Why Managing Risks Means Managing Arguments

Here is an excerpt from an article written by Justin Fox for the Harvard Business Review blog. To read the complete article, check out the wealth of free resources, and sign up for a subscription to HBR email alerts, please click here.

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So it was Lyme disease that did it! The tick-borne illness kept JPMorgan Chase’s Ina Drew out of the office for extended periods in 2010 and 2011. And it was during Drew’s absences, according to a richly detailed account in The New York Times, that the bank’s chief investment office, which she ran, began to get into trouble:

The morning conference calls Ms. Drew had presided over devolved into shouting matches between her deputies in New York and London, the traders said. That discord in 2010 and 2011 contributed to the chief investment office’s losing trades in 2012, the current and former bankers said.

Whether this really was the main reason for JP Morgan’s $3 billion (and growing) trading loss or not, it does at least sound like it could be true. Managing risks — especially the hard-to-pin-down, moving-target risks that any financial trading operation has to cope with — inevitably involves arguing. Which is why managing those arguments, as Ina Drew appears to have done brilliantly during the financial crisis but wasn’t around to do for the past couple of years, is so important.

The words “risk management” usually evokes less subjective, more data-driven pursuits. But data and objectivity can only get you so far. Philosopher Karl Popper famously proposed that to be scientific, a theory had to be falsifiable: that is, it had to make predictions that could be tested and possibly shown to be wrong. Popper spent a lot of time thinking about this definition of science and the burgeoning science of probablility, which he called propensity. (This summary is from Wittgenstein’s Poker, a book I’ve been reading):

As far as falsification is concerned, he thought that statements involving stable propensities — such as, ‘The die has a one in six chance of landing on six’ — could be tested by looking at what happens in the long run. But isolated statements of propensity — such as ‘There is a propensity of 1/100 that there will be a nuclear holocaust before the year 2050′ may resist testing, and to that extent exclude themselves from science.

Routine risks like worker safety and even some day-to-day trading hazards can thus be managed successfully with a mechanistic, scientific approach. But the kind of big-picture bets that JP Morgan’s chief investment office made could never be tested, or managed, in that way. Decisions either worked out or they didn’t; given the small sample size it was impossible to test what the true probabilities were.

To navigate such unquantifiable hazards, then, you need to make judgment calls. And that’s where argument (or discussion, or conversation, if you prefer) comes in. You want diverse, even opposing viewpoints. You want to manage their interactions in a way that allows the quieter, less-senior, less-predictable voices to be heard. You probably do want to accord different weights to the arguments of different people, although deciding how to do so (past track record? clarity of argument?) is hard.

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To read the complete article, please click here.

Justin Fox is editorial director of the Harvard Business Review Group and author of The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street.

What Not to Spend Your Time On

Bob Pozen

Here is an excerpt from an interview of Bob Pozen by Justin Fox for the Harvard Business Review blog. To read the complete article, check out other articles and resources, and/or sign up for a free subscription to Harvard Business Review’s Daily Alerts, please click here.

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This is a fourth in a series of conversations on personal productivity between Bob Pozen, chairman emeritus of MFS Investment Management and senior lecturer at Harvard Business School, and Justin Fox, editorial director of the Harvard Business Review Group. Pozen is a lawyer, and he started out in a legal career: law professor at Georgetown and NYU, associate general counsel at the SEC, partner at a D.C. law firm, general counsel at Fidelity Investments. Then, in 1997, Fidelity chairman Edward C. Johnson put Pozen in charge of Fidelity’s giant mutual fund arm, Fidelity Management & Research Co. Since then, Pozen has developed some pretty clear ideas about how top executives should do their jobs.

Justin Fox

Fox: How do you decide what to spend your time on when you’re the boss?

Pozen: Top executives usually say they set their priorities and then figure out how to implement them. But in this process many executives make a critical mistake. I’ve noticed this when I’ve mentored new CEOs. They say, “Here are the top five priorities for the company. Who would be the best at carrying out each priority?” Then they come up with themselves as the answer in all five areas. It might be the correct answer, but it’s the wrong question.

The question is not who’s best at performing high-priority functions, but which things can you and only you as the CEO get done? If you don’t ask yourself that question, your time allocations are bound to be wrong. Lots of CEOs who have been great number twos flounder as number one because they are implicitly asking the wrong question. That happens because they usually rose to CEO by being very good at getting things done themselves.

I try to focus on the things that I and only I can do. Those may include meeting with high-level regulators, or visiting with key clients. This may mean giving speeches to certain audiences or recruiting senior executives. But you really have to hold yourself back from taking on other functions or tasks even if you might excel at performing them.

For example, when MFS CEO Rob Manning recruited me to join the firm as Chairman in 2004, we explicitly divided the high-priority functions. Although I had run the investment management group at Fidelity, Rob is a talented investment guy and natural leader and wanted to take charge of the investment group. He and I agreed that I wouldn’t run the group, and that I wouldn’t even show up on the investment floors. This agreement was necessary to avoid confusion about who was heading investments. Similarly, when there were very important meetings with regulators, Rob didn’t attend.

Fox: What about those of us who aren’t CEOs?

Pozen: The key, I’ve found, is to become messianic about the principle that everybody owns their own space. This is the human resources analogy to bottom-up investing.

Under this approach, every employee is viewed as the owner of a small business — his or her division, or subdivision or working group; the performance of this unit is his or her responsibility. As the boss, my role is to provide my reports with resources, give them guidance and help them do battle with other people in the broader organization. But they own their own unit.

I can’t emphasize this principle enough because at every level, employees need to feel they’re in charge. An effective leader not only has to set priorities but also has to mobilize the organization to implement them. But this will happen only if the employees have a true sense of owning these functions in the broadest sense. I’ve seen quite a few organizations where employees say, “I didn’t do X because it wasn’t within my job description, or no one told me to do it.” These are flagrant violations of the ownership principle.

Fox: So how do you instill this ownership principle?

Pozen: You don’t describe in detail the tasks that employees should be doing. Instead, you present a general set of priorities for the upcoming year, and let your employees formulate the specific ways to implement them. You also ask: “What are the metrics by which I should judge your success?”

When I became president of Fidelity Management & Research, we faced a major challenge because the fund business had grown so rapidly. So we created lots of small units within the company to provide many employees with the opportunity to “own” their unit. While we recognized that creating so many units would bring coordination challenges, it was worth the price to give portfolio managers more say over the activities of their own investment groups.