Oops! We Encountered an Unexpected Error

What happens when the best intentions lead to unexpected problems?

Most of us have almost no idea how our cell-phones really work.

Cell-phones? What then about GPS functionality on those devices? Well, we also cannot even begin to comprehend how GPS systems have to take into account the fact that time slows down for the GPS satellite up there in the sky (due to the the velocity-caused and gravitationally-caused impacts - according to Einstein's Special and General Relativity).

Time moves slower up there where the satellite is? Really? Yes! It does! And, these time dilations must be part of the GPS system's calculations to enable your cell-phone to correctly position you on your Google Maps or Apple Maps.

Dilations? Well, we also don't have a clue how drugs are used to control cervical dilation during childbirth.

So, yes, most of us have an extremely limited understanding of the science behind 'anything' really. Yet we love the magic that it unlocks and we constantly enjoy the unlocked benefits despite our cluelessness of the underlying science.

We then read about the science of Climate Change and the associated existential risks - and some of us then 'kinda' get the fact that the scientific method i.e., the methodology that brought us cell-phones and GPS systems, is probably a superior way towards acquiring knowledge: superior to 'opinion' at least. (Bear with me here, please.)

Many of those people then try their best to do their bit to minimise 'brown' footprints. And, they may then decide to invest their money in ESG stocks (i.e. 'green' stocks) as opposed to 'brown' stocks. That is a strategy that makes sense. Or does it? This video (at around 2:44 - and specifically at 3:11) suggest that it may not be the case. And it uses formal Stanford University and Carrol School of Management research papers to argue that point. This, then, were it to be a correct assertion, is a classic case of the Law of Unintended Consequences.

In a business environment, one builds a strategy for a very simple reason: Striving towards sets of benefits. But, beware: focussing only on those benefits may make us blind to the existence of lurking Unintended Consequences. And the negative impacts of these Unintended Consequences may sometimes be huge when the Butterfly Effect kicks in. It manifests as explosions, implosions, and slow motion train wrecks.

In our trade/vocation, namely consulting, we encounter both successes and failures. The root causes for failures (or under-performance) are often 'obvious'. There is no strategy, poor strategy, half-hearted-commitment, under-funding, blinkered or blind optimism, and so forth. But an underated common root cause of failure is this notion of Unintended Consequences.

Where do these Unintended Consequences (let's now call them "UCs") stem from? There are many ways in which UCs manifest. We will only cover two of those here.

Primarily UCs originate from incomplete thinking and/or hubris; the notion that I/we, given our superior and superb skills, know best. We are able to do (i.e. design, build and implement) all of this ourselves.

This type of sub-optimal behaviour boils down to cognitive biases such as the Choice-Supportive bias, Confirmation bias, Law of the Instrument, Salience bias, the Semmelweis Reflex, and most importantly, the Egocentric bias (with its many sibling and child biases such as Illusion of Validity).

And then we amplify all of this in our groups through behaviours such as the Yes-man syndrome.

You are not a lesser human being if you suffer from these biases. We all do. You and I both suffer from these biases. All of us suffer from all of them - to some extent, at least.

So, what is the answer? The answer is to get an independent perspective from 'outside'. The answer to incomplete thinking is to augment the thinking. Simple as that.

The second UC cause that we will touch on relates to Risk identification and Risk mitigation. This point requires a long discussion which is outside the scope of a short article. Suffice to say that we have encountered countless such instances and that the following points apply.

Simply put, the identification of a risk does not mean that the risk must always be mitigated (or be mitigated in the most 'obvious' manner). It must not be mitigated if the only available mitigation will create other bigger (i.e. more likely and/or more impactful) risks. And if more indirect and/or incomplete (but useful) mitigation is possible, such actions should rather be taken.

In most corporate environments, the previous paragraph is heresy.

Nevertheless, it is true that those that are burdened with risk management in corporate environments often do not have a full (or even good enough) understanding of the environments where they have to identify risks. They are not immersed deeply enough to identify the UCs of their mitigation dictates. Furthermore, it is difficult, if not impossible, for domain experts to push back against such dictates as audit and risk committees are often backed up by independent outsiders such as auditors.

So, what is the answer? Again, the answer is the same: independent perspectives from outside are needed.

But, hang on, did we not just say that auditors fulfil that 'independent' role? Yes, we did, but the brutal truth is that they are not entirely independent with respect to this type of question.

Their independence will not stop them from agreeing with the identification (and often they are the ones that 'discovered'/identified the risk). That is fine. A properly identified risk really is a risk. The second part of the process, the mitigation of the risk is where the independence difficulties arise.

The auditors' skin in that game is the same skin that internal corporate Audit and Risk committees have. Both parties, in most instances, simply cannot sign off on the non-mitigation of a known risk. Their professional ethics and best practices do not allow it. If they do not sign off, they may be liable.

So, what you need is 'true' independence. Auditors, as well as most of the 'big' consulting groups, have to have a game plan that forces them to deal with what is in front of them - and to then deal with unintended consequences later.

Conversely though, true independence from true professionals will allow for the search for a (in this case, non-political) Third Way: a way that balances the identified risks with the Unintended Consequences of the most natural mitigation approach.

Providing that level of independence, coupled with insight and experience, is the role that service providers such as us play.

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