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How the CRO can communicate with the CEO about risk

Insurance Consulting and Technology|Insurance Linked Securities|Reinsurance
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By Dave Ingram and Alice Underwood | October 24, 2019

Avoid the illusion of communication by understanding your audience – it’s the key to crafting and delivering your message in a way that enables CROs to have meaningful influence.

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About our 'A Year in the Life of the Strategic CRO' series

In our ongoing A Year in the Life of the Strategic CRO series, risk experts from our Insurance Consulting and Technology team, Willis Re and other parts of Willis Towers Watson cover how a strategically focused CRO can drive corporate strategy through the enterprise risk management planning process and throughout the year.

What's the job of a CEO? When it comes down to it, a CEO's job is to make decisions. The right decisions. Your role as chief risk officer (CRO) is to help the CEO make informed decisions. But how do you that?

It starts with communicating effectively with the CEO. And that requires understanding the CEO's priorities.

The work of the CRO provides valuable insight on critical business issues — insight that can help a CEO arrive at the right decision. But all the insight in the world doesn't help if the person making the final decision doesn't see it and, just as importantly, understand it in a way that enables true influence to the decision-making process.

How does your CEO think?

"The single biggest problem in communication is the illusion that it has taken place." (George Bernard Shaw)

In his 2011 book, Thinking, Fast and Slow, Daniel Kahneman describes two modes of thinking. The first is fast, intuitive and applied so often in our daily lives that it takes over almost automatically. The second is slow, rational and calculating, and takes a lot of work. The training required for analytical, technical and financial roles heavily favors this approach.

And, of course, a statistical, rational process is extremely useful. Predictive models can do many things as well as, or better than, the unaided human brain — even when that brain is highly trained.

In one experiment, Paul Meehl looked into whether trained psychologists would do better than a statistical algorithm at diagnosing patients admitted to hospital programs. He found that the algorithm did better than the average clinical psychologist and about the same as the more experienced clinical psychologist.

But many business leaders climb the corporate ladder using a path that requires more "fast, heuristic-based" thinking than "technical, algorithmic analysis." That's not necessarily a bad thing!

How do executives make decisions?

Business schools teach you to define key metrics and then find solutions that optimize those metrics. For example, we may seek to maximize expected value. But a large group of executives that Zur Shapira polled and interviewed about their approach to risk-taking decidedly did not favor a "maximize expected value" approach to decision-making under risk.

(By the way, this implies that almost all these folks are irrational – or that the definition of "rational" used in financial economics and behavioral economics is incorrect.) Instead, their preferred approach was to maximize likely profits from among possibilities with acceptable downside potential.

This fits with what Gary Klein found in his book Sources of Power: How People Make Decisions. In studying how highly experienced people make decisions, Klein discovered that they do not typically use a slow, rational process. Their "natural" process is to study the problem against one solution quickly selected from their mental "library," which has been constructed over years of experience.

If, upon closer examination, that solution appears unworkable, they seek to improve it or identify another solution that would pass the test that the original solution failed. At the end of their analysis, they have a solution that works under all the conditions that their study anticipated.

Such an approach works well for executives who must make decisions quickly — especially when not all of the variables can readily be quantified, and when there is no single, precise model for the exact relationships among them. So it's no surprise that many CEOs make use of it.

Risk and reward or risk and ruin

There is a framework that allows for plural forms of rationality that can help us to understand people's real-world behavior. Drawn from anthropology, the plural rationality framework recognizes that groups tend to exhibit four types of risk attitudes: manager, maximizer, conservator and pragmatist.

The plural rationality framework
Drawn from anthropology, the plural rationality framework recognizes that groups tend to exhibit four types of attitudes about risk.
Risk attitude Quick description
Manager Carefully quantifies and balances risk vs. reward.
Maximizer Increasing reward is much more important than reducing risk.
Conservator Reducing risk is much more important than increasing reward.
Pragmatist The future is much too uncertain, so keep options open.

Our research to date with insurance professionals suggests more than 50% of top executives favor a maximizer or pragmatist view, whereas this is only true of 30% of company staff.

Many insurer staff members are highly trained in the manager approach, but only a minority of top executives agree with this view of the world.

This would imply that people often feel the need to present recommendations based on careful, rational, painstaking analysis to decision-makers who do not really trust that kind of analysis.

Don't just speak — have influence

The point of communication isn't to speak. It's to be heard and understood — to have influence and motivate action.

Effective communication requires knowing what information you want to convey and what action you want to motivate, but that's not enough. You must also know your audience — in this case CEOs—well enough to determine which factors will truly resonate and motivate them to take the desired action based on your information.

It's a good idea, for example, to have a sense of the CEO's thinking style (analytical or heuristic?), decision process (rational decision-making or natural decision-making?) and risk attitude.

In many cases, it will likely be more effective to downplay the detailed analytical process by which you arrived at your conclusion. Instead, focus on what it means to the company and to the CEO's priorities.

Common priorities include customers, profits, corporate survival and value growth. Which of these is most likely to catch a CEO's attention? There's no single answer, as you can see from the following quotes:

  • "The purpose of a business is to make as much money as possible for the shareholder." (Milton Friedman)
  • "The purpose of a business is to create a customer." (Peter Drucker)
  • On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy…your main constituencies are your employees, your customers and your products. (Jack Welch)

So you need to learn what will best motivate your audience.

Take those priorities, whatever they may be, into account when you craft your message. Summarize the parts of your message that speak less directly to the top priorities, and spend more time and effort conveying how your insight addresses what the CEO sees as the key corporate need.

Be the change

The pain of changing becomes less than the pain of staying the same.

We advise against trying to change your CEO. Although you may wish you could change the way that your CEO approaches decision-making, organizational behavior expert Edgar Shein says that people will change only when "the pain of changing becomes less than the pain of staying the same." If there's no pain, there's no change: People must perceive that something is broken to even consider change.

Remember: the CEO's job isn't just to make decisions — it's to make the right decisions. So any information you bring to your CEO must be communicated in a useful format, so that he or she can chart the right course for the company.

Understanding your audience is a fundamental strategy for avoiding the illusion of communication; it's the key to crafting your delivery to achieve meaningful influence.

Authors

Dave Ingram
Head of Willis Re ERM Advisory

Alice Underwood
Global Leader of Insurance Consulting and Technology

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