Risk Governance and the Politics of Rage

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At a time of discord, the world came together in celebration on 11 November 2018, which marked the 100th anniversary of the World War I Armistice.

In commemoration, President Macron convened the Paris Peace Forum to showcase ‘governance solutions’ presented by project leaders from all walks of civil society — to include private business. “Peace is linked with global governance,” Forum organizers contend, with reference to corporate governance as well as the civic sort.

It may be unusual for those with corporate or risk governance responsibilities to view their work in terms of War and Peace. They should. As the world lurched towards war in 1914, economic tensions played significant role. Business is the engine of prosperity. When businesses stumble and economies wobble, discord swiftly leads to conflict. It is a good time to take in the lessons of history.

Chief among such lessons is the importance of trust. The human race is successful because of a carefully-cultivated ability to cooperate with strangers, at scale, as a presumed norm. Our institutions — government, the media, the financial system, etc. — create the pre-conditions necessary to the broad extension of trust by establishing a ‘trust infrastructure’ that enables collective action around shared challenges for mutual benefit. The result is widespread prosperity. Where such a trust infrastructure is lacking or impaired, prosperity wanes.

If we accept this, then we should be deeply worried by findings that reveal trust in our core institutions have cratered. Reasons for this are many, but we would submit that a decline in successful risk governance is a critical factor.

When ‘the elites’ running our institutions — and private businesses — are repeatedly seen to place their own interests before those of the people they are meant to serve, our shared trust infrastructure erodes and that faith in ‘the system’ is lost. A sense of betrayal then fuels a Politics of Rage.

The faith of regulators, investors, employees, and customers collectively constitute the four pillars that support successful businesses and economies. When this faith is lost, the four pillars instead resemble the Horsemen of the Apocalypse.

Pestilence: It is ironic that many in business view regulation as a pest: after all, businesses that enjoy regulatory approval benefit by a powerful barrier to entry for would-be competitors. With regulators making misconduct risk a priority, it’s clear that firms showing a greater commitment to managing such risks will benefit by less ‘pestilent’ regulatory attention.

Famine: As Larry Fink warned CEOs in his portfolio last year, firms that fail to produce socially good outcomes may lose a ‘social license’ to exist. Businesses that fail to establish effective risk governance may be penalized by investors, and those that lose investor appeal will be starved of capital.

War: Competitive business struggles are often described in terms of warfare. Today that metaphor extends to cover internal threats from a firm’s employees, who represent a ‘strategic vulnerability’ even as they remain one of a company’s chief sources of competitive advantage; e.g., consider how Facebook’s employees have kept the company in a negative light the news through complaints of perceived political bias, management infighting, and cultural conflicts. Facebook is not alone.

Death: Monitored from above by regulators and investors, and judged by employees from within, firms face equally intense scrutiny from customers below. Consumers today look to company leaders to take a stand on political and social issues. Doing so successfully can become a source of brand advantage. Failure exposes the firm to customer backlash and can spell its undoing.

War and peace are intimately tied to the ability of economies to provide a path to prosperity. This extends beyond the political realm: it is business that creates the conditions for wealth creation.

Like our public institutions, private companies must work to create a trust infrastructure that allows for broad social cooperation. To do so, they must themselves be trustworthy, guided by trustworthy leaders, directing trustworthy staffs. Business is at the front-line in the struggle for restored public faith in our institutions, and those in risk governance roles are at the vanguard. They must conscientiously champion the cause. As President Macron urges, “Let us never be sleepwalkers in our world, let us always be vigilant.”

Views expressed in this publication are the author’s and do not necessarily reflect the views of the Paris Peace Forum.

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Karen S. Cook is Professor of Sociology and Director of the Institute for Research in the Social Sciences at Stanford. She conducts research on social networks, social exchange, and trust and has edited several books on these topics, including Trust in Society (2001), Trust and Distrust in Organizations: Emerging Perspectives (2004), and Whom Can You Trust? (2009). Prof. Cook serves on the academic advisory board at Starling.

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Stephen Scott is the founder and CEO of Starling and a recognized leader in the RegTech space. Over a previous 25-year career, Mr. Scott specialized in risk management and investigative intelligence, working with: corporate boards and officers; legal counsel, governance, risk & compliance professionals; investment firms; and government officials. He has led successful client matters in over 50 countries and he has lived and worked in New York, Washington, London, Frankfurt, Madrid, and Shanghai.

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Better #governance for a world at peace. Visit: www.parispeaceforum.org

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