In a turbulent market-place, with steady risk and even some periodic Catastrophes (cyber-attacks, political issues, weather and earthquakes, as examples), Risk is something that should be a careful and objective consideration for all leaders…
Yet the NACD 2013–2014 Public Company Governance Survey found that only 26 % of companies have a defined risk appetite statement to guide their thinking about how to consider risk.
While that may be a new concept to many of us – it was to our team – it may point to a deeper reluctance on the part of leaders to give serious due diligence to the risks inherent in their businesses.
Studies are emerging that point to reactions of discomfort in dealing with risk. These studies show that the “fight-or-flight” hormone cortisol is released in response to the stress induced when humans are faced with choices inherent in risk. For example, in a December, 2013 study published in the Proceedings of the National Academy of Sciences of the United States of America, researchers found that when exposed over a period of days to a situation of uncertainty, the subjects became more risk-averse as time progressed. Conversely, studies find that in times of stability, leaders tend to underestimate risk…!!
Security guru Bruce Schneier notes, “We’re bad at accurately assessing risk; we tend to exaggerate spectacular, strange, and rare events, and downplay ordinary, familiar, and common ones”..
Neither approach to risk is responsible leadership – and, in fact, may prove to be poor leadership – usually and unfortunately, in retrospect. Responsible leadership demands clear-headed consideration of risks before the environment triggers the cortisol. What are leadership questions you should be asking regularly in your organization about risks ??
1. What is important for us to protect at any cost, and where do we have some degree of tolerance ? A baby food manufacturer cannot tolerate a food safety issue, but may be able to accept some risk around source of its product ingredients. This question helps your organization to reflect rather than react when there are challenges.
2. What are our most constant risks, and how can we keep them in an acceptable range ? Constant risks tend to be in such day-to-day issues as failures in suppliers or partners or transportation. While not devastating, they can be disruptive in the moment if there isn’t a backup plan. Good leaders assure these day-to-day risks have been considered and addressed.
3. How much will it cost to reduce a given risk, and would it be worth it ? Keeping in mind Bruce Schneier’s comment about exaggerating the rare risks, it’s important for leaders to keep the organization from over-reacting to the one-in-ten-thousand chance of the spectacular disaster.
4. Can we afford to take more risk on this, and what are the worst case scenarios if we do ? In those times of uncertainty when the tendency to entrench is high, a good leader will beg the question. Often the worst case scenarios are not catastrophic, nor even of long-term impact.
5. How much total risk can we afford as an organization ? It’s good to look at each risk independently, but at some point, the inventory of risks also has to be considered. If TWO or THREE Risks were realized at the same time, what would it do to the company ??
A dauntless Leader does not shirk the responsibility to objectively consider the organization’s “ Risk Appetite ”, no matter the discomfort it engenders...If you find your head in the Sahara of risk, pull it out and start asking these questions… !!