Paul Moroz is chief investment officer and portfolio manager at Mawer Investment Management Ltd.
“The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome ....”
– Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk
We acknowledge that there are many aspects of managing investment risk that are outside of our realm of influence. These are the areas where we should be minimizing our time. After all, a fish doesn’t waste time trying to control the waves.
Maximizing our time and efforts where we do have some control, however, can provide an investment edge. One such area is the culture we choose to foster.
An optimal culture is crucial – the decision-making environment is one of the most important elements of the risk management framework. In my view, a cohesive culture that encourages debate, diverse views and candid opinions from everyone – regardless of title – reduces the possibility we miss an observation that could lead to an opportunity or mitigate a potential risk. We spend a lot of time focusing on team culture because we find it is the foundation on which better investment decisions are made.
Don’t be the emperor
A cautionary tale in risk management is to think of a brooding senior executive sitting behind a closed door in an imposing corner office, one with whom everyone is too scared to do anything but tacitly go along with his every decision. How that scenario usually plays out follows the tale of “The Emperor’s New Clothes” –everyone is afraid to tell the emperor he’s actually naked until the end.
The learning here is to foster an environment where information or thoughts are seen from a neutral standpoint. The communication of these is simply part of a transaction, one where the sender can deliver their truth without fear of reprisal, and the receiver is open to the information. Ego, or a personal sense of ownership, shouldn’t enter the picture.
As an example, one of our summer students came over to my desk to debate the merits of a Brazilian company, the management of which I had met on a recent trip to South America. We had a difference in interpretation of how its business model worked, and the result was a great back-and-forth discussion.
It is important that even a student feels comfortable enough to walk over to the CIO’s desk and debate ideas. In this case, the student’s different interpretation did indeed raise a risk to the investment thesis.
No one has a lock on knowledge
The less someone feels comfortable to speak their mind, the more likely major oversights can occur – or complacency can take root. It’s important to strive for having a diverse and independent set of thinkers on your team because otherwise you will miss out on a key perspective.
We have found it useful to incorporate a “gathering evidence” mental model approach for fostering a flat hierarchy and as a means to ensure all observations are shared. In this model, the job is to gather evidence in order to provide a complete (as possible) investment case. It’s as if we’ve been tasked with preparing for a trial – except we have to collect evidence for both the prosecution and defence.
The guiding principle behind this approach is that no one person has a lock on knowledge. Anyone on the team can find, have and share a thought or idea. And, equally important, everyone knows they have a responsibility to do so.
The “evidence-gathering” approach to evaluating information also encourages receptiveness. Team members are better able to be open-minded to new ideas – even if they run counter to their own thinking – because individually, you know you don’t have all the answers.
High trust leads to candour, which better shields an organization from risks
For the “gathering evidence” approach to work, everyone must be open to listening and engaging with their colleagues’ findings and feedback. Otherwise, it’s difficult for independent thought to thrive in daily work practice. Ultimately, that receptiveness (with no fear of reprisal) is what leads to a high-trust environment, and this is crucial to maintaining a strong and resilient culture.
For a work culture to be fortified against potential risks, it must shift or adjust to encourage candour and humility. People must feel empowered to share their views and have confidence they will be heard.
You should never be afraid to tell “an Emperor” they are naked.
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