I do not want to foresee the future. I am concerned with taking care of the present. God has given me no control over the moment following.
—Mahatma Gandhi
Leaders often face a dilemma: How can they be responsible for things that are beyond their direct control and outcomes that may not be entirely predictable in uncertain times? The simple truth is that they can’t. But despite that fact, many leaders feel responsible anyway and make every effort to control the uncontrollable and try to create certainty out of uncertain situations. I believe this is a mistake. As leaders, we must first take responsibility for those areas we can control and then prepare for uncertainty while recognizing its inherent unpredictability.
Risk and uncertainty are natural parts of any business. However, leaders should focus time, resources, and attention on the things that they can affect and control, not the things they can’t. While you must be prepared for the uncertainties you can’t control—with a plan in place if they come to pass—you can’t dwell on them. Put the bulk of your energy into the things you can control and leverage for the benefit of your business.
Some of you may wonder, “What’s the big deal here? As leaders, of course we should control our areas of responsibility and be prepared for surprises.” I agree that even in the best of times, these are basic tenets of a good leader. However, there are different aspects of control and uncertainty that may catch you off-guard when times become more difficult and you find yourself in the fog of rapid change in your markets. It’s important to understand the human element associated with each of these factors and how they can affect your business.
In any business, one of the most important areas of concern is risk. In fact, many large businesses have entire departments dedicated to risk management. Risk comes in many different forms, some small and others significant to the future of a business. One thing is certain: it all must be managed. Otherwise you could be building a foundation for trouble that will haunt you in future years.
Let’s again consider the example of Umpqua Bank. As a financial institution, our primary function is to manage risk. It’s what banks do day in and day out, and our risks come from almost every area of our business. For example, we loan money, obviously a risky business. We try to mitigate that risk by requiring loan applicants to provide us with information about their creditworthiness and ability to pay back the loan. We also build loan portfolios where concentrations in a particular class of loan could place the company at more risk then we should tolerate.
Think back to 2008 when the housing bubble truly popped. If a bank had too much of its total loan portfolio in residential or home construction, it faced serious issues as the borrowers defaulted and the loans quickly went bad. Some banks managed this risk element poorly and subsequently failed. They thought that this area of originating loans was profitable (and it most definitely was before the housing bubble burst) and that the housing market would never crash (it had been on a steep upward swing for a number of years after all), so why wouldn’t they continue to make these types of loans? As we learned, history is not a reliable predictor of the future.
In addition, many of these banks got caught up in the euphoria of the times and failed to prepare for the uncertain possibility that the real estate market could very well take a dive. Some stuck their heads in the sand and embraced denial. Many of these banks now no longer exist. Consider Lehman Brothers, which in 2007 had peak revenues of $59 billion and in 2008 ranked number thirty-seven in the Fortune 500 before it went bankrupt that same year. What happened to this venerable Wall Street investment bank, founded in 1850? During the height of the housing bubble that peaked in 2007, Lehman Brothers borrowed heavily to purchase subprime mortgage-backed securities and real estate, eventually reaching a leverage ratio of at minimum 31:1. That is, for every dollar in equity that Lehman brothers owned by way of these securities, the company was in debt to the tune of thirty-one dollars. (A federal bankruptcy court-sponsored report later put this ratio at closer to 44:11.)
This house of cards came crashing down when the housing bubble burst and Lehman Brothers’ losses quickly grew and became unsustainable. The company announced that it would seek Chapter 11 bankruptcy protection on September 15, 2008.2 Lehman Brothers was eventually liquidated, with its various businesses sold off to a variety of different financial services firms.
However, many other institutions did a great job of managing the risk in their loan portfolios, faced the music on losses, ensured they were capital healthy, and came through this difficult period stronger than when they entered it. They are now the winners.
Every kind of business has similar issues as it relates to managing risk. Think about the retail store manager who’s responsible for preparing orders for the Christmas holidays. His job (among many others, to be certain) is to make sure the store has enough of the right kind of inventory on hand to meet customers’ shopping needs. Ordering too little or too much can have profoundly negative consequences on the business’s cash flow, sales revenues, staffing, reputation, and much more. The permanency of this manager’s job may very well depend on how accurate he is in making his forecasts of consumer behavior.
The moral of the story is that every company has risk that the management teams of all companies have to manage every day.
As the CEO of my company, I expect my direct reports to stay on top of all the issues, goals, and opportunities that they have control over. I often tell my associates that it’s appropriate to worry about those things that they can change and control. I believe this is that the issues they face should be well in hand and controllable while they steer their divisions to meet goals, resolve problems, or take advantage of opportunities. I also let them know that it’s not productive for them to worry about those things over which they have no control. For the most part, uncertainty is uncontrollable; however, you can and should be prepared for any number of possible outcomes.
Business owners or executives who have goals they’re expected to achieve are going to move heaven and earth to be successful and produce results. However, worrying about uncertain events that may or may not occur can bog them down and cause them to second-guess, hesitate, or wait before acting. Acts of God like floods, earthquakes, and getting hit by a meteorite are clearly obvious uncertainties that could conceivably happen and harm the status of your business.
To me it’s detrimental to worry about these possibilities. And yet in the same breath, I will tell you that you should do your best to prepare for them. Do you have the right insurance? Can you back up your computer system quickly? Do you have a disaster recovery plan in place that all employees are aware of and knowledgeable about? So I think you worry about the things you can control and prepare for the things that you don’t have control over or have uncertainty about.
The overriding idea is that I’m going to be very focused on those things that I can affect. I will always have specific answers to what we’re going to do to achieve our goals. However, I’m not going to worry about what happens if an earthquake rocks Portland and blows the hell out of everything! While we need to be prepared for that (we are, after all, located less than fifty miles to the west of Mount Hood, an 11,240-foot-tall volcano that’s one of the most recently active in the Cascade Volcanic Arc, where the Juan de Fuca plate subducts under the North American tectonic plate, creating volcanic activity in the area), I can’t worry about it because it could happen at any time.3 But we do need to prepare for such an event and be ready for it.
There are other kinds of uncertainties that we also need to anticipate and prepare for. I wonder how many business owners have seen a big-box competitor indicate it’s making plans to open a new superstore across the street from them, and wonder, Now what do we do?
Why haven’t they thought about this possibility before, and why aren’t they already prepared to minimize damage to their business in the best way they can? Being proactive with uncertainties is a good exercise, and I highly recommend it. I realize it’s impossible to prepare for every possible unknown, but you should prepare for at least the five or six things that could have the greatest impact on your business.
At Umpqua we’re large enough to have an enterprise risk department within our company that constantly keeps me and others advised of the level of risk that we have in the different areas of our business. They produce a document every month that details the likelihood of a risk occurring and the impact it would have on our business. We also have ways to measure the level of risk to determine if the risk identified is within our area of comfort. If it is trending into the danger zone, we are warned so we can take whatever action is necessary to prevent, minimize, or correct the deficiency.
Few small businesses, however, have enterprise risk management departments that can keep them out of trouble in the same way ours does. The enterprise risk manager in these companies is instead going to be the business owner or one of its executives or managers. These leaders should anticipate and be prepared for a variety of challenging situations in their businesses and their communities, industries, and markets. And there are people who can help prepare for these uncertainties—from insurance companies, to Certified Public Accountants, to attorneys, and many others. There are plenty of resources that they can use to make sure that they’ve got the big risks pretty well nailed down. One great resource for small business is to develop an advisory board of directors. Recruit four to six professionals who agree to meet quarterly to discuss your business and your market to help you stay in touch with the competitive landscape and get objective and honest advice about your company and its prospects going forward.
In business, I believe we all understand that we will be held accountable for achieving our goals. It makes little difference if you’re part of a large organization or a sole proprietor. We all still have accountability to someone.
When I interview people to join our company in a leadership role, I always try to ascertain whether this person can take control of this department or division, motivate and inspire his or her people, and communicate effectively on progress made before I make the hiring decision. This is also the case with people who currently work for and with me. I am constantly observing and reevaluating their ability to stay in control of their areas of responsibility.
I also believe in giving people the benefit of the doubt. If they have personal confidence in their ability and the respect of their people, and if I know firsthand that they have worked diligently toward achieving their goals, I support them 100 percent, without question. The leader who’s making daily progress toward achieving his or her controllable goals will usually be able to anticipate the uncertainties that could derail his or her best efforts and intentions.
One more comment on uncertainties. Most of the time when we think of something happening that would be out of our control, we tend to think of it as having a negative impact on our company or goals. Again, this goes back to our programming. In reality, some uncertainties can be positive and fulfilling. How about the woman who won the lottery? That would be fulfilling and certainly unexpected. In business it could be something as simple as a large sales order coming in unexpectedly or a technological advance in another industry that sparks a new idea and opportunity for your company.
Yes, there’s no doubt that many uncertainties can bring challenges for your business, but let’s not forget that there are plenty of other unexpected events that provide wind for our sails. We should always try to be prepared for and ready to leverage these as well.
For the most part, the decisions leaders encounter in business are black or white; in other words, the answer is clear: make it and move on. Should we hire more associates to staff a store that has recently had several retirements? Yes, because if we don’t, we won’t be able to maintain a stable work schedule, which would potentially have a negative impact on the satisfaction of both our customers and our remaining associates. Should we invest more money in television advertising? No, at least not until someone can show us a direct correlation between running a television ad and an increase in new accounts in the target market.
I believe that making decisions like these is for the most part easy and a matter of course for most leaders. What’s difficult is getting the correct information and intelligence so you can make a rational and well-informed decision. I also believe that if you’re not careful, the law of diminishing returns can set in during the course of the decision-making process. Some people want to have an extremely high probability of success before they decide to act—well over 50 percent. So they wait. And they wait. And then they wait some more. Most of the time, the new information they receive while they’re waiting adds nothing to their final decision. Yes, I realize that there are exceptions to this general statement, but in my experience it’s not very often.
For some reason, most people seem to be conditioned to believe that fifty-fifty odds are not very good. In reality, I think fifty-fifty odds are great. If you were a baseball player batting .500, that is, you got on first base one out of every two times you were at bat, you’d be a hero. As a leader, you have to recalibrate your expectations.
An executive might tell me, “Ray, we have better than a fifty-fifty chance of success if we decide now. However, if we wait two more weeks and get this done when things are a little bit more in our favor, I’ll feel more confident in our success.” When that happens, I’ll look at this person and say, “Are you kidding me? Your chances are that good? What are you waiting for?” Better than fifty-fifty odds are great, depending on the decision, of course. I say this because as a leader, I have confidence in this person’s ability to add another 10 or 15 percent in his or her favor just by getting involved. So get all the critical information you can, but be aware that it’s too easy to get bogged down in minutiae and information overload in making decisions. Timely decision making is critical to making progress in the areas you control.
There’s another color that can insert itself every so often in the decision-making process: gray. Depending on the complexity of your business or how high you are in the food chain, more decisions can turn gray instead of a simple black or white. These are the decisions that need to be made that don’t have a clear answer, or there’s more at risk that the decision maker needs to think about before taking the next steps. The gray decisions are the ones that confound decision makers the most. Too often, we stew and worry so much about making the correct decision that we paralyze ourselves and our company.
When I see this happening with the people who report to me, I’ll say, “Why are you torturing yourself over this? Why don’t you just decide? You’re going to feel great about it once it’s over and you move on.” Of course, it’s easier said than done, but some people like to tie themselves up in knots unnecessarily to get to a decision they knew they were going to make anyway. Why get all worked up over this?
Common sense says that you’re going to look at the data. You’re going to ask people to share information, perspectives, and recommendations with you. You’re going to evaluate your own intuition about what you think of these inputs from your people (more on intuition in Chapter 5). What about the person who is in front of you and asking for your decision? What confidence level does he have? People who have confidence in their own skills and abilities and can communicate that to their leader make that leader’s job a lot easier when it comes to making decisions that aren’t always black and white.
At Umpqua Bank, one of our goals is to grow. This means that we want to see our people making progress toward their goals every day. But sometimes people working for me worry too much that their growth number for a particular period will fall short despite their best efforts.
I do like the fact that they’re concerned about missing their goals and I like it that they hate to lose, a trait I love in a leader. The people who work directly for me put enough pressure on themselves that it’s impossible for me to add any more (well, maybe sometimes). As I said, I like working with and dealing with people who want to win.
But at the same time I think most leaders would say that it’s the top executive’s or business owner’s job to make sure an organization’s people keep things in perspective. If an associate who has worked hard and in whom you have full confidence falls short on growth goals for the period, that shouldn’t be the end of the world. I want my top executives to work hard and meet or exceed expectations. However, from time to time I also tell them (without letting them off the hook) that putting too much pressure on themselves can be dangerous to them and to others. I’ll say, “Let’s keep this in perspective—and remember it’s just a number.”
Years ago, Jean-François Manzoni and Jean-Louis Barsoux described something they called the “set-up-to-fail syndrome.” According to the authors, when employees fail, their bosses rarely blame themselves for this failure. Perhaps the employee who failed isn’t very smart, or maybe isn’t motivated to succeed, or can’t set priorities, or just doesn’t “get it.” And while Manzoni and Barsoux concede that there are indeed situations when the reason for failure can be laid squarely at the feet of the employee, in the majority of cases, “an employee’s poor performance can be blamed largely on his boss.”4 The manager behavior that leads to this outcome may be accidental, and it may occur with the best intentions, but the results are the same nonetheless: an employee who’s been set up by his or her boss to fail.
The mechanism of Manzoni and Barsoux’s syndrome works roughly like this. The employee misses a goal, and the boss starts worrying that the employee may not be up to the task. As a result of this worry, the boss focuses more attention on the errant employee, beginning a cycle of micromanagement intended to boost the employee’s performance. Instead, the employee interprets this added attention on the part of the boss as a loss of trust and confidence in the employee’s capabilities, which causes the employee to withdraw. The more the employee withdraws, the greater attention the boss devotes to the employee, increasing the employee’s perception that he or she is not trusted to do a good job. The eventual result is an employee who’s paralyzed into a state of inaction, afraid to do anything that might attract further attention from the boss. In the worst case, the employee may quit or be fired.
A good leader knows when to take pressure off their team. If you push too hard for too long, you can create serious morale problems in your organization and burn out your team members, with the result that you could lose good people. You need to know when to push, but you also need to know when to loosen up a little bit. If you’ve set a deadline of two weeks to get a report done and your employee tells you it’s going to be a week late—and I know that she’s working hard on it—I’ll say, “I know if you jam this out in the next week, the risk of failure goes up a lot. I want you to take your time and do it right. If it’s going to be a week late, no, I don’t like it, but I’m giving you the extra week to get it done because I want success. I don’t want failure.”
I can deal with timing. If someone is dragging their feet, that’s one thing, but around my company they can’t slow down because the velocity of our company (if there were such a thing) would expose them. This goes back to the numbers, the goals, and anxiety. Anxiety is highly contagious in an organization because when you’re anxious, you’re irritable, testy, and on edge, and you’re at risk of making decisions that you might regret later. People need to know they have time to perform and make decisions confidently, and leaders need to give their people the space to succeed without constantly looking over their shoulders and worrying about whether their boss is keeping a close eye on them.
Worry only about those things you can control while preparing for uncertainty—always. For those areas you can control, make sure you’re giving your people the latitude to make timely and informed decisions advancing you toward your goals. People also need to be reminded every so often that with empowerment comes accountability.
Notes
1. Douglas A. McIntyre, Ashley C. Allen, Samuel Weigley, and Michael B. Sauter, “The Worst Business Decisions of All Time,” Free Republic, October 17, 2012, http://www.freerepublic.com/focus/f-chat/2946112/posts.
2. Sam Mamudi, “Lehman Folds with Record $613 Billion Debt,” MarketWatch, September 15, 2008. http://www.marketwatch.com/story/lehman-folds-with-record-613-billion-debt.
3. Erik Klemetti, “Volcano Profile: Mt. Hood,” April 24, 2009, http://scienceblogs.com/eruptions/2009/04/24/volcano-profile-mt-hood/.
4. Jean-François Manzoni and Jean-Louis Barsoux, “The Set-Up-to-Fail Syndrome,” Harvard Business Review (March 1998), 101–113.