An Appetite for Risk

When you wake in the morning and the blizzard is howling outside and the temperature is 40 degrees below zero do you venture outside and start hauling your sledge? When you encounter the crevasse fields do you get out the ropes and tie everyone together so that if one person falls in the others can help pull him out again? In both of these scenarios, which I have encountered many times, the answer is always different. It’s about qualifying and managing the risk.

In business taking and managing risk is part of what we must do every day to create profits and shareholder value. There's no such thing as a safe risk. None of it is safe. Rather, it is about reviewing the various scenarios, going into areas others are less likely to go and making decisions.

Decisions should be made by the leader responsible for the task. Prudence, experience, judgement, intuition and situational awareness of leaders directly involved in the planning and execution of the task are the critical elements in making effective risk management decisions

But the sudden and cataclysmic corporate meltdowns of recent years suggest that many companies neither manage risk well nor fully understand the risks they are taking. “Who dares Wins” is the SAS motto however, as with the SAS, the risk needs to be qualified and managed. We are not talking here of betting the company or taking unsubstantiated risks.

What's a stupid risk and what's a calculated risk (i.e. a good one)?

We can all come up with daily life examples. Taking your entire pay cheque and betting it on a roulette table in Las Vegas is dumb risk. Investing your retirement savings in mutual funds in the stock market when you’re young is a smart risk.

But what is risk in business? When it comes to your business and/or career, ultimately only you can determine that. People and books can only give you advice about various directions. With risk we always get in the question of risk appetite. Clearly, a standout employee, entrepreneur, and a leader all need a healthy appetite for risk and a hearty helping of self-confidence to overcome all that.

But how much is enough? Is there a point at which confidence and risk tolerance become liabilities? And though it's common to mix the two (after all, you need confidence to take risks), do they really go hand in hand?

Here are some tips for helping you manage risk...

Accept the risk
Risk is related to gain; the greater the potential gain, the greater the risk. To evaluate risk maximise the likelihood of success.

Take no unnecessary risk
Accept only risks necessary to achieve goals.

Anticipate and plan for the risk
Risks are more easily controlled when they are identified early in the planning process.

Appropriate decision-making
Decisions should be made by those responsible for the task. There judgement, intuition and experience with the task is critical.