STUDY REVEALS THREE REASONS WHY COMPANIES MISS THE EARLY WARNING SIGNS OF EMERGING CRISES HEC Paris Business School

STUDY REVEALS THREE REASONS WHY COMPANIES MISS THE EARLY WARNING SIGNS OF EMERGING CRISES

The study, developed by Prof. Pablo Martin de Holan at HEC Paris and colleagues from University College Dublin, Ireland, draws on the experience of businesses and banks during the Irish banking crisis and offers practical advice on how business can overcome resistance to act when faced with those warning signals.

Astudy released by HEC Paris Business School reveals why companies almost systematically fail to detect and act upon the early signs of imminent crises. The study was developed by Prof. Pablo Martin de Holan, Dean of the school’s Qatar campus, along with colleagues Prof. Federica Pazzaglia and Prof. Karan Sonpar from University College Dublin, and Ms. Maeve Farrell from Accenture. The study draws on extensive data and archival information gathered in the wake of the Irish Banking crisis and throws light on a phenomenon that recurrently affects millions of companies around the world.

“Many companies prefer to focus on short term advantages instead of the potential long-term damage that could result from ignoring the signals.”

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HEC Paris is an international business school established in 1881 and located in Jouy-en-Josas, France. Among the most selective French grandes écoles, HEC Paris offers its flagship Master in Management, MBA and EMBA programmes, specialised MSc programmes, a PhD programme, and executive education offerings.

As Prof. Martin de Holan explains: “Crises of these incomplete (and often incoherent) are generally preceded by a trail of early warning signals. warning signals but often managers (and the companies they manage) overlook them, In the report, the authors outline a threemissing a ‘recovery window’ when things can step framework to act upon those early get done to prevent the worst consequences warning signs: of the crises. Yet, there are strong forces that n Recognise the attention traps which prevent managers and companies from acting distract us from noticing the signals. This on these signals, even if they believe they will help increase your chances of spotting represent real threats.” emerging trends. Companies should try to

According to the study, early warning resist the urge to prioritise urgent daily issues signs often indicate significant environmental over long-term planning or to seek analogies changes that deviate from current trends, and confirmatory patterns. In practical but which may not yet have reached a level terms, this might mean organising meetings requiring immediate action. The danger of which encourage people to share their views dismissing these signs or underestimating regardless of how unlikely they might be. If their impact is that companies are left ‘off outsiders (or people working with outsiders) guard’ until it is too late for them to take are invited to join these discussions to share meaningful action. emerging trends from other firms or sectors, The study identifies three main even further. reasons why companies miss those n Amplify the trends you have early warning signs: identified by involving team Overlook: Many people and businesses treat warning signs as “By adopting members in scenario planning exercises where various ‘noise’ or simply overlook them because the signs are not compatible a more proactive hypothetical situations are created and tested. This is a more delicate with their own previous experience. approach, step since it is not necessarily cost In the study, the authors point to one particular interview they did during executives will be effective to amplify and develop every weak signal. However, by the research phase: “a bank manager able to embrace applying mindful attention to talked about risk as a function of our memory; if you’ve never seen uncertainty while anomalies and reports, you can build a ‘trending topics’ list of weak something happen before you don’t making positive signals. This can then be used to foresee it as a risk.” identify which of the warning signs

Disregard: Sometimes we might sense of these appear most frequently, carry the spot a warning sign but deliberately disregard it based on our own past incomplete (and most risk or are the most interesting to develop further. or present experiences. According to often incoherent) n The final step would be to model the report, many companies prefer to focus on short term advantages warning signals.” the impact of these emerging trends through simulations and other instead of the potential long-term modelling tools. This approach damage that could result from allows the organisation to test its ignoring the signals. resilience to the potential scenarios

Underplay: Even if that have been identified. In this organisations do acknowledge the stage, the ‘what-if’ becomes ‘how importance of these signals, they still often big’ and should allow managers to move from underplay the magnitude of the potential wondering whether something is even possible consequences and delay acting in the belief to actively evaluating the impact of these that inaction will not result in any damage to scenarios and defining the right actions to take their business. should they become consolidated trends.

However, the report also concludes that managers and companies can overcome their instinct to overlook, disregard or underplay by adopting a mindset which considers unwelcome information, or which may even contradict someone’s individual world view. By adopting a more proactive approach, executives will be able to embrace uncertainty while making positive sense the positive effects will be magnified

The study was developed conducting a qualitative research study based on interviews with bankers, financial advisors, regulators and auditors; on archival records including annual reports from regulatory authorities, commissioned reports, and information shared via broadcast media and the press at the time of the crisis; and on data analysis following an interpretive approach.