Skip to content

Posts Tagged ‘Risk’

Underestimating a Silent Problem

Tuesday, June 22nd, 2010

Risk. Exposure. Liability. These are words that should be at the forefront of every conversation when a silent problem is identified ( a problem that has been avoided, neglected, gone unnoticed, or been intentionally silenced). The reason being, too often we underestimate the real impact a silent problem can have on an organization, and its share price. For instance, we need look no further than Bear Stearns, Lehman Brothers, Madoff, Toyota, and now BP. In each of these and 100s of other of instances, while the crisis on the surface appeared under control, in reality things were totally out of control. Such can be the impact of a silent problem.

 In a recent Reuters article titled Wall Street Said Buy, Buy, Buy BP Stock As Gulf Crisis Unfolded illustrates how analysts often underestimate the financial impact of disasters that eminate from silent problems. The story states:

As early word of BP’s Deepwater Horizon blowout began spreading, investors panicked. After closing above $60 before the April 20 disaster, the energy giant’s shares plunged almost 20 percent in New York, to below $50, in just two weeks.

It is not hard to understand why. Even then, the out-of-control oil spill in the midst of rich fishing grounds and nearby resort beaches raised the specter of horrific damages and untold potential liabilities.

Yet, nearly to a person, the dozens of securities analysts who followed the British oil giant were unfazed. As BP (BP.N: Quote, Profile, Research, Stock Buzz) (BP.L: Quote, Profile, Research, Stock Buzz) shares continued to drop, most were screaming the same message: buy, baby, buy.

Credit Suisse, which had a “buy” rating on the stock at the time, did not even mention the accident in an April 28 report. The firm upgraded earnings estimates after BP reported strong quarterly results the day before.

A day later, with BP’s shares then down 11 percent, Citigroup’s Mark Fletcher weighed in. He argued that the decline was “disproportionate to the likely costs to the company, even assuming damages can be claimed.” In the same report, he estimated BP’s total share of the cleanup at just $450 million — today, conservative guesses put the figure at $10 billion to $20 billion.

Around that time, Morgan Stanley was among the chorus citing the strong rebound of Exxon (XOM.N: Quote, Profile, Research, Stock Buzz) shares after the 1989 Valdez tanker spill in Prince William Sound, Alaska, as a reason to be bullish. “We think the sell-off presents an attractive buying opportunity for investors with medium-term investment horizons,” the firm wrote.

All told, 27 of 34 analysts tracked by Thomson Reuters rated the stock “buy” or “outperform” as recently as May 11. The other seven rated the shares “hold.” There was not a single rating of “sell” or “underperform” among those tracked.

The BP crisis is horriffic. It’s impact will be felt for years, and probably decades. And when we look at the evidence, it was a problem being intentionally silenced, and no one screamed Wolf!

Denial

Thursday, December 10th, 2009

Denial is a powerful word that connotates  a multitude of emotions. Its also a word that tends to get people and organizations into trouble. Unfortunately the transformation from Denial to Acceptance comes with much baggage, and commonly occurs too late. Too late to make a decision. Too late to pursue an alternative path. Too late to make an impact. Too late to survive its rath. Yes, denial too often becomes a, Too Little, Too Late” scenario. 

It’s no surprise that denial is at the heart of the Silent Problem phenomenon impacting many organizations today as I have written about repeatedly, which is why I found an article that delves into Denial over at Harvard Business, titled, Four Tools for Defeating Denial intriguing. Here are a couple of the excerpts.

Arrogance of power fuels denial. Executives flush with memories of past successes sometimes think that they are above the facts, that the facts don’t apply to them. Deniers prevent change when they give lip service to problems but reject solutions that would require sacrifice or wrenching turns… Deniers gain followers because the “no change; carry on as usual” message is comforting. Doing nothing different or nothing at all — is easy. Everyone has silent veto power. Deniers can simply sit on their hands, miss meetings, lose reports, or let timetables slip. Presto! No change.

Whatever a change agent’s cause — global warming, ending risky financial speculation, reforming pay to reward performance, corporate culture change, or innovation in an established institution — confronting denial is essential

Denial is simply stated, “Trust me, we don’t have a problem.” And without a problem, there is nothing to solve, nothing to discuss and no next steps. In effect, it has been silenced and that’s why its so dangerous! If you’re not looking, you will either adapt to the scenario (which makes the situation normal over time) or it will suddenly hit with great force, which I refer to as a Without Warning Event.  If you want to counter denial, you must follow these four steps (which are in my book Without Warning.

  1. Make the Problem Visible and Memorable: You must turn denial into a problem and then make it visible and memorable for everyone to see. Once this has occurred, its difficult to state that a problem doesn’t exist.
  2. Create a Sense of Urgency: Once the problem is visible, its important to create a sense of urgency. If you don’t, the problem can easily fall back into a state of denial. The easiest means to creating a sense of urgency is to ask this simple question. “What is the risk of doing nothing?” This question will get the problem on track.
  3. Allow Anger, Avoid Fear: If you attack denial, you may have many reasons to be angry, such as why didn’t we deal with this earlier. The challenge is to leverage anger for the positive (i.e. getting your team energized), but avoid fear, which can debilitate your team and your effort.
  4. Influence: When you attack denial, you’re ability to influence will be essential. It’s how you help make the problem visible, but also obtain the resources to get the problem solved.

Bottom Line: The premise of silent problems inside organizations and their impact on performance is gaining acceptance. How companies deal with denial is critically important to the future viability of every organization. Make it happen.

The Next Shoe to…

Monday, April 6th, 2009

Its been a year since BearStearns was brokered in a last minute deal. California institution IndyBank followed. Then Lehman Brothers, AIG, Washington Mutual and others. Today, the marketplace has stabilized and rebounnded off its lows. We’re out of the woods - Right?

Over the past week, its encouraging to see signs that things are improving, however I have to wonder if another shoe could fall.  If you’re reading this post, you likely know someone whose credit card limits have been lowered - substantially. In years past, credit cards were an efficient and effective source of capital and provided the necessary cash flow to start and grow a business. Its also been a source of capital for consumers in good times and bad. That source in many instances has dried up and no longer a credible source of money.

And this is where the next shoe comes into play. To regain its footing, the marketplace needs consistency and adequate financial resources.  Do we have this? There is an interesting article over at Forbes. Steve Forbes interviews Meredith Whitney, one of few that saw the mortgage exposure and resultant financial meltdown of a year ago.  Its well worth the read. She may very well be foretelling a Without Warning Event.  At least now, we should be aware of the potential for such an event.

Be the one to see it coming!

The first leadership book to point out the problem, then hand-deliver the solution.

Without Warning - Rondey Johnson

Learn More

Order Info