How CEOs are challenging boards on risk

Sep 19, 2019
How can boards adapt to new behavior and ways of thinking required of CEOs? Officials with Deloitte discuss

In the face of rapidly advancing technology, organizations are adapting to a never-ending cycle of pressures, each of which can disrupt a portion of the business system and often threaten the entire business model. As we have heard from dozens of CEOs we interviewed for a recent study, this relentlessly disruptive environment has demanded a shift in how they need to respond.

Our inquiry into disruption from the perspective of CEOs, and how they believe they should chart their strategy amid constant whitewater, involved intense discussions. The results are published in a report – Can CEOs be undisruptable? – in which we discuss how they might leverage their role to navigate and overcome this ‘new world disorder.’

What we heard from them is that the ‘undisruptable’ CEO now acknowledges the pressure to shift from chief protector to chief agitator. Traditionally, CEOs were seen as bringing consensus but increasingly they are seen as bringing tension into the company. This means more ambiguity within the organization and constant micro-revolutions to remain competitive.

Boards may not yet have come around to this mindset. How might CEOs’ attitudes that they must be undisruptable affect the board, and how can boards adapt to the new behavior and ways of thinking now believed to be required of CEOs?

At least from the CEO’s standpoint, a cultural evolution may be needed for the board to adapt and become more comfortable with behavior that may appear risky. We believe the responses required for these strong exogenous forces mean that boards may have to readjust their reflexive approach to risk mitigation if they want to support their CEO and the continued growth of the company. This likely requires quite an adjustment in mindset from overseeing only long-established risks to an expansion of that oversight to include strategic risk as well. And strategic risk, in light of the current atmosphere of continuous disruption, can take on a very different character.

Unquestionably, overseeing risk is a core board responsibility. But in the new business environment, the conception of risk has increasingly shifted from traditional risks – such as compliance and financial – to a much more subtle and profound risk: the danger of being rendered obsolete by disruption. This is what strategic risk is now addressing. Consequently, in the new climate, risk-mitigation requires – from the CEO and the entire corporate leadership team – proactive traits, an ‘exploratory’ mindset and behavior fundamentally different from that required during periods of greater stability.

CEOs with whom we spoke say they believe they are required to engage in behavior that might have once been considered risky. In response, they will increasingly seek to have their board develop the same undistruptable mindset so as to reduce the likelihood of strategic obsolescence. In other words, one conclusion we have drawn from CEOs is that the more disruptive our environments become, the more CEOs will need to reconsider the company’s appetite for risk, and will need the oversight of the board to adapt and understand in ways parallel to those of its CEO.

This by no means suggests that boards should adopt a laxer attitude toward risk. On the contrary, it suggests an expanded role boards need to play as they carry out their risk oversight responsibilities. We have learned through our research and discussions with CEOs that boards need to be satisfied that the CEO and the C-suite adequately embrace experimental behavior that, in the short term, may result in episodic cycles of ‘fail fast, fail often, risk more, risk often’. In the long term, this can create a vital culture and provide an effective platform for business model innovation.

CEOs we interviewed suggest that rather than lowering the bar on risk, boards now base their oversight on an enhanced characterization of risk, one that encompasses both execution/compliance risk and strategic risk. This creates tension between a ‘risk more, risk often’ mindset and the shareholder value the board is safeguarding. Boards are recognizing that their CEO’s amplified yet focused attitude toward risk is part of a greater strategy for long-term undisruptability.

Rather than relying solely on finding CEOs leading undisrupted organizations, we interviewed CEOs from diverse industries and of relatively equal size and complexity to Fortune 250 organizations. These leaders embody attributes of high competence and adaptability to disruption. In these conversations, we inquired as to the mental models and the strategic levers they use to face disruption. In order to ensure consistency, we suggested a precise definition of disruption to them, but they all insisted on discussing it as a more general proxy for rapid yet progressive business model obsolescence.

Our analysis yields five attributes to which CEOs aspire in order to become undisruptable. If the desire for risk is low, or the CEO has difficulty managing – and the board has difficulty navigating – the inherent tensions that accompany uncertainty and ambiguity, then the effectiveness of responses to disruption are typically severely compromised.

Although intended to address strategic risk, each of these attributes introduces execution and/or compliance risk, though at a different order of magnitude. Some require initiatives that are encumbered by clear risk. Others may only indirectly pose a significant concern to board members.

EMBRACING AMBIDEXTERITY
One of the five attributes is embracing ambidexterity. This means relentlessly and simultaneously engaging in decisions and actions to optimize (pursue efficiency plays) and explore (take the risk to introduce initiatives that could achieve greater market share and ultimately lead to reinvention and new business models).

Savvy business leaders keep an eye on both cost-saving and profit-enhancing strategies while engaging in innovative, pie-in-the-sky R&D thinking and testing. Juggling both with equanimity is a feat for both the CEO and the board. The tension inherent in ambidexterity is driven in part by external stakeholders that want short-term yields yet expect CEOs to work for the long term. Ambidexterity is a key factor in expanding the definition of risk that CEOs, C-suites and boards need to use.

In our CEOs’ definition of traditional risk, many boards may find relatively little to be concerned about in achieving optimization and might find the newer focus on strategic risk to be a source of anxiety. The CEOs say that if the board accepts this new approach, and evolves to a newer understanding of risk mitigation, it might more easily recognize the peril stemming from allowing the management to be asleep at the wheel and in effect, passively overseeing the company’s demise.

CULTIVATING EMOTIONAL FORTITUDE
A second element of undisruptability reflects another fundamental tension that today’s leaders face. In our research, CEOs talk about the importance of acknowledging the real fear of a rapidly changing landscape but learning how to use that fear as fuel to generate more productive outcomes. They talk about the need to place big, well-thought-through bets with minimal trepidation and discuss ways they would strive to pursue these bets with passion and intensity, even if they resulted in flops along the way.

Ultimately, the CEOs with whom we spoke indicate that emotional fortitude, or grounded audacity, may very well be a core ingredient of undisruptability and the innovation mindset. They have learned to lead in a chaotic world in part by bringing chaos into the organization and understanding fully that failure, though never desirable, is inevitable and cannot affect the confidence and passion for innovation of the CEO and his/her leadership team.

The CEOs we interviewed believe board members can intellectually accept these concepts. Boards are aware that their role is defined, in part, to oversee the level of risk a CEO may desire to assume.

Simultaneously, most boards now acknowledge that a higher level of risk may be a necessary ingredient in protecting against disruption. This can result in what we call the ‘knowing-doing’ gap. This anxiety-producing moment surfaces when the time arrives to approve and operationalize a risky action. Boards know, intellectually, the higher-level risk may be necessary, but when the discussion or vote leads to action, to do it, the discomfort can be palpable.

Traditionally, boards have been focused on creating order out of chaos, minimizing tensions from ambiguity, stewarding a culture where clarity is embraced, and striving for zero innovation failures. Given the new undisruptable mindset, however, many directors could see the need for boards to strike a new balance between supporting and rewarding CEO risk-taking while discouraging recklessness.

BEGINNER’S MINDSET
The Zen Buddhist concept of ‘beginner’s mind’ captures the ways our CEO respondents aspire to see the world: from the perspective of those who can find moments to switch off their vast experience and knowledge to perhaps continuously see it from fresh perspectives. This is a marked departure from what boards have traditionally expected of CEOs: that they always have answers to the challenges the organization faces.

Having a beginner’s mind means the individual with the most insight into sources of, or solutions to, disruption is the one who is willing to recognize that he/she may not have the most relevant expertise.

A well-documented example of the importance of beginner’s mindset, Salesforce.com CEO Marc Benioff continually reminds his employees to stay nimble and keep questioning the state of affairs. Part of Salesforce.com’s original vision was to disrupt traditional enterprise software by replacing on-premise solutions with only those residing in the cloud. That same drive to perpetually disrupt itself pervades the company, but now it must get 31,000 people to move like a start-up.

Benioff takes time off alone annually to consider profoundly new ideas, none of them based merely on iterative refinements of current products or elements of the company’s ecosystem or organizational strengths. It may be said that the ultimate act of undisruptability is to become a disruptor yourself. Benioff knows this. He imagines disruptive ideas from whole cloth, many without organizational precedent.

As with the other attributes, CEOs would like their board to mirror the attributes of undisruptability while guarding against irrational and excessive strategic risk.

IS RISK TAKING NECESSARY TO MITIGATE RISK?
How can a board member know if this somewhat counterintuitive, risky behavior is something to support or to oppose? A CEO facing disruption might say, ‘There’s a probability this might not work, but if we don’t do it, we are going to lose a strategic part of our business. I’m going to show you why, to get to that next level, we have to try this.’

In contrast, if the initiative appears to be more of a Hail Mary pass, the board might want to balance the risk of failure of the individual initiative against the strategic value of experimentation. Ultimately, is the chance being taken consistent with the company’s risk appetite?

Board members may also want to observe the CEO through the lens of a series of risks that did not work out. The litmus test is whether the CEO learned from previous failures and can communicate that. If the CEO gives latitude to direct reports to take risks and they fail, the CEO’s expectation needs to be: show me what you’ve learned.

This is a subtle shift toward strategy and away from a focus on failing, while placing a high expectation on learning. By setting expectations that emphasize discovery through risk taking, CEOs interviewed who aspire to become undisruptable could seek to have their board become more aligned on what may be a new risk profile.

Benjamin Finzi is a managing director and co-leads Deloitte’s chief executive program. Robert Lamm is an independent senior adviser to Deloitte’s Center for Board Effectiveness. Mark Lipton is graduate professor of management at The New School in New York City and a contributor to Deloitte’s chief executive program. Debbie McCormack is a managing director of Deloitte’s Center for Board Effectiveness.

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