Leading is learning from the past
It is not just a matter of leadership to learn from the past. The experiences for better or for worse that we have had, whether as people, organizations or countries, end up being the best learning. The book “of life”, that experience that business leaders are supposed to face the changing challenges of the markets.
Hence, corporate finance chiefs can prepare for the worst of what is yet to come, on account of so much instability and uncertainty that we have been getting used to.
Past crises offer lessons on how to navigate chaotic times, from the recent turbulence of Covid-inflicted lockdowns on the world economy, to the accelerating impact of climate change, to the Ukraine War. It is clear that CFOs must deal with an increasingly wide range of unforeseen scenarios caused by factors beyond their control.
The invasion of Ukraine poses a specific challenge to the global economy that many European countries thought was beyond the limits of what is possible in the 21st century: a war on their own doorstep. Beyond the devastation experienced by the Ukrainians, this conflict has thrown the world economy into convulsion.
This is set against a backdrop of global inflation, which is at its highest levels in 40 years in the UK and US, and an energy system struggling to balance the imperatives of affordability, security and expansion of renewable energy to meet with climate change ambitions.
Lessons learned about the impact of war from past conflicts, through research by Imperial College London and the Stockholm School of Economics, which was conducted on the inventory purchases of 650 companies in Mozambique, a country where Political conflicts, instability and crime are common events and an obstacle for private companies.
Each company’s purchases of items for resale to customers were examined during a 22-month period of violent political conflict within a 10 km radius of their locations. And the conclusion was reached, that on average, those in areas with local violent conflict reduced inventory investment by as much as a fifth. This effect was even worse for smaller companies, which suffered the most damage and reduced investments by a third.
While some of the small businesses went out of business, for those that remained active, this problem persisted for almost two months. This shows that regular conflict could put companies in a constant state of underinvestment due to growing uncertainty and lack of demand for products and services.
Violent political conflict is just one more scenario that CFOs will need to consider in their financial forecasting and risk management. There is also overwhelming evidence of the effects of climate change and the need for urgent action by governments and companies.
In another recent study with researchers from Imperial College, Universidad Nova de Lisboa, and the University of Zurich, they investigated how rising global temperatures affect businesses in the United States, finding that a 1°C rise in Average daily temperatures were associated with a reduction in the company’s sales of around 2%, presenting long-term challenges to its operations.
The drop in revenue is mainly explained by lower labor productivity and ability to supply goods when temperatures are higher, as well as a limited ability to adapt to temperature changes when companies also face financial constraints.
What can CFOs learn from this research?
There are three key steps CFOs can take to reduce the impact of such external shocks. First, implementing a robust approach to planning, scenario analysis, and risk management is key. In the past, most financial managers planned for anticipated crises that were likely to affect their businesses, such as exposure to commodity prices or the supply of specific materials.
Today, CFOs must consider a much broader range of risks and outcomes stemming from local problems and global disasters like a pandemic. A decade ago, few companies would have been exposed to a cyber attack, the disruption of global supply chains, or an international energy emergency as a potential crisis for them, whereas now it is a grim reality for most companies.
Second, Western companies should learn the lessons from their counterparts in emerging economies, where managing turmoil, turbulence and volatility has long been an important part of business operations. In a world experiencing increased volatility, uncertainty, complexity and ambiguity, CFOs in the West have a lot to learn about adaptability, flexibility and how to deal with a crisis from companies in countries like Mozambique.
Managers in these countries had to learn how to quickly adapt their operations, management, and financial practices to deal with challenges as varied as violent political conflict, high inflation, or institutional vacuums.
Third, CFOs must commit to lifelong learning and development to ensure their strategies remain relevant to today’s business landscape.
A Swedish and Dutch study
A randomized study from the Stockholm School of Economics and the Rotterdam School of Management found that, in Mozambique, managers who received training in finance changed their practices as a result. They streamlined short-term financial planning, including working capital management, plausibly easing existing financial constraints, resulting in increased investment.
As the global economy continues to experience unforeseen challenges, CFOs will need to reexamine their financial strategies to help them withstand unexpected shocks and build greater resilience.
Leadership in times of crisis
Disasters can make or break a leader. In the age of COVID-19, some leaders have risen to the challenge: keeping their communities, employees, and students informed, pausing and restarting daily life, and managing the fallout from social and economic disruption.
Meanwhile, other leaders are floundering—miscommunicating, failing to provide reliable information, and failing to keep promises.
Although the pandemic differs from other crises in our lives, the research and experience of psychologists dedicated to the study of social and organizational psychology, who have already experimented with past crises, are professionals who can provide a good part of the answers that are needed. today. Scholars of crisis leadership never fail to take into account the opinions of these professionals, as well as the leadership experiences carried out by both business and political leaders, since in general, their work has shown that leaders who they communicate effectively and learn from their mistakes they are set up for success. Those who dissemble and dither can harm and alienate their constituents.
“What leaders need to realize is that when a crisis occurs, they can’t just rest on their laurels and think everything will go as normal,” says Ronald Riggio, PhD, professor of leadership and organizational psychology at Claremont McKenna College in California. “You need to train, prepare and execute.”
Perhaps the most essential element of crisis leadership is clear and reliable communication. Best practices for crisis communication, established through years of psychological and organizational research, include transparency, honesty, and empathy.
Good communication starts with understanding the questions your audience has, and then talking to experts and reviewing data to answer them accurately. Next, leaders need to develop and test the messages to make sure they don’t mislead people, says psychologist Baruch Fischhoff, PhD, a professor in the department of engineering and public policy at Carnegie Mellon University.
For example, California Governor Gavin Newsom has relied heavily on the expertise of physicians and public health professionals in crafting his messages to constituents, even featuring these experts during his press conferences.
Throughout the coronavirus crisis, leaders have had to deliver a lot of bad news: extensions of stay-at-home orders, large-scale furloughs and layoffs, illnesses and deaths. But leadership scholars agree that even in such dire circumstances, honesty is the best policy.
“Full transparency is essential,” says psychologist Jeremy Hunter, PhD, associate professor of practice and founding director of the Executive Mind Leadership Institute at Claremont Graduate University’s Drucker School of Management in California. “Leaders who withhold information essentially shoot themselves because that breeds mistrust and uncertainty.”
Research from the University of California
Research by Fischhoff and Roxane Cohen Silver, PhD, a professor in the department of psychological sciences at the University of California, Irvine, shows that the public prefers honest answers, even when the news is bad, and that it’s hard for leaders who lose confidence to regain it. And this position was held in the middle of the year 2020, just after the pandemic crisis unleashed, that is, when it had to be admitted that much was still unknown about the coronavirus at that time and how it was going to affect our lives in the following months and years.
“Minimizing the uncertainty of what we are going through is false,” Silver said at the time. “What we can do is recognize that uncertainty is associated with anxiety, so the anxiety that many people are feeling right now is an appropriate reaction.”
Finally, when communicating data to followers, leaders need to keep in mind that some people have trouble understanding numbers or performing mental calculations. That doesn’t mean leaders should avoid sharing numerical information, says Ellen Peters, PhD, a psychologist and director of the Center for Science Communication Research at the University of Oregon School of Journalism and Communication.
“Providing numbers corrects misperceptions,” she says. “People are much more likely to overestimate certain risks if you don’t give them numbers.”
Reduction of the cognitive effort of the audiences and/or people who listen to the leader
Leaders who share numerical information must do everything possible to reduce the cognitive effort required of their audiences. That means providing only the necessary information and doing the math ahead of time to make the data more relevant and digestible.
You can also include visual representations of numerical information and structured lists that describe what readers can expect in a longer written communication.
Preparation is key
Although crises are almost by definition unexpected, effective leaders can and should prepare for them, says Fischhoff. “You’ll often hear leaders say they didn’t have time to respond effectively in an emergency,” she says. “But if you didn’t have time, you didn’t do your job. Your job is to be ready, to know your audience, and to give them clear and accurate information about what’s going on.”
Crisis leadership training
Ideally, public officials and leaders of large organizations should complete crisis leadership training, which typically teaches leaders how to manage emotions, assemble emergency task forces, and maximize technology and communication channels. At a minimum, other leaders, such as small business owners, should have action plans for a variety of potential emergencies, including an economic crisis, a major lawsuit, or a natural disaster.
When a crisis arises, leaders must first focus on managing their internal experience before providing guidance to their teams and communities. Leaders must think of themselves as islands of coherence in a sea of chaos. Your ability to manage yourself through this process, to stand firm and clear in a completely disorienting situation, is really what will make or break you.
One way to do this is to manage your own attention, including by engaging with the media, as too little information will leave leaders uninformed; too much can be overwhelming.
Manage and understand emotions
But managing also involves tuning in to your own internal emotional responses and understanding how those responses can influence decision making.
What is happening in your body during a crisis? And how does that influence the way you make sense of a situation and make decisions about it? If you can’t consciously see that, then you have one arm tied behind your back in terms of your ability to think clearly about your options. If you are locked in fear, your ability to develop creative solutions is limited.
Lessons to take away
After a crisis, many experts recommend conducting an after action review (AAR), a structured report promoted by the United States Army that involves the analysis of an incident, the response and lessons learned. When it comes to leadership development, leaders tend to learn more from their mistakes than their successes.
An AAR should include steps to prevent a future crisis, but also strategies to respond in the unavoidable event that it occurs. This focused discussion should take place as soon as possible after a crisis and outline concrete guidelines to prevent or manage similar incidents in the future.
For example, the Federal Emergency Management Agency and several other organizations conducted AARs after Hurricanes Katrina, Rita, and Harvey to assess preparedness and response operations, recommending improvements in staffing, housing solutions, and other areas.
A crisis can shake leaders and their communities, but it can also present an opportunity for growth.
Crises are places where we find our greatness because they push us in ways that, in normal times, they don’t push us. We find strengths and abilities that are latent within us. As a leader, this type of crisis is an opportunity to find your greatness and activate it in others around you.
The opportunity that lies in every crisis
We have all heard that the Chinese use the same world to describe the concepts of crisis and opportunity. What they mean is that in every crisis there is an opportunity, depending on how you look at it. The word crisis comes from the Greek “separate, sift”, which means to pass judgment, to keep only what is worthwhile. There is an opportunity in every crisis and the deeper the crisis, the better the opportunity may be. But some people are not able to see it this way.
The gigantic Covid crisis seen by some as the “perfect storm” should at least help us to see better, to see more clearly; divert our gaze from our individual or national problems; have a global look; realizing that our local crises (for example, dangerously rising unemployment) cannot be fully understood if we do not place them in an international perspective.
When the International Financial Crisis of 2008-2009 began to cause tremendous injustices of economic inequality such as an awareness of the serious mistakes that due to lack of supervision and adequate controls in certain types of financial operations, it ended up causing an economic earthquake with consequences that could never have been imagined. in previous crises. Because this crisis affected everyone, both the most advanced societies of developed countries, as well as emerging, developing and underdeveloped countries. What the crisis did do is give us an intensive course of enlightenment. He exposed how the selfishness and greed of the rich produced this great financial crack. We can also see the speed with which global markets react to the panic of losing profits, but also the extraordinary generous measures of the world’s governments.
This crisis amazes us when we see how efficient the “global fear” of global bankruptcy is in mobilizing an enormous amount of resources and political efforts; there are so many millions (or billions?) mobilized, that we cannot help but compare them with the small amounts allocated to urgent policies, wherever they are, to fight against the poverty that threatens millions on the planet and achieve the humble Goals of the Millennium, which must be continually reviewed because they are never achieved.
Poverty also produces fear, global fear, but the poor are used to it; its crisis is the same as always, a “silent tsunami” to which we are accustomed. And solidarity reactions are excessively slow. What is certain, and if we are a little positive, is that these major crises allow us to open our eyes a little to make comparisons and realize the urgent need for more ethics and responsibility in the behavior of the world economy.
Crisis or opportunity?
The question makes more and more sense, since economic decline is a key element for social equity and ecological sustainability. Keep in mind that sustainable degrowth is defined as an equitable reduction in production and consumption that increases human well-being and improves ecological conditions locally and globally, in the short and long term.
The paradigmatic propositions of degrowth are that economic growth is not sustainable and that human progress without economic growth is possible. Degrowth advocates come from diverse backgrounds. Some are critical of the globalization of markets, new technologies or the imposition of Western development models on the rest of the world.
They all criticize GDP accounting, although they often propose different social and ecological indicators. Degrowth theorists and practitioners support an extension of human relations rather than market relations, call for a deepening of democracy, defend ecosystems, and propose a more equitable distribution of wealth.
We distinguish between depression, that is, unplanned decline within a growth regime, and sustainable decline, a voluntary, smooth, and equitable transition to a regime of lower production and consumption.
The question we ask ourselves is how positive degrowth would be if, instead of being imposed by an economic crisis, it were actually a democratic collective decision, a project with the ambition of approaching ecological sustainability and socio-environmental justice at the global level. world.
The economic growth paradigm has dominated politics and policy since 1945. Environmental concerns were introduced later, but always subordinated to growth objectives. Win-win expectations, sustainable growth through technological and efficiency improvements, have not been met. The current economic crisis opens up a social opportunity to ask fundamental questions. Managed well, this may be the best, possibly the last and only opportunity to change the economy and lifestyles in a way that will not lead societies to climate, biodiversity or social cliffs.
The idea of degrowth (décroissance in French) arises as a response to the triple environmental, social and economic crisis. Therefore, it has not come out of nowhere and the people who defend degrowth come from different philosophical horizons, movements and intellectual sources. The first of them is culturalist. It comes from anthropologists who criticize the idea that the countries of the South should follow the development model of the United States and Europe. It is a criticism of what could be called the irruption of the generalized market system, in terms of Karl Polanyi. The second source of degrowth is the search for democracy, the aspiration to determine our economic and social system, breaking the close link between the political system, the technological system, the education and information system, and temporary economic interests.
The third source is ecology, defending ecosystems and showing respect for living beings in all their dimensions. The fourth source is linked to what some authors call “the meaning of life” and the movements around it that emphasize spirituality, non-violence, art or voluntary simplicity. The last source can be called bioeconomics or ecological economics. It deals with constraints related to resource depletion and waste disposal.
So a degrowth is needed to avoid overloading the sink and source capacities. Pro-degrowth bioeconomists believe in more equity.