The boardroom is a battleground, risk managers are generals and raw materials are the lives of soldiers; important risk management lessons can be learnt from history’s greatest wars

Risk is inseparable from warfare as it is from business. In war the stakes are high, for failure may mean the defeat and subjugation of a nation, while the principle raw material of warfare is the lives of the soldiers who must do the fighting. It is logical enough to therefore expect a successful general to be an expert in managing the risks he faces, and a glance through military history indeed shows that many of them, from Hannibal to Montgomery, knew how best to deal with the risks of their trade.

What can business learn from them? The world of risks faced by business is remarkably similar to that faced by those in charge of an army. Familiar military concepts such as logistics, domination of ground, command and control, and strategic or tactical balance have their civilian equivalents in supply chain, market penetration, management hierarchies and resilience.

Communication is of as much importance to the general as to the risk manager, and clarity of purpose is central to both. Take this from Montgomery, on assuming command of the eighth army in 1942: “I want to impose on everyone that the bad times are over, they are finished! Our mandate from the prime minister is to destroy the Axis forces in North Africa … It can be done, and it will be done!” Clear and to the point – there is no mention of ‘deliverables’ or ‘drilling down’.

History lessons

Reputation is also important for the general, to give his troops confidence in his leadership and to strike fear into the enemy. The Duke of Wellington said of Napoleon that his presence on the battlefield was worth 40,000 men, and the same could be said of Rommel, whose reputation for aggressive risk-taking could induce paralysis in the British eighth army during the Second World War.

Generals have always spent time cultivating their reputation – a lesson which should not be ignored by business. Sun Tzu, author of The Art of War, wrote: ‘Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.’ It is a maxim that anyone seeking to push their brand should take to heart.

Cutting your losses

It is in the field of risk appetite, however, that military history can bring most enlightenment to the risk manager. The UK Treasury’s guide ‘Managing your risk appetite’, says: “Risk appetite is about taking well thought through risks where the long-term rewards are expected to be greater than any short-term losses,” and since this is precisely the mindset of the general approaching battle, it is worth looking at how generals manage this risk.

The obvious example of how not to do it is to be found in the sanguinary battles on the Western front during the First World War.

In one offensive after another, British and French generals took the ‘one more heave’ mentality, whereby the commitment of ever greater resources to a failing attack merely resulted in a massive increase in casualties rather than the anticipated breakthrough. The same failure to assess risk properly and to let risk appetite get out of control is to be found in many a corporate M&A battle.

It is again to be found in Operation Citadel, Hitler’s last attempt to attack on the Russian front in 1943. “Whenever I think of this attack, my stomach turns over,” Hitler said, but the planning was too far advanced to be easily cancelled, and the attack was duly crushed.

Here, loss of prestige became a factor in risk assessment, distorting the appetite for risk, with disastrous consequences. Napoleon, on the other hand, usually got it right. At Austerlitz, he gave up a defensive position and weakened his right wing to tempt the Russian and Austrian armies to attack (they could have forced a retreat just by waiting).

The Russian general Kutuzov knew attack was the wrong option, but was overruled and the allied armies were duly smashed by Napoleon’s counter attack. Napoleon assessed the risk correctly and deliberately deceived his opponents into thinking their risk was much smaller than it was.

In boardrooms, less may be at stake than on the battlefield, but many of the pressures that can distort a general’s view of risk are similar. It is the risk manager’s task to present the correct assessment, and looking at where military men get it right and wrong can be a useful guide.