Paulo Freire on the Perception of Institutional Risk

In Pedagogy of the Oppressed, philosopher and educator Paulo Freire provided an interesting insight into potential mechanisms that facilitate irrational risk taking:

A different type of false perception occurs when a change in objective reality would threaten the individual or class interests of the perceiver. In the first instance, there is no critical intervention in reality because that reality is ficticious; there is none in the second instance because intervention would contradict the class interests of the perceiver. In the latter case the tendency of the perceiver is to behave “neurotically.” The fact exists; but both the fact and what may result from it may be prejudicial to the person. Thus it becomes necessary, not precisely to deny the fact, but to “see it differently.” This rationalization as a defense mechanism coincides in the end with subjectivism. A fact which is not denied but whose truths are rationalized loses its objective base. It ceases to be concrete and becomes a myth created in defense of the class of the perceiver.
(Freire, Pedagogy of the Oppressed, 1970, p. 52)
Paulo Freire

As Freire proposes, individual threats or class interests create a condition where the objective facts become intentionally distorted and a myth of reality is created. This dynamic continues to be a factor in organizational risk, particularly when there is an agency theory conflict present within that of a organizational decision maker. For instance, consider the dilemma of a senior business executive faced with the following risk management decision:

The Executive Decision: Certain Personal or Uncertain Institutional Outcome?
As the head of a business unit that has established very aggressive revenue growth, the Executive is pleased that a new technology to which a brand new industry product offering is finally available. Like most new technologies, many of the early bugs aren’t yet worked out and indeed, some of the analysts have warned that some of the bugs could result in operational failure, technical error, or outright exploitation that would put lives, customer financial assets and reputations in jeopardy. However, to the Executive, these are possible risks, and none of the analysts have given him a firm and likely probability of them happening. Lacking a guaranteed number that declares these risks almost certain to happen, the Executive unconsciously embraces prospect theory and rationalizes the likelihood down to “nearly impossible.”

Corresponding to the risk assessment of the Executive is his own personal evaluation of risk. As a business unit head, hardly an hour goes by where he is not reminded of the aggressive revenue goals, launch commitments to business partners and ever increasing expenses being realized from the carefully-timed product launch. Indeed, there is no doubt that any significant delay in the product’s launch would have a certain personal risk to the Executive: termination, possibly unrepairable reputational damage, career track derailment and banishment to industry’s minor leagues. Immediately following such professional harm would be financial and personal impact, with the payment of mortgages, vacation houses and children’s college educations likely to be placed in jeopardy. Indeed, the prognosis for divorce risk from any delay in product launch is significant.

So should the vague and uncertain warnings of analysts (who are not part of the Executive’s circle of influence, are perceived to have no skin in the game, and certainly don’t share his awareness of pressures) to subordinate the almost certain and terminal personal risk faced? Given all that has been put on the line by the Executive, an analyst had better be absolutely certain, compelling and convincing of these risks before the Executive would give them meaningful consideration.

Instead, the Executive pursues the path of rationalization and myth making:

“Certainly our people are smart and they’ll figure out fixes to this stuff before it’s too late.”

“We can’t afford to fail – they know they’re going down before I am so they’d better invent a fix.”

“What are the chances this really will happen? If it was going to happen, it would have happened by now!”

“This criticism is but a small minority. My brightest product executives, our vendors, and the people in my circle assure me this isn’t a significant concern.”

“We haven’t had it occur before to any big degree – we’re still here in spite of previous mistakes, so they’re probably just alarmists. We always recover well if our backs are up against the wall.”

“If anything happens, it’ll probably occur after I’m long gone and cashed out. It’ll be someone else’s neck, not mine.”

Indeed, given the high degree of noise to the signal of risk forecasting, especially in the areas of technology and operations, the analyst is fortunate to derive any meaningful message from the signal. Precise and certain promises of risk are all but impossible and the risk analyst is left with a weak argument that rarely offsets the certain personal risk of the executive.

Prescriptive Advice?
Freire’s thought (as well as mine referenced here) provide mostly descriptive utility in letting us know we have a problem. It appears increasingly evident, however, that efforts to affect change in the perception of the Executive are most fundamental should we wish to correct this rather widespread but increasingly detrimental institutional flaw. In addition to instilling the practice of risk management within all areas of decision making (e.g. the guidance provided in ISO/IEC 31000), and tying executive compensation to risk-adjusted performance, governance programs must expand on the capacity to educate, assess and evaluate methodologies and techniques for expanding the accuracy in perceptual capacity within the decision maker ranks. Last but not least is the need to shift truth-seeking exercises from ineffective “truth as the correctness of statements” audit and compliance program, to a risk-centric “truth as the unhiddenness of entities” methodology (Heidegger, The Essence of Truth, 1931) in creating a greater linkage between subjective conceptual maps and the objective institutional terrain.

More on the latter topic in an upcoming post.

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One response to “Paulo Freire on the Perception of Institutional Risk

  1. Dianne Blitstein Solomon

    Neither “perception of the Executive” nor tying compensation to risk taking are effective avenues for correcting what you call the institutional flaw. Heidegger is on the right track. The first step is to reveal – reveal facts, risks, and strategy. The second is to give shareholders more say in executive compensation and require a staggered pay-out beginning four years after taking office. Thought has to be given to redefining value.

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