sun,” she says. “There’s a lot of mileage you can get from that.”

3) Utilise Technology 

Staying in touch with employees is getting easier as technology and connectivity keeps improving. Ian McCubbin says: “We’ve been experimenting with FaceTime… I can FaceTime my guy in Japan who can be walking around his factory and he can show me stuff at the same time we’re talking.”

Ian Mills, Group Vice President of the Worldwide Technical Expertise Platform at global service solutions business Sodexo, uses a specialist content management system to share knowledge across the team. “We form groups on a particular subject and then use our collaborative tools which will send out updates if someone has been active. That works pretty well,” he says.

The key is to use the various channels and applications now available. Gary Kildare, Chief HR Officer at IBM Europe, says: “Communication is tough when your team is spread around the world and in different time zones. One of the practical leadership skills needed today is the ability to communicate successfully whether it’s in person, through email, via web or TV link, by phone or conference call.”

4) Bring People Together 

While technology undoubtedly has a significant part to play in communication, you do need to be visiting your team in their various locations in person on a rolling basis.

“Face to face contact with colleagues operating overseas is a critical element for successful business transformation; cultural nuances and body language can be missed on video links, and being in the country will provide deeper insights into the local political, economic and business climate,” says Bryan Marcus, Former Regional Head for Latin America at Volkswagen Financial Services, who adds that he made sure there was always money in the budget for people to travel and meet one another.

It’s important to bring the whole team together too, even if it’s only once or twice a year. “Those sessions are partly for business but they’re more about relationship building and then once you have that relationship and set the common direction… you’ve got what I would call functional and check-in sessions that can be virtual,” says Ian McCubbin.

5) Be Culturally Aware 

Time needs to be taken in order to understand other cultures. Ian Mills says: “Never forget the cultural side of how to manage teams, because if you’ve got that wrong, it doesn’t matter what you do with communication… A lot of it comes down to experience. My advice to anyone starting off managing a global team is to do some cultural awareness training.”

Anne says: “It’s around people being open to seeing things from a different perspective. That means recognising and being sensitive to other cultures and the fact that something that might work in Mongolia, for example, may not work in North America.”

According to Els, the best approach to developing relationships is by focusing on individuals. She explains: “I always start with the person. While I believe it is important to know the basic dos and don’ts, I don’t over-think the culture too much. I believe there’s much more variability in individual behaviours than there is in national culture, which is an average of everyone in that country.”

***
Ultimately, good leadership will always get the best out of a global team. It requires, on personal level, maintaining your focus no matter how complex working schedules get, engaging employees, establishing a strong sense of purpose and keeping motivation levels high to ensure the right business outcomes are delivered.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Own Goals in Cross-Border M&A

Comm-update-23-01-12-2

The acquisition of a foreign company figures highly on the agenda of many executive teams as the quest continues for new markets and improved economies of scale. Such transactions pose a considerable amount of risk and that’s why management must ensure the strategy is sound and the legal and cultural differences are understood, so a clear plan for integration is in place once a deal has been signed.

There will always be an element of risk associated with purchasing another business, domestically or abroad. Here are five of the most common howlers that CEOs need to avoid when they decide to go shopping overseas:

1) Assuming too much

It’s a dangerous game for management teams to make assumptions about foreign markets. Jim Wilkinson, Group Finance Director at online gaming company Sportingbet, says: “Every country has a different culture to the UK, with different rules and regulations, so you need to understand everything from holiday times, payment processes, bonuses, how they actually work, levels of remuneration, and how quickly people expect integration processes to happen.

“In the US, for example, where I’ve done a couple of acquisitions, management have expected all the redundancies to happen straight away, whereas in other countries, particularly in parts of Europe, they don’t expect redundancies to happen at all. Understanding how people expect you to manage them afterwards is important.”

Aleen Gulvanessian, Partner at law firm Eversheds, comments: “Local teams mustn’t be left to make assumptions which might be inappropriate in the foreign country, so you conduct the transaction in the way you would locally at your peril when dealing with a cross-border acquisition. It’s very easy to think that there won’t be a problem and just not be aware of something potentially critical.”

There will be differences, legal and otherwise. Ian Bowles, CEO at software provider Allocate, says: “It’s a mistake for an acquiring company to automatically assume that their way of doing things is absolutely correct and try to do things exactly in the way they would in their own territory, and I’ve been a recipient of this rather than a manager of it.

“There are legal and process differences and you need to understand the working environment and customer environment. You’ve got to be culturally sensitive when you acquire something overseas. You can endorse corporate standards but you’ve got to do it in a way that is acceptable to the team you’ve acquired or you’ll create misunderstandings and false barriers that’ll make smooth integration more difficult.”

Nothing kills a deal quicker. Jim says: “The biggest single mistake is cultural, where people assume that it’s the same as the country they’ve already operated in, and if you want to destroy value very quickly then do the acquisition and watch the management team walk as you end up with a rudderless company.”

2) Inexperienced management

As an acquirer, you need people you have absolute faith in on the ground. Paul Budge, UK & Ireland Managing Director at consumables distributor and outsourcing business Bunzl, says: “Because we’re very decentralised as an organisation, when we do an acquisition, the person that’s going to run that business, whether they are from the acquired company or our own resources, is going to be working remotely, so it has to be someone we absolutely trust.”

Bob Emmins, Finance Director at ABF Ingredients, says: “You’ve got to have a local presence. You can’t run it from the head office or another geography. You’ve got to have people that know the geography, the language and customers, the legal practices in particular and some of the local nuances that are applicable in that market, otherwise you’ll be very lucky to conclude the deal and you will not integrate it.”

It’s a case of getting the balance right. If the acquirer brings its people in and drives change too quickly or, by equal measure, too slowly, then the value in a company can quickly be eroded. Alan Howarth, Non-executive Chairman of telecoms specialist Cerillion Technologies, says: “The first 100 days of any M&A activity is key to an enhanced future business. Too often there appears to be a lengthy period of inertia where fear of the unknown travels across the combined business.

“The desire for change – always underestimated – is seldom found beyond those that initiate any such programmes. So the board has a responsibility to communicate the advantages and consequences the changes will bring to the new corporation. All too often, senior executives work very hard in this period but in isolation.”

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3) Post-deal lethargy

Another danger is that the process of integrating two businesses can be lost on executives. They get excited about the value creation on the balance sheet but forget the hard part lies in knitting the companies together. Aleen says: “We find that where the acquirer is disappointed with the target they’ve acquired, it’s often because you’ve got a different team dealing with the integration post transaction to the team that was involved with actually doing the deal.

“You should be thinking about integration during the course of the deal process. Where your team doing the deal overlaps with the one conducting the integration post acquisition, you tend to find the most successful transaction.”

Jim says: “You need to keep control of it from your head office; you can’t just leave it up to the local team. This means a lot of time is spent on the phone and it requires frequent visits to the country while you’re conducting the negotiations and due diligence, and once you’ve made the acquisition you need to physically be there.”

There are no shortcuts. Alan says: “In my experience, both in terms of mounting an international acquisition and more importantly integrating the target organisation with the host, success revolves around the understanding of culture and change. The more you appreciate the drivers and operating style of the acquired business the greater your likelihood of successful integration. Due diligence pays scant attention to the less quantifiable measures when the key to integration is ensuring that a new corporate message can be embraced by all parties.”

Bob comments: “People can get wrapped up in doing the deal and money talks, so money can often be used to get over the normal negation tactics to conclude a deal. But when you come to integrate it, if you haven’t thought about that market and put the right local resources in place, you are just destined to fail. You’ve got to have knowledgeable local resource with local connections.”

4) Poor use of advisors

Aside from having seasoned non-executive directors who know what to expect, it makes sense to invest in quality advisors as they can make an enormous difference during negotiations. Jim says that “you need local advisors as the local tax rules, regulations and laws are important, so you need people that know what they are doing”.

Bob says: “Third party advisors are the voice of reason that prevents you from going headlong into the pitfalls. They should not just be encouraging you to do a deal because they get a healthy commission on completion, but they have got to do more to protect the risks. For a longer-term benefit for their customers they need to be helping that customer ensure that the integration is successful.”

5) No plan B

Surprises in M&A are rarely of the good variety. Things will go wrong. That’s not to be cynical, but when you have volatile market conditions, different ways of operating and cultures and large sums of money involved, it’s probably wise to expect the odd hiccup along the way.

Simon Braham, Investment Director for cross-border M&A at private equity firm LDC, explains that contingency plans are crucial when a business begins to operate internationally and makes acquisitions, such as putting in place someone whose role is to specifically liaise between the domestic board and local management in order to ensure that any fires within the business are spotted and extinguished quickly.

***

A lot of M&A loses momentum because management focuses solely on the deal and loses interest in implementing the rationale for increasing the size and presence of the business. Few companies can afford to be that lackadaisical in their thinking anymore. As Don Elgie, CEO of insight and communications agency Creston, puts it: “The key point is that acquisitions stand a greater chance of success if there is a strategic reason for them, rather than just financial roll up.”

That’s true regardless of where you’re buying a business, although acquiring abroad will undoubtedly present a greater test in terms of putting your ideas into practice, largely because of there being more variables to overcome.

Nevertheless, it’s not something to be shied away from. “Acquiring companies in faster-growing overseas markets gives UK companies an opportunity to more quickly build up scale and buy into the growth of these quickly expanding economies and markets,” says Simon. “Importantly, cross-border M&A offers a very strong alternative to what could be a higher risk and importantly slower ‘greenfield’ organic growth strategy.”

Just be sure your team are up to the task and the reasons for expansion have been examined. Pankaj Ghemawat, Criticaleye Thought Leader and Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Spain, warns: “It’s the oldest mistake in international business, companies going overseas when they’ve succeeded at home.

“If you’re Walmart and you’ve mowed down Sears and K-Mart at home, obviously there’s a tendency to think: ‘If we can do this in the US retail market we should be able to do it in South Korea, Brazil or elsewhere.’”

Learning to Lead in Asia

For those executives who are embarking on a senior leadership role in Asia, it’s time to pay closer attention to culture, relationships and personal networks. Without addressing those elements, a person may easily and unnecessarily become cast adrift and feel disempowered in a highly confusing environment.

Mark Wilson, Managing Director of BoTian and Chairman of BoCheng, two of AB Sugar’s businesses in North China, explains: “Having lived and worked [here] for five years, I’ve certainly had to adapt my leadership style. In China, western norms and logic don’t apply and you must be flexible at all times even when you think an agreement has been reached.”

Brian Stevenson, Non-executive Director of the Agricultural Bank of China, says: “Be flexible in your judgments, especially early-on in your learning experience. The western ways often don’t work in Asia and adaptations to your established management style will be required.”

There’s no way of rushing the process of adaptation. Chris Merry, CEO of professional services firm RSM Tenon, who worked in Shanghai for three years, says: “The key thing is just not to get frustrated by the differences but be very patient to see how those differences work out and see how you can work within the culture rather than against it.”

It’s a case of possessing the self-discipline to understand that process and execution will not necessarily be what you’re used to. Gary Kildare, Vice President of HR, Americas, Europe & Asia Pacific for IBM, adds: “It comes down to getting an understanding of how people think; being sensitive to the way people are and the backgrounds they have.”

Without that awareness, you’re pretty much setting yourself up to fail. David Harding, Deputy Chairman at Magnum Berhad, Malaysia’s largest fixed odds lottery, recalls his surprise at the business motives in his adopted country: “Disposing of core assets proved the hardest task, mainly because there was status associated in ownership. Pride or saving face are as important, and maybe even more important, than financial remuneration, in securing engagement and focus from people.

“The collective is far more important than the individual, and performance management, including the confrontation of underperformance, needs a collective rather than individual focus here.”

Assuming that ‘you know best’ can have calamitous results. Mark says: “Newly arriving expats mustn’t fall into cultural stereotyping; China is a huge country made up of many different ethnic groups and regions, each with its own characteristics and business styles. Think of China more like the EU: one common trade block made up of many different countries, each with their own languages, dialects, customs and ways of doing business so you need to adapt your approach and strategies accordingly.

“Likewise, differences between the generations are pronounced due to the pace of economic and social change during the last 60 years. Senior managers often don’t understand their juniors’ expectations and vice versa; this can make expats good mediators.”

Where many organisation fall short is by trying to impose the group strategy in such a dogmatic fashion that individuals on the ground aren’t given enough autonomy to bridge that cultural divide at a local level. Gary says: “Successful businesses are the ones that are going to work effectively at integrating across borders,” he maintains. “There’s a kind of natural conflict that exists out there; the conflict of a country’s culture and traditions versus corporate success, as these things are not always in perfect harmony.”

Ian Durant, Chairman of investment and development concern Capital & Counties Properties, explains: “Business is personal. The role of family and the role of the corporation is something different in Asian cultures, so there’s often a reluctance by individuals you’re working with to acknowledge publicly they don’t know an answer or to give you any push-back on something they don’t agree with. You might think you’ve briefed everybody and they’ve all said ‘yes, we understand,’ and that they’re happy with the objective but you might go away and find they’re not at all happy but didn’t want to admit it in public.

“You need to be patient and receptive to body language and other signs. After a while you begin to read the signs and you talk to people one-on-one and you get them to play back to you what it is they’re committing to.”

It’s something that comes from having proper experience of working and living abroad. Matt Crosby, Associate Director at management consultancy Hay Group, says: “It is dangerous to assume that the high performers in the mature markets are going to be high performers in the emerging markets… in the West you often have quite mature business processes that provide a degree of infrastructure, support and logic that you don’t have in the fast growth businesses typical of the Far East.

“Your best people will cope, but unless these individuals are used to moving around, they may not have developed the more latent abilities around being able to cope with different environments, such as being more culturally sensitive, working with a bit less information and being comfortable making decisions based less on process and data and more on what they feel is right and that they think will work.”

Top of the class

In terms of desired leadership skills, those who know how to manage fast growth and the challenges this presents are in high demand. Howard Thomas, a Criticaleye Thought Leader and Dean of Lee Kong Chian School of Business in Singapore, says: “If I had to pick skills and competencies that are emphasised here, it would be growth and the questions around entrepreneurship and innovation, and the need for a complete understanding of the different laws and regulations… There is also the need to build talent in markets where there is a clear shortage and then the appropriate use of strategic human capital.

“Beyond that, there is also the fact of understanding the role of government in the growth of Asian economies. Certainly, in China and Singapore and in a number of other countries, the government has a very strong role.”

Bob Garratt, a Criticaleye Associate and one of the founders of the China-EEC Management Programme in Beijing in 1983 (the first Chinese MBA programme), observes that there still exists a huge amount of naivety among business people when it comes to understanding the role of the government as a lever for getting things done.

According to Bob, discussing different leadership styles is by-and-large an irrelevance. “You can’t even start there, it just doesn’t work,” he comments. “You have to begin by understanding that the Communist Party of China, despite all the rhetoric, is still in total charge. Most business people don’t see this; don’t understand how it works and don’t realise what occurs.”

It’s here where building the right kind of relationships can be the dividing line between success or failure. Nandani Lynton, Adjunct Professor of Management at the China Europe International Business School in Shanghai, says: “When westerners move to Asia, they’re not at all used to how the personal network is the core of business relationships as opposed to being something that is just an additional nice-to-have.”

For me, as CEO of Criticaleye, it’s clear that unless senior executives understand this there is a danger that they can become isolated from both their support network and local market, which is why you need to harness contacts and make new ones to further your appreciation and grasp of local culture and remain grounded to western governance and leadership standards (sadly, playing rounds of golf won’t be enough).

Nandani continues: “It’s about how you decide who you need in your network and how you go about building those relationships, because you have to build them before you need something… It’s also about understanding that, especially in China but in much of Asia too, everything is political.

“Something that looks to you like a pure business decision probably isn’t; your customer knows they’re making a political statement by choosing you as opposed to your competitor. The way that you phrase a marketing campaign may need to use particular buzzwords that are in line with the government at the moment. Things like that that we simply don’t think about in Europe.”

It can take years to digest this and some evidently never do. Brian says: “The ‘region’ is a complex mix of cultures, religions and history. It is in no way a whole, even less so than Europe for example. There is no economic, political or social cohesion [between different countries] in place or planned so it should not be treated in any uniform way. Looking at Asia from afar it is surprising how many people forget this.”

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Agility and the Role of the HQ

Agility has become the lifeblood of a successful corporate. That cultural transfusion is not exactly easy for more traditional boards to accept, but in such volatile times it’s now often the case that it is the divisional and country managers who need to make key decisions in their respective local markets to keep that competitive edge.

Julian Birkinshaw
, a Criticaleye Thought Leader and Professor of Strategy and Entrepreneurship at London Business School, says that “in a context where the world is perhaps changing more rapidly than it has in the past, the companies that succeed will be more agile and that means they are more adept at identifying new opportunities and moving quickly.”

Complacency over operating models will be punished as will holding on to the view that things will return to what they were before the financial crash. Ruth Cairnie, Executive Vice President for Strategy and Planning at Shell International, says: “We have had unprecedented volatility in the past few years and our projection is that this will increase… You can expect many changes and an uncertain environment so it is managing through that – it is about being able to deploy resources or redeploy resources quickly.”

Mark Phillips, SVP, Medicine and Process Delivery for GlaxoSmithKline, says: “To me, ‘corporate agility’ is about the ability of an organisation to respond and act quickly in the face of external drivers, be they threats or opportunities. This requires an organisation that is well connected to its environment and can scan for opportunities and challenges and a structure that can flex to adopt new business models, channels, products and services. It also requires the organisation to be able to formulate and maintain a simple but sound strategy.”

Two-way street 

The decision to centralise or decentralise is something of a moving target, depending as it does on the relativity of industry, geography and profitability. Indeed, for a global business, the move to bring more decisions ‘in-house’ in tougher markets will not be exclusive to giving greater autonomy to MDs and CEOs in countries where growth and scale are easier to come by.

It’s a question which goes to the heart of the boardroom. David Mann, Managing Director for Management Consulting & Integrated Markets for UKI Accenture, comments: “You have to make strategic decisions as to where you invest for the future and where to retain the option to invest because you can’t do everything at once.”

Bala Chakravarthy, another Criticaleye Thought Leader and Shell Professor of Sustainable Business Growth at IMD in Switzerland, says: “Here is the challenge: do you build a structure based on the weight of current revenues or do you build one based on the potential for future revenues? Although there might be large, established markets like the UK and Germany, the scope for growth may be limited and therefore do you give more autonomy to a slightly smaller but higher growth market?”

The strategy, culture and values as defined by the HQ have to be clear. Mary Jo Jacobi, a Criticaleye  Associate and a Non-executive Director of Mulvaney Capital Management, says: “The role of the headquarters seems to have changed a lot since I began my career from an almost militaristic command and control approach, to a totally decentralised laissez-faire approach, to today’s hybrid model where the HQ provides central guidance and functional leadership, but leaves some discretion as to local operations. Organisations must present a unified face and clearly defined brand, while promoting a culture that is nimble and takes into account regional and operational differences as well as the speed of change.”

Ruth elaborates on this point. “Standardising at a global level everything that you can makes a lot of sense. In my experience, you can always push that a lot further than everyone thinks… If you have different standards in each country, then it makes everything a lot more difficult, whereas if you have clear and common standards about how you design and execute projects, it becomes much easier to move resources around.”

That’s crucial when bringing changes into a business in an attempt to improve flexibility. By way of example, Ruth notes that two-and-a-half years ago a separate project and technology division at Shell was established “so that they then housed a pool of our project engineers as opposed to those resources being organised into local and regional teams”.

Bruce Cox, Managing Director of Rio Tinto Diamonds, observes that when operating across multiple countries with vast degrees of political and cultural diversity, “it’s essential for us to be an international company that has some minimums globally in how we operate in terms of our standards and behaviour… but we really need to feel local.”

During the past 12 months, the company has adopted a programme that it calls ‘Empowering the Node.’ Essentially, this codifies the ethical behaviour of staff and extends to providing more autonomy to senior managers so they have the ability to call the shots. “There is a minimum standard in terms of the way we work around health and safety requirements, community engagement and what we expect in regards to our operational integrity,” says Bruce. “Once that is defined, we then put a person into a country who we really trust and let them have the resources and a fair amount of scope and scale to make decisions so long as they are consistent with the larger values of Rio Tinto.”

For Mark, “the best organisations appear to have addressed the fundamental question of what must be done locally, such as customer interface, managing local relationships and stakeholders and local compliance, while also addressing those functions which should be central, mainly from an alignment or efficiency perspective in terms of financial management, systems, strategy and IT.”

Top to bottom 

It’s fair to say that the notion of head office broadly driving strategy is certainly nothing new. But the complexity of markets combined with the need to be able to react quickly where necessary is different and those boardrooms which are in denial about this will at some stage be horribly exposed. David says: “For international businesses, the centralised model needs to understand how to work in a new environment… In many industries, value is destroyed because [the HQ] becomes too prescriptive at a local level.”

Gwen Ventris
, Former COO for Europe and Executive Director at AEA Technology, says: “Many organisations are finding it increasingly difficult to differentiate their products and services and have become too distant from the customer. They have lost the ability to understand markets at the local level sufficiently well to be able to rapidly shape or respond to opportunities as they arise.

“Global corporates’ historical responses to these challenges have often been to decentralise, giving the P&L units more authority to take local decisions. While in most cases this is likely to be a step in the right direction, I believe that in the current context creating corporate agility requires significantly more than moving accountability for decision making closer to the coal face. It requires a strategic perspective which involves ‘shaping and influencing’ markets while having the flexibility to respond rapidly.”

The cultural and leadership challenges this poses are immense. Bala says: “Fast decision-making remains a big issue; I don’t know of any company that doesn’t talk about it but very few have been able to achieve this.”

According to Bruce, “corporate agility can be achieved through two primary levers, the first stuctural and the second cultural”. He explains: “By focusing on an organisational design that limits the layers and structure interposed between the CEO and operational employees, this enables the efficient flow of information and the speed and accuracy with which decisions can be made and implemented.”

Cutting through this is the challenge. From the perspective of leaders, there is a responsibility to communicate with clarity and not to let layers of bureaucracy and process blind them to what is going on in a business. Ruth says: “If you sit at the top of a big organisation – and that can be the sub-set of a business – it is extremely difficult to know what is happening. You can communicate frequently about what you want to happen but I actually think you need, in the right way, to bring in a feedback loop and find ways of engaging with the front line to test out what is really happening.”

In other words, engaging people and talking to them. “If you have two, three or four layers of management that you have to get through before influencing the front line, you can’t assume things are happening in the way you want them to,” continues Ruth.

Bruce states that bringing about change is pretty much impossible unless the leadership demonstrates and reinforces the values and systems that are being put in place. There has to be a visible and authentic, hands-on involvement by those who are driving the agenda, otherwise there won’t be any buy-in. “I am so frustrated by change being implemented by email,” he notes. “Emails do not change anything… It might inform you of what’s on the mind of a leader, but it doesn’t change behaviour. What changes people’s minds and behaviour is engagement.”

And it’s those inspirational qualities that will be required in abundance if businesses are to possess the leanness, flexibility, accountability and strategic vision to navigate the global markets.

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk