Leadership fundamentally involves three main elements: people, change and risk, as well as the preparedness to fail whilst trying for greatness. However, of all the changes currently affecting the business environment, it could be the leader’s approach to risk that is changing the most. An Ernst & Young (EY) survey from late last year found this change is especially prevalent in Australia’s banking sector, where 89 per cent of respondents reported that the board and senior management were increasing their focus on risk.
But is this increased focus in the right spirit? Ultimately, every business is run by human beings hardwired to limit their exposure to risk. It is obvious that, consciously or otherwise, a leader’s personal risk appetite has a big influence on how they live their life, and how they influence a business.
How does your risk appetite shape your business?
Your tolerance for risk defines a quantum that you might be willing to take on certain decisions in each area of your life. Whether you are a business owner, CEO or board member, your risk appetite, capacity and tolerance will shape your pursuit of risk and the parameters the business must employ in deciding whether or not it’s actually worth it.
Our brains are wired to avoid risk and play safe, which often leads us to over-estimate risk and exaggerate its consequential effects. We frequently underestimate our own abilities to prevail and give ourselves a false sense of security by believing that inaction may not be to our own detriment and so observing the status quo is acceptable. Maybe this was once an acceptable way to approach risk in the business landscape, but not so anymore.
Digital is driving a new ‘speed agenda’ in industry in everything from the innovation of business models through to the ability for leaders to take more frequent, calculated risks while out-learning their competitors. This means the ‘tone at the top’ of organisations strongly dictates the behaviours and the way companies operate. Embracing this pace is fundamental to achieving sustained high performance.
Embracing a culture of risk
Whilst the external environment and all of its parameters can have a direct effect, those things that can be controlled are ultimately influenced by culture. This culture begins with leaders and, to an increasingly significant degree, their attitude to the acceptance and taking of risks.
Taking risks at the speed of business today and the accompanying cadence of disruption is demanding leaders communicate context to your team or Board of what is going on around you and what you are trying to achieve.
Whilst there are a multitude of complex factors at play in shaping a prevailing risk culture, it is the reflective capacity of the leadership to sense threats versus opportunities, aberrations versus emerging new normals to continue to inspire and build trust and engagement with the ‘why’ of the organisation. However, this continues to be an area where leaders struggle. In a survey from February this year, Deloitte found that just 17 per cent of organisations have a full awareness of the risks that could lead to a crisis.
Is engagement enough?
Unless the leadership of an organisation models a courageous mindset others in the organisation will become nervous and interpret this as the bosses being more risk averse than risk ready.
Increasingly, leaders will need to show the resilience and courage to embrace failure in order to be truly successful. This will make it safe for people in the organisation to contribute more than they otherwise would.
Questions are being asked of traditional risk management models and whether probability and impact rated as low, medium or high are robust enough when an increasing number of emerging risks, even after mitigation, are being rated as high.
Suggestions are being made that perhaps risk appetite and risk quantum might be equally valid as the axis of risks offers assessment criteria of either good, acceptable or bad.
Arguably, leaders may need to learn, unlearn and re-learn approaches to risk given change has never happened this fast before, and it will never be this slow again.
Taking calculated risks, failing fast and often and demonstrating resilience will help leaders to build a culture of courage in their organisation. This new culture will drive a push for sustainable value creation against the pull for safety anchored in the organisational beliefs and assumptions of what got us here will get us to where we want to go.
By: TEC Alumni Chair, CEO mentor and coach Trent Bartlett