Crises are anything but new and novel. Why then, in recent decades, has the management of risk and crises engendered so much research in business schools and occupied so much time in corporate boardrooms?
Are crises becoming more frequent, are they becoming more complex, are their costs becoming greater, is public awareness and hence brand risk increasing, or are the externality costs of a crisis more likely to be internalized? Whatever the reasons, governments and corporations have fundamentally shifted the priority they accord to the management of risk including the capacity to manage crises.
Given the global uncertainty, it’s a particularly challenging environment for public sector risk management. Any discussion of the issue must include the complexities presented by pervasive globalization in managing public sector risk, the uncertainty inherent in any crisis, the role of expectations management, and the importance of institutions, leadership and communications.
We can start with the changing context for risk management arising from globalization, and its expanding scope of interconnections and blurring of jurisdictional ownership. Globalization is about far more than the integration of markets, or the collapsing of distance and time, or the emergence of new non-governmental trans-national entities. What is remarkable about globalization today is the interconnections among individuals, firms and groups, made possible by the information revolution and technology, whose pervasiveness is often underestimated, misunderstood or ignored, until it suddenly has to be deciphered and incorporated into our understanding.
A by-product of the intersection of globalization and technology is complexity. Consider the example from the recent global financial crisis of the many European banks whose balance sheets were infected by toxic assets emanating from the U.S. These same toxic assets started life as seemingly benign but very low-quality mortgages. They were then bundled together, securitized and collateralized, and became through the power of statistical models, high quality structured products promising high returns and low risk – true sorcerer’s gold.
A common refrain post-crisis from rating agencies to financial sector executives to regulators in the U.S., U.K. and a number of other countries was that these instruments, all based on evidently poor quality mortgages, were too complex to properly understand and risk assess.
A related by-product of globalization and the information revolution is the connected world. With the advent of the Internet, the World Wide Web and high-speed broadband, we are now in a truly 24/7 global information age, and this has fundamentally altered the way governments think about risk and how they handle crises.
In this age of instantaneous communications comes an expectation of instantaneous responses. The 24/7 multi-channel universe demands 24/7 responses from governments, from public services, from businesses, from whomever. This, in turn, has changed the complexity of public policy management in general, but particularly so in the event of crises, and raises the challenge of whether the speed of management processes can match the expectations for the speed of responses.
A fundamental characteristic of any crisis is uncertainty. In our data-rich digital world, the gap between data and knowledge often widens in the early stages of a crisis as speculation explodes in the multi-channel digital universe, too often masquerading as fact.
Policymakers always face a tension between the urgent search for knowledge to better understand the nature of the crisis so as to more effectively shape the response, which takes time and expertise, and the understandable desire for action, to do something and to be seen as doing something. But this tension, while inevitable and challenging, can be partially “bridged” by effective strategic communications.
Another characteristic of all crises is that no two are exactly alike. Some are one-off “shocks,” for example, natural disasters such as Hurricane Katrina. Some are the cumulation of a series of interconnected events, like the global financial crisis and subsequent global recession. Some are triggered by terrorism and war. Some are political crises, with different triggers, drivers and rhythms.
While all are different, collectively they offer some useful insights for public sector handling of future crises as well as the management of risk. In this regard, it is worthwhile to reflect on several Canadian experiences with public sector crises, and then attempt to draw broader lessons.
Consider the following:
In the immediate aftermath of the 9/11 terrorist attacks, U.S. skies were closed to all incoming international flights. There was no “scenario binder” for such an unexpected event, and there was unbelievable uncertainty. Transport Canada, working with air traffic control systems in other countries, landed 239 of these flights in Canada and redirected hundreds more safely back to Europe and Asia. Almost 40,000 unexpected passengers in remote airstrips were security cleared, housed, fed, and then re-routed to the U.S. when their skies opened again nearly a week later. All in all, it was an extraordinary crisis management achievement that required extensive and real-time cross agency cooperation and delegated decision making.
In the context of the same 9/11 attacks, both the NYSE and U.S. markets ceased functioning, creating huge unknowns in both markets with extensive cross listings of stocks and cross holdings of marketable securities. In this atmosphere of uncertainty and little information, Finance Canada officials worked with the TSX, the Bank of Canada and Canadian banks to rapidly close the TSX as well as the domestic money market and, in conjunction with the Fed, inject tens of billions of dollars into the North American financial system. Later, the subsequent reopening of Canadian markets was coordinated in a staged sequence to the reopening of U.S. markets.
In the global financial crisis of 2008, an event of unprecedented complexity, pervasiveness and uncertainty, the Canadian financial system weathered the global meltdown relatively well, in sharp contrast to the U.S., U.K. and many other advanced economies. This was an example of both sound risk management and deft crisis management. Despite the strength of Canadian regulatory policy, financial sector practices and solid corporate governance, the effective management of the financial crisis from a Canadian perspective required close coordination and cooperation among the key Canadian public sector oversight institutions; frequent, and open dialogue with Canadian financial sector CEOs; and close international cooperation with finance ministries and central banks in other G-20 countries as the crisis unfolded. The financial crisis highlighted the limits of national sovereignty and national regulatory institutions to deal with complex problems that have significant but uncertain global interconnections.
So, what lessons can be drawn from these and other Canadian experiences with public sector crises?
First, leadership and strategic communications matter. Successful risk management relies on strong managers who develop, implement and defend rigorous systems for risk identification, evaluation and mitigation. Successful crisis management relies on strong leaders who develop, implement and sustain rigorous communications strategies tailored to the specific event but based on the common principles of reassurance that someone is in charge; expectations management of what may be achieved and in what timeframe; credibility as an information provider in