COVID-19 has exposed the fragility of our businesses, and CEOs are bracing for more upheaval.
It follows that CEOs who are fit to manage businesses out of crisis understand their business’ core vulnerabilities, and the measures for managing them.
Business vulnerabilities were present before the pandemic. Toll and BlueScope experienced the disturbing implications of cybersecurity breaches. Retailers and shopping centres were sluggish to respond to disruption from ecommerce. Major banks booked profits amid toxic cultures, dated and costly ways of doing business, and cybersecurity holes.
Our CEOs have been reactive to risks and threats.
Responding to the 23 million breaches of money-laundering law, Westpac CEO Peter King described the firm and its culture as reactive and immature. Directors, led by Lindsay Maxted and other accountants and lawyers, failed to act.
The Victorian Premier, Daniel Andrews, appears to respond to one crisis after another without ever acknowledging that he lacks the teams and expertise to deal with them.
Short-term fixes aren't the answer
Other actions during the crisis have reinforced the tendency to resort to short-term fixes that fail to find the underlying cause of vulnerability. Many CEOs have laid off staff, raised capital, and sought government handouts.
JobKeeper has been a wealth transfer mechanism from the taxpayer to savvy operators such as Solomon Lew’s Premier Investments.
Short-term solutions such as these resemble sugar hits when a stronger immune system is needed.
Going forward, CEOs need to start building a more resilient immune system for corporate Australia. That can only occur when they recognise their own and their business’ vulnerabilities.
The problem is not that CEOs fail to recognise risks and threats – it’s that few appreciate what it means to lead a vulnerable organisation.
CEOs and business leaders can take four steps to address these concerns:
1. Recognising and managing core vulnerabilities, not competencies
In our experience, CEOs treat risk, threat and vulnerability as synonymous. But, at any time their businesses face risks, threats and vulnerabilities that must be managed differently.
Take the big four banks, which excel at identifying risk in their loan portfolios, and managing them. They can also see threats when they materialise, including the challenges the royal commission posed to their reputation and legitimacy.
Dive deeper and you will see that our big four banks face vulnerabilities that will eventually be their undoing.
Dive deeper and you will see that our big four banks face vulnerabilities that will eventually be their undoing. One is their unsustainable cost base, which is an order of magnitude greater than that needed to deliver basic services.
This makes them vulnerable to competition from online distribution systems that leverage big data to source and assess loans. The region’s runaway leader in financial services, Singapore-based DBS, is the threat.
But it can only be managed by proactively addressing the core vulnerability of unsustainable costs.
2. Managing vulnerabilities differently from risks and threats
Risks are everyday hazards that can be covered by back-up plans, insurance and hedging. Threats are external jolts that expose vulnerabilities. Vulnerabilities are defects in systems, including from faulty business models.
For a retailer, a risk is a customer default, a threat is a competitor, and a vulnerability is an inability to respond to an online business model.
To bring this closer to home, a storm is a threat to a house with a weak foundation. The way to respond to repeat storms is to fix the foundations rather than plaster over cracks after the storm does its damage. For CEOs, this means identifying core vulnerabilities in business foundations, together with the structural solutions.
Rob Scott, the CEO of Wesfarmers, uses simulations of threats to expose vulnerabilities, stress-test responses, and sharpen capabilities. Tesco, the UK's largest retailer, goes further, carrying out “multiday simulation” exercises designed to see how vulnerability from the pandemic can play out.
The key is to viscerally experience the existential challenge of worst-case scenarios by stress-testing the business to them.
Atlassian incessantly faces the vulnerability that others will develop superior software solutions for its enterprise clients. That means instilling a culture of innovation to allow the best ideas to surface, and more partnering to acquire technology.
3. Accepting that vulnerable businesses require vulnerable CEOs
Pretending to be unassailable can backfire. It not only makes it hard for CEOs to ask what is wrong and get honest responses, but some evidence even suggests that investors underreact to overly optimistic CEOs.
Working from home means more communicating from CEOs. And workers quickly disengage from boiler-plate messages or thunder speeches. CEOs who emphasise emotional intelligence without understanding how to practise it find themselves marginalised.
David Solomon, Goldman Sachs’ CEO, has become the poster child for the vulnerable CEO. He acknowledges the firm’s failings on race, and hosts podcasts and online forums to see how the firm can do better.
With workers suffering mental health fallout, a priority has been to identity professionals who can alleviate their suffering and increase productivity. Solomon is transparent and blunt with workers about the negatives of the pandemic, while recognising that volatility increases profits.
Previously, these approaches may have made him look weak. Today, they enhance his reputation, and that of Goldman’s. His key piece of advice? "We're all being much more vulnerable as we're trying to lead our people. I think that's effective leadership, and it's working."
4. Changing perceptions of business partners
Getting in touch with vulnerability means accepting that we don’t have the right answers and resources for business as usual. Instead of engaging in hyper-competition, stronger CEOs are working towards sharing and accessing resources, including human resource systems, office space, warehouses, and even IT.
For leading CEOs, the crisis has become an opportunity for collaborating beyond working together to help the government. In fast-moving consumer goods, creating super-lean, just-in-time supply chains is a poor substitute for sharing them.
Many large businesses don’t compete on administrative services and IT; they compete on products and services. Large mining companies and universities, for instance, each spend hundreds of millions of dollars on IT when they could pool IT resources into single platforms.
CEOs can help business emerge stronger from the crisis. The best-positioned will be those who can embrace and manage their own and their firm’s vulnerabilities.
To receive a fortnightly email wrap up of stories from Lens.