The (relatively) easy part of risk management is learning how to mitigate the threats that can negatively impact your organization's ability to function. You know the drill. Prepare now for your organization's response to the next sudden hike in energy costs or the latest credit crisis.
For most organizations, the much harder part is identifying and acting on risks worth taking in order to create value. The fact is, calculated risk taking is a fundamental precept of capitalism: no risk taking, no innovation, no competitive advantage, no shareholder value.
Nonetheless, many established organizations are characterized by a desire for stability, certainty, and predictability, not by a propensity to actively pursue risk. These companies avoid entering new markets, fail to develop new products, or ignore the potential benefits of mergers and acquisitions, preferring instead to conduct business as usual.
Unfortunately, playing it safe doesn't always prove so prudent after all. For instance, railroads, the dominant transportation industry of the late 19th and early 20th centuries, ignored and failed to co-opt the development and application of the internal combustion engine. As a result, they were not prepared for and thus did not share in the value created by the shift to traveling via passenger cars and shipping freight via truck. More recent examples include the emergence of Internet-based telephone service (VoIP), the digital delivery of videos direct to consumers' TV set-top boxes, and the massive migration to email and away from postal mail. In each instance, dominant players did not anticipate and capitalize on the shift.
As demonstrated by these examples, we believe that a major impediment to establishing a risk intelligent enterprise is the irrational fear of taking justified and calculated risks to create value. Such fear is a product of what we call "the taboo of failure." Despite many organizations' propensity to invoke the language of bold decision making, in today's global business environment, too few decision makers are comfortable with the notion of failure—to the point where those who bring up the possibility are characterized as "doomsayers" or are marginalized for not being "team players."
And upper management is not the only group seemingly unable to take reasonable risks. Fiona Lee, a psychology and business professor at the University of Michigan, conducted a study that found that traditional management styles often leave employees at all levels too insecure to risk innovation. She noted that fear of failure impedes taking the risks necessary to innovate. "Corporate America has very little tolerance for failure," she noted in a recent interview.1
Intelligent risk taking for reward will never become the norm in an organization where failure is not acceptable, no matter how reasonable and justified the risk taken.
The risk intelligent enterprise strives to banish the fear of failure and in so doing positions both decision makers and personnel at all levels to embrace intelligent risk taking for reward. We believe that an open and supportive environment that encourages the examination of previously unquestioned assumptions will help bring about intelligent risk taking.
Is success a product of such an environment? According to the Stern School of Business at New York University, the most successful companies—General Motors in the 1920s, IBM in the 1950s and 1960s, Microsoft and Intel in the 1980s and 1990s, and Google in this decade—share a common characteristic. Each achieved success not by avoiding risk but by seeking it out.2 Furthermore, a study of the 50 largest U.S. oil companies between 1981 and 2002 found that the firms taking more risk in exploration and development earned higher returns than firms that took fewer risks.3
Banishing fear begins by rewarding intelligent risk taking—even if occasional failure is the result. Once employees understand that failure may be an acceptable price of taking justifiable risks, the organization will be positioning the enterprise to live long and prosper. Intelligent risk taking can make it so.
Lara Abrash is a partner and the national audit and enterprise risk services chief of staff at Deloitte & Touche LLP. She can be reached at (212) 492-3918.
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