COVID-19’s Lessons in Strategic Failure for Boards and Management Teams
Tags: CEO, Failure, Risk Management, Board Of Directors, Strategy

SARS-CoV-2

Strategic failure is not just the opposite of success. It is a different phenomenon that has its roots our individual and collective inability or unwillingness to anticipate, accurately assess, or adapt in time to emerging threats.

COVID-19 has been no exception, and has important lessons to teach boards and management teams.

Novel threats are often difficult to anticipate because they emerge from complex global systems with interacting cause/effect relationships that are frequently time delayed and non-linear.

Anticipation is made more difficult by the way humans have been wired by evolution. We are naturally overoptimistic and focus on information that confirms our existing beliefs. And when uncertainty increases so too does our tendency to copy the beliefs and behavior of others, rather than trusting our own judgment.

In the case of COVID, however, there is ample evidence that public sector and, to a lesser extent, private sector organizations had anticipated the severe threat posed by a pandemic respiratory virus.

For example, “Event201” was an eerily prescient war game run in October 2019 by the Johns Hopkins Center for Health Security, based on a more transmissible version of the coronavirus that causes SARS. The game report concluded that, “we don’t have dedicated antivirals, or the expectation of producing an emergency vaccine in a timely fashion with coronaviruses.” Similar exercises emphasized the critical importance of time dynamics in the race between a respiratory pandemic’s emergence and a nation’s response to it.

In the case of COVID, warning indicators for pandemics had been established and were being monitored by national security and healthcare agencies.

However, a new first threat emerges, indicators are often noisy, and assessment is sometimes made more complicated by the appearance of surprises whose meaning is ambiguous.

In addition, evolution has burdened humans with some unhelpful instincts. We are naturally overconfident and have a poor intuitive grasp of non-linear, positive feedback-driven processes. We strive to avoid the cognitive dissonance and social disapproval that often accompany changes in our beliefs. And we are also easily distracted. For example, in the early stages of COVID’s emergence, much of the world was transfixed by Donald Trump’s impeachment trial, the US Democratic primaries, and the run-up to Brexit in the UK.

A further problem is that even accurate assessments of a novel threat may fail to convince leaders to issue warnings and take action. As Henry Kissinger is reputed to have once said to an intelligence analyst, “you warned me, but you didn’t convince me.”

For example, as late as February 26th, Donald Trump was still telling the public that the current number of COVID-19 cases in the U.S. was “going very substantially down, not up”, and claiming that “the U.S. is “rapidly developing a vaccine” for COVID-19 and “will essentially have a flu shot for this in a fairly quick manner.”

More broadly, warnings are often delayed because as organizations grow larger and more bureaucratic, they tend to penalize false alarms more heavily than missed alarms.

In the absence of timely and accurate warnings and advice from government leaders, many investors and companies were poorly prepared to independently assess the threat posed by COVID’s exponentially worsening effects.

For example, at the end of 2019 researchers at North Carolina State University found that, “only about half of surveyed organizations engage in formal risk identification and risk assessment processes [and] less than 20 percent of companies viewed their risk management process as providing important strategic advantage.”

Investors’ assessments weren’t much better. As early as January 9th, the Financial Times warned, “China says pneumonia outbreak is linked to coronavirus.” Yet the US equity market didn’t peak until February 19th.

While information spreads almost instantly today, collective understanding of its meaning typically diffuses much more slowly, until it eventually passes a tipping point and the previously dominant narrative gives way to a new one. As was the case with COVID, for emerging threats this takes a surprisingly long time to happen.

However, even when a timely warning is issued, successful adaptation to an emerging threat still depends on a keen understanding of its time dynamics — specifically, what we call the safety margin.

This is the gap between the time remaining before a threat passes a critical strategic threshold and the time still needed to implement an effective response.

In the case of COVID, the impact of exponentially increasing infections on the rapidly shrinking safety margin seems to have been either misunderstood or ignored.

The result was a cascading series of adaptation failures, including the Trump administration’s initial refusal to implement the National Security Council’s “pandemic playbook”, then confusion about public sector chains of command, multiple snafus over the approval and deployment of testing and tracing processes, and delays in implementing masking and physical distancing measures.

The end result was hundreds of thousands of excess deaths, a shattered global economy, and greatly diminished public confidence in many institutions that will take years to repair.

The COVID pandemic will go down as one of the greatest strategic failures in history. But it was not inevitable.

As successful responses in countries like Taiwan showed, COVID’s human and economic costs could have been minimized had leaders designed and used effective processes for anticipating, accurately assessing, and adapting in time to emerging strategic threats.

Directors and boards should take these painful lessons to heart, and use them to strengthen their companies’ processes for governing and managing strategic risk.

Tom Coyne and Neil Britten are the cofounders of Britten Coyne Partners and the Strategic Risk Institute LLC, with offices in London and Denver