Risk Management: Reject the ‘Business as Usual’ Mindset’
Author: Ron Dembo
Like many in the entertainment industry, The Shaw Festival in Ontario faced a bleak outlook for 2020. Over a typical year the theatre company generated $220 million in economic activity. But as Covid-19 swept across Canada and the rest of the world at the opening of the year and millions lost their lives, lockdowns came into place and workplaces ground to a halt. Many institutions faced bankruptcy. But The Shaw Festival came through it unscathed. How did they do it? They were the ultimate risk thinkers! Although Shaw Festival kept going for as long as they could, it soon became clear that their summer and winter line-up would have to be put on hold.
Facing a Bleak Winter
But for the actions of executive director and CEO Tim Jennings three years prior, his actors and musicians — many of whom were on independent contracts and so were ineligible for the Canada Emergency Wage Subsidy (CEWS) — would have walked from The Royal George’s three bright red doors, out under the awning, and into an uncertain future alongside the thousands of others whom Niagara’s bustling tourist and entertainment industry had failed.
Instead, Jennings kept nearly every employee on his payroll full-time despite having no productions to put on. As around them friends and family lost their jobs and fell into hardship, the employees of Shaw Festival found their bank accounts filled with a monthly paycheck.
Prophet or Practiced Risk Thinker?
Justly, many observers were left in awe of this apparent oasis in the global economic desert. When asked how he did it, Jennings revealed that an insurance policy that covered his company against losses from a pandemic — a policy he had purchased three years before any whiff of Covid-19 was on the air — had kicked in with a full payout.
Against a threat that no one could have predicted, Jennings’ move back in 2017 looked at the opening of 2020 to have been a stroke of incredible foresight. As the National Post commented, “the Shaw’s insurance policy doesn’t look merely fortuitous. It looks downright prophetic”.
But Jennings was no prophet. “It wasn’t about this pandemic at all,” he said, reflecting on the policy, “it was about communicable disease”.
Alongside his CFO, Jennings had sat down to do some risk thinking. Specifically, he had begun to think up different scenarios for what could go wrong during a season, examining potential pitfalls and problem areas for his time ahead at the helm of the company. Jennings had spent a long career in the theatre, and he had witnessed before how a common cold could wreak havoc on productions. All it took was for one of the rotating repertory ensembles to come down with a stomach bug and soon the whole team was off sick, stalling shows and costing millions.
The Hedge Against Disaster
Wanting to avoid this predicament, Jennings hedged against it, taking out an insurance policy that captured even the extreme outcome of a communicable disease: global pandemic. In the end, it saved his company millions and ensured that his actors and musicians remained among the only ones in the world to still hold a job during the outbreak.
Jennings called it “good fortune”, but we’d call it scenario generation at its finest.
Key to Jennings’ success was his ability to imagine potential futures that were different from a business-as-usual forecast and act upon them. Relying on business as usual — or the “official view” of 2020 that perhaps the festival’s stakeholders had in mind — would have meant ignoring, discounting, or remaining blind to the minuscule probabilities of outlying events such as a pandemic, terrorism, or a financial crisis impacting business operations.
A business-as-usual approach sweeps the possibility of radically uncertain events under the rug — exactly the kind of events that tend to sink businesses on a regular basis.
Yet decision makers so often remain blind to possible deviations because of a type of “inertia thinking” prevalent in the close-minded corporate world. This is a mode of thinking that projects continuity while ignoring inconvenient risks — that falls prey to the optimism bias (or wishful thinking) of the business plan for that year and extrapolates linearly from current trends. If this thinking had a catchphrase, it would be, “if things keep going at this rate…” But, of course, they rarely do. Risk thinking is how we escape this pitfall.