July 2021 Risk Management Business Risks

52 Risks® Update (June 2021): Vale Edward de Bono – a visionary in thinking about risk management, Risk Culture: 52 Risks® in the Australian Financial Review and on the Fear and Greed Podcast, Have We Forgotten About Property Cycles: Lessons from the Past, and more

Vale Edward de Bono
One of the world’s greatest thinkers, Edward de Bono passed away last week. I have been a big fan of his work for many years, having been introduced to his thinking when I was 15 years old in high school. I had a teacher at the time who was passionate about de Bono’s then-emerging work on lateral and creative thinking.  

De Bono’s Six Thinking Hats, published in 1985, was a simple yet effective framework to assist groups with decision making. The Black Hat or risk hat became well known and widely quoted (even by those who hadn’t read the book !). This hat is described by de Bono as “probably the most powerful Hat; a problem, however, if overused; spot difficulties where things might go wrong, why something may not work, inherently an action hat with the intent to point out issues of risk with intent to overcome them.”

You can read more about the Six Thinking Hats here. I am sure his legacy will live on for many decades to come.

Risk Culture
Risk Culture is often only talked about in the context of banks and other financial services firms. And there any many poor examples in this sector. Recently, however, I have been asked to talk more broadly about non-financial services sectors case studies where risk culture was an issue.

The Australian Financial Review’s Chanticleer recently shone the spotlight on the role of culture and risk culture in a firm’s success and failure. The question was posed as to why such large, sophisticated and well-resourced groups such as Boeing and Credit Suisse can make almost catastrophic errors in managing risk.

As noted in the article “if you scratch below the surface, it is apparent there were flaws in the cultures of both companies.” The full article is behind the AFR’s paywall here.

Continuing with the theme of culture, I was a guest on the Fear and Greed podcast this month, talking about the downside impact of poor culture and how to identify it. I observed that from the outside it can often be exceedingly difficult to identify. I also noted that in some respects, poor risk culture or culture generally, is often a symptom of just plain bad management (I diplomatically called it ‘management competence’).

You can find the podcast here.

Property Cycles – Lessons from the Past
Are property cycles – or even business cycles – dead ? This question was posed at a recent property industry networking event held by EG Funds Management that I spoke at. I remarked that we do not so much see traditional property or business cycles now – more wild gyrations in asset values driven by financial markets and liquidity.

I did, however, highlight that the fundamentals of business and property still apply. Businesses and commercial real estate that were of a higher quality are inevitably less impacted by downturns. For commercial real estate, assessing market conditions and future supply and demand in the segment were key.

I talked to the group – who were all under the age of 40 – about the Melbourne CBD office market in the early 1990s (where I was working at the time). The market went from a ~2% vacancy rate to nearly 28% in about four years because of a massive oversupply of new office space.

All the experts at the time overestimated demand and underestimated the supply response to a squeeze in CBD office space in Melbourne in the mid-1980s.

One of the landmark buildings built at the peak of the boom, 333 Collins Street, was developed at a total cost of $525m between 1989-91. It was effectively taken over by one of its financiers and later resold for $243m in 1996.

Peter Deans