As we have just seen, every kind of society needs to manage its risks effectively, whether it is a small or large firm, a city, a state, or a country. I have also made the case that risk management is ideally not a separate function but is sewn into the very fabric of society such that ordinary employees or citizens become managers of risk. Fighting terrorism on the home front, for example, can only be effective when citizens are aware of the dangers and are educated to identify the potential threat behind, for example, an ownerless bag left on a train. For a society to function effectively in this way, several attributes need to be present. Here, we will look at these attributes and discuss several exemplars with and without these attributes.

Attribute 1: A Shared Passion

If society's members share a passion and commitment to continued prosperity and existence, they will do what it takes to ensure that result. The evidence of this can be seen in twentieth‐ and twenty‐first‐century startup nations and companies. Israel is one example amongst modern nations as evidence of the importance and shared passion, commitment, and goals.¹ There are other significant examples in earlier Western history, including the United Provinces that became the Dutch Republic (today, the Netherlands) and the United States. The United Provinces, the young Dutch nation in Europe's north, rebelled against the all‐powerful Spanish branch of the Habsburg Empire in the sixteenth century.² The Dutch lacked the resources of their Spanish masters, who combined the firepower of its leading military power of the day with the fabulous wealth of the gold bullion mined in South America. They were, nonetheless, defeated by the Dutch upstarts whose commitment to the cause of their independence saw great feats of bravery and ingenuity. Lacking natural resources forced the Dutch to innovate and engage citizenry in the effort to fight for the young nation's existence. Developing strategies to address external threats was not nearly as important as the ability to pull together the citizenry to fight against those threats. A similar paradigm can be seen in the examples of the American Revolution in its fight against its all‐powerful British rulers.

The spirit of a startup is, of course, generally exemplified by technology companies like Google and Facebook. The success of such companies, whose existences were precarious at the start, is due to more than innovation and a great product. Yahoo! Erstwhile CEO Marissa Meyer made a splash when she called for a return to Yahoo!'s roots as a startup recognizing that the vital energy of the startup is a valuable commodity. However, it may not be so easy, indeed Meyer found this out the hard way, to recreate that spirit. When a company is small and growing, each employee feels a strong alignment between his very identity and that of the company. Each employee is preternaturally alert to the threats and risks, which abound on all sides. Most startup companies fail for a number of reasons but mostly because the risks to the company's future from both internal and external forces are greater than at any other stage of the company development cycle. Those companies that do survive and prosper do so in part because of their effectiveness in identifying and addressing the risks to their existence. Though the risks are great, the levels of motivation, if it can be tapped effectively, is even greater. How many search companies were competing with Google? How many social networking companies were competing with Facebook?

The motivation of employees to give back to their community, their company, is most clearly visible in a successful startup. Why do people work the hours they do in a startup? Could it be in part because of a desire for the community and colleagues within that community to do well? Working hard will increase their chances of succeeding. Avoiding risky behavior and errors can be tied back to the same motivation.

“Only the paranoid survive” is the well‐known adage originated by Andy Grove of Intel.³ There is surely something in it. Maintaining a culture of awareness of the risks and threats and the sense that all members of the community need to play their part in countering them is hard to do. But it is probably the one thing that separates out those who survive from those who don't. If a company can tap the passion of its employees to make them paranoid about risks every day, then maybe the startup can survive and prosper. This should not just be how startups operate but how every company operates if it wishes to manage risk effectively.

The question is, how do countries and companies retain that startup passion? How do they hold on to the sense that everyone cares, to the extent, that they are not simply paranoid about their own survival but also about the survival and prosperity of the larger group or country? In the case of the United States, one saw the startup unity give way to division in the Civil War. One can see the same thing happening in the case of Israel. The sense of shared passion and unification of a people against a common threat weakens as the country matures and the immediate perils wax and wane. The startup fails unless it can take things to the next level of maturity—shared values.

Attribute 2: Shared Ethical Values

Adherence to a set of ethical values is the second key attribute for societies wishing to manage risk effectively. Having passion is important, but it needs to be directed toward a common goal and set of objectives. An agreed set of ethical values helps to keep internal threats to a minimum and creates the effective basis for the rule of law.

The nascent Dutch Republic shared a set of religious beliefs based around the Calvinist church.⁴ It was really this set of beliefs that differentiated the rebels against their Spanish rulers. The young civil society was founded around two core Calvinist philosophical pillars: first, a work ethic that placed a premium on work and merit as opposed to nobility of birth, and, second, religious tolerance. Agreement to these ground rules was what created the glue to enable a vital and vigorous society to emerge. Internal threats posed by, for example, Hapsburg supporters who could have formed a dangerous alliance with the pro‐Hapsburg Belgium were never able to muster sufficient support to pose an internal threat to the revolt.

One can see from the US Civil War how dangerous disagreement on basic core values can be to emerging internal threats. The rift that was formed in the young republic was to no small extent due to ethical and ideological disagreements. Disagreement on the issue of slavery was the focal point, ultimately, in the rift between the North and the South that could only be resolved by a Civil War that cost the lives of hundreds of thousands of Americans. Force was the tool, but the majority shared the view that slavery should end and also that people had equal rights regardless of race and color. Ultimately, the agreement over a set of core values enabled the republic's continued growth and prosperity.⁵

One can see in Israel the impact of ideological splits down religious and ethical lines. The place of the very religious, for instance, and whether they should serve in the Army, and whether or not land should be exchanged for peace have both led to significant rifts in that society. The rift poses a serious risk to the state and highlights the importance of a shared set of beliefs in confronting internal threats. Recalling the Israeli withdrawals from the Sinai Peninsula and from the Gaza Strip, for example, there were scenes of violence with some settlers only leaving after the use of force by Israeli soldiers. There are now over a million very religious Jews who live in Israel. The vast majority of them do not serve in the army or pay taxes.⁶ There was once an agreement to subsidize the religious community, that there was a place in a Jewish society for Torah scholars; however, the concept was intended to cover a small number, maybe a few thousand, of truly gifted scholars. As the numbers have increased by the hundreds of thousands, the consensus has broken down and the rift poses a major internal threat to the future of Israel. Another rift has formed between those who wish to give up land for peace and those who do not. The assassination of Prime Minister Rabin by Yigal Amir and the murder of Arabs in Jerusalem by Baruch Goldstein have been the clearest manifestations of this rift. While such actions continue to be opposed by public opinion and law enforcers continue to have the full support of most citizens, one wonders how robust this consensus around democratic and secular values will remain to be and how effective this can continue to be in countering rogue threats.

Germany's post–World War I descent into chaos and the arrival of the Nazis at the helm of German power is a solid example of how rogue threats to the healthy functioning of a state, if not effectively countered, can lead to a state's effective destruction. The Nazi message found fertile ground in a world that was falling apart financially. The feckless and irresponsible policies of the kaiser that led to defeat in World War I⁷ were forgotten in favor of a narrative that pinned blame on Jews and Communists who were seen to be exploiting the weakness of the German nation for their own advantage. It took World War II and the destruction of a majority of Jews in Europe for a consensus in favor of a democratic, secular state in Germany.

This lesson should not be lost on banks and other commercial institutions. Just as important for such organizations is agreement on the basic rules of the game, the cultural currency of the environment, and the right of the institution to enforce them. Surprisingly, just as in broader society, one cannot assume that such a consensus exists, but it is equally essential in countering rogue elements. The dynamic at play in a commercial entity, especially a bank or other type of financial institution, is one between the individual and his search for profit and the bank's objectives. The bank relies on the individual to seek a profit but within an agreed framework and within the context of a broad set of rewards. Widespread flouting of trader limits, traders conspiring with controllers, bankers sharing confidential information with colleagues, and so on, all pose potentially existential threats to a bank but cannot take place in the context of strong agreement on the rules and the ethics of the bank. With a group of employees passionate about the firm, agreed values will also ensure their cooperation in identifying potential rogue elements before they can do too much damage.

Successful companies instill a common set of beliefs and values in their employees. If they are strongly instilled, employees tend to do the right thing, however that is defined. Google's “Don't be Evil” is likely the most well‐known summary of a firm's values. Other firms, though, such as Disney and Sony, have clear sets of values that employees appear to share. Goldman Sachs and Bridgewater Associates are good examples of explicitly stated values within the financial services sector, and it is hard to think of a rogue trading incident in either case.

Bridgewater Associates is a very successful hedge fund. Its growth to an investment entity with over $80 billion under management has been rapid. Its founder, Ray Dallio, has attracted attention, however, not just as a result of a successful investment strategy, but also a unique management philosophy. Principles, a hundred‐page text that is required reading for Bridgewater's new hires, sets out the principles that employees are expected to follow to guide them in their work on a daily basis.⁸

Goldman Sachs employees have shown outstanding commitment to uphold certain standards of professional behavior and values. On occasion, this may mean working in the gray areas, but not as rogues but as a company authorized strategy. The success that Goldman enjoyed through deploying effective risk management activities through the 2008 Financial Crisis demonstrated the flexible but broadly defined boundaries that employees work within and the complex structures of decision making. Furthermore, Goldman has not shrunk from firing employees who they have felt overstepped the bounds regardless of how much they made for the firm. Taking such aggressive steps puts employees on notice that there is a set of rules that they must live by or else suffer the consequences.

Attribute 3: Willingness to Debate Issues—The Open Society

When things go wrong and bad and unexpected things happen, there are two possible reactions: either put your head in the sand and pretend it was just bad luck or study what happened, acknowledge your mistakes, and fix them so that it doesn't happen again.

The Chinese and Soviet communist regimes both at different points in time attempted to cover up disasters. These provide useful case studies for the axiom that the cover‐up is usually worse than the original incident. Without dynamic, real‐time, honest debate and interaction between leaders, managers, and people, incident aftermaths will fester and potentially lead to replays or a failure to correct.

The Chernobyl nuclear disaster occurred on April 26, 1986, and is still widely considered to be the worst nuclear disaster in history. While news of the disaster was being reported in the United States, the playing of music replaced news broadcasts in the Soviet Union. The general population of the Soviet Union was first informed of the disaster only two days after the event. At that time, the reports vastly understated the scale of the damage. The response to contain the damage and get people to safety was slow and unsophisticated. With the general population kept in ignorance, there was no public screaming for help or offering to help. Can you imagine how long it would have taken to identify the Boston Marathon bombers without the ability to enlist the help of the public? Steps were taken by the Soviet government that one can't imagine in an open society. In another example, in an attempt to dilute contaminated meat, the Soviet government mixed small amounts of radiation‐tainted cow carcasses with uncontaminated beef before shipping the toxic mix across the country. No less a person than Mikhail Gorbachev has called Chernobyl a “turning point that opened the possibility of a much greater freedom of expression, to the point that the system as we know it could no longer continue.” Continuing to conduct such complex and weighty management issues in secret had become untenable.⁹

The SARS epidemic in China provides a second useful case study. The outbreak of severe acute respiratory syndrome (SARS) began in the Guangdong province of China, which borders Hong Kong, in November 2002. Chinese authorities did not report the incident to the World Health Organization (WHO) until February 2003, by which time there were already 305 reported cases and at least five deaths. Contact with outside media and the WHO was discouraged by the Chinese government and a WHO team that had traveled to Beijing was prohibited from visiting the Guangdong Province for a few weeks. Such actions slowed down the possibility of international cooperation to counter and mitigate the threat. This resulted in international criticism, provoking the Chinese Health Minister to apologize for the reporting delays and the Chinese government to issue directives that the press should not refrain from delivering bad news. Unlike the Soviets, the Chinese Communists appear to be able to coexist with a society that can be at times critical of its decisions and crisis management. When China suffered a new strain of avian flu (the H7N9 virus), the government promptly reported on the event and widely shared information pertaining to the outbreak. This response was noticeably different from that following the SARS outbreak. Indeed, the WHO praised China for its actions in quickly reporting and sharing information. Who knows how many lives this may have saved? The moral is clear: Err on the side of sharing too much, rather than too little, information, and ensure that society's leaders are not invested in structures of power whose existence depend on keeping information on “embarrassing” incidents away from the public eye.

As it goes with countries and national systems of leadership and authority, so it goes with firms. An unwillingness to acknowledge internal issues and to share information across the enterprise inevitably leads to a failure to address them properly and a greater risk of reoccurrence. I have discussed the importance of sharing information, for example, about Rogue Traders, trade execution issues, external fraud, and so on up and down and across the organization. Sharing information proactively is only the first step in the process. An open forum for identifying the potential missteps and sources of error in an environment free from recrimination is the important next step. Such a forum can only take place in an organization where the leadership gives its blessing. A lot of attention is paid to fancy analytics and predictive data capabilities. However, first it is important for everyone to understand what just happened, not what may or may not happen in the future.

Bridgewater Associates is a leader in this area in financial service. Founder Ray Dallio has sought to embed the principle of open self‐analysis and honest debate about issues and errors. When confusions arise, he has said, it is important to discuss them openly, even if that involves publicly pointing out people's mistakes—a process he referred to as “getting in sync.” He added, “I believe that the biggest problem that humanity faces is an ego sensitivity to finding out whether one is right or wrong and identifying what one's strengths and weaknesses are.”¹⁰ For senior employees joining Bridgewater as lateral hires, this can seem strange and uncomfortable. The results, however, appear to support the strategy. Bridgewater has been and continues to be a very successful organization.

Attribute 4: Education

An educated citizenry is critical if society is going to be able to manage its risks effectively. We discussed Seligman in Chapter 20 and his theories of happiness. An engaged citizenry is a happy citizenry. Education fuels engagement and opportunities for advancement leading to greater levels of fulfillment. Enhanced ability to manage risks is not the goal of such education, but it is an important byproduct. Education and understanding allied with opportunities for advancement create a citizenry with a strong stake to push back against the status quo, enabling greater focus on those things all around that can threaten to take that away.

The example of fighting terrorism relies on an educated populace for both specifics as well as general information. The population of London was fairly well educated in the dangers of terrorism and previously played a role in identifying potential terrorist threats in everyday life during the 1970s, thanks to IRA bombing campaigns and educational programs that followed in their wake. The 9/11 attacks were visited on a New York and US populace relatively innocent and comparatively uneducated regarding the threat posed by terrorists. Now New York has its eyes wide open for terrorism. The Times Square bomb plot of May 2010 was actually foiled by two street vendors alert to the danger. One wonders if they would have noticed such a threat prior to 9/11. Now, of course, other attacks have been visited in the US on Boston, San Bernardino, Orlando, Minneapolis, and Columbus, other cities relatively innocent to terrorism and so now the education process will kick off more broadly. The lessons from one city should really be transferred to other cities before disasters strike them, too.

A high level of education leads to an educated defense force, police force, and other critical risk management institutions of a self‐aware society. The Israel Defense Forces, for example, has no separate officer corps; rather, every citizen joins at the same level, and progress through the ranks is based on time served and merit. This is the risk manager par excellence, its members alive to threats posed continually from within and outside the country, continually in a state of high readiness for action to counter any such active threat.

In translating this lesson to the corporate venue, one finds a lot of parallels. First, one does find that companies that seek out the highest levels of academic excellence in their employees are rewarded by employees with high levels of motivation and behavior that generally conforms to the company codes of ethics and behaviors. Second, if companies actually invest in exciting learning programs for their employees, they can succeed in achieving higher levels of excellence. Training in risk and compliance issues can be important tools for creating employees engaged and aware of these important issues. Lastly, by offering younger employees the opportunity to get involved in senior discussions about risk, as if there is no gulf between senior officers and junior employees, firms can create the type of apprenticeship training model that will likely have more impact than anything strictly classroom‐based. Senior leaders can benefit from the lessons from the trenches they learn about from their frontline troops, while their more junior colleagues can benefit from the wisdom and experience of their leaders.

Attribute 5: Interconnectedness

Seligman's third source of happiness comes from the interconnectedness of people. Societies that foster close connections and relationships can monitor what is going on more easily. When children or others get involved in rogue actions, it is generally those who have somehow become unmoored from the normal bonds of society. The society of today places a premium on the number rather than the quality and depth of connections. People count their friends on Facebook, but a large number of virtual friends does not make them any more connected in reality. Yet the breaking of communal bonds is nothing new for American society, which has long encouraged the tearing up of the roots of communities in search of riches and the next frontier. This dynamic has long fostered the development of the isolated and rugged individualist in search of personal freedom. If one looks at the statistics regarding personal mobility, one sees that people are far more likely to move around from place to place in the United States than other Western democracies. This mobility weakens connections within societies and thus makes societies likely more vulnerable to individuals planning rogue and mass murderous actions, both because such people may feel alienated and because fewer people are involved with them to discourage or to monitor what they are doing. The shockingly high number of mass murder events in the United States appears to correlate with a society that has grown increasingly disconnected. Of course, there are other factors involved—prevalence of weapons and inadequate support for the mentally ill—but this factor seems to be underestimated in its influence.

When one looks at primitive tribal societies, there is certainly no shortage of weapons for citizens to use against one another. However, rogue actions are a rarity. Another example of a society with close social bonds and a high incidence of weapons are Israel and the communal life on a kibbutz. Amoz Oz's novel Elsewhere, Perhaps is about life on a kibbutz and, among other things, about the positive role of gossip in modifying the antisocial behaviors exhibited by some members of the kibbutz.¹¹ In such societies as these, abruptly vicious, murderous actions are fewer and far between. In a society with loose social bonds, aberrant and abhorrent behaviors do not come up against the tough judgments and influence of family members, friends, and neighbors and so can go smoothly from harmless fantasy to terrifying reality.

By translating these lessons to the corporate arena, companies that succeed in building strong connections between employees will see better teamwork and less rogue activity. Why damage the people you respect; why take risks that may result in damaging the interests of the team you work with; and, how can you take unauthorized risks if your activities are discussed with superiors and colleagues? Like the kibbutz and the tribe, a firm that is a good risk manager emphasizes the personal and seeks to build connections between employees.