Safe but Stifling
Is doing the safe thing the way to have a better result? Or does it lead to your ultimate detriment? That’s a question worthy of an experiment. As for the results, you have them here in my golfer’s (or CEO’s) guide to risk management.
I love golf. It is truly a great sport. It is a perfect balance of risk and reward — a battle of mental and physical abilities.
It is a game you play against yourself and within yourself. At the end of a day, you add up your score and know that you, and only you, own that score. There is no one to blame or steal the reward. It is all on you. I love that.
As of late, I started to focus on the impact of taking risks when playing. I wondered: If I were to take more risks while playing, would I score better? Would my risk-taking give me more rewards?
So I decided to conduct an experiment. In two rounds this month, I implemented two completely opposite risk strategies.
For the first game, I decided to play very conservatively.
I would lay-up if I thought I might get into trouble. I would use a lesser club off the tee just to keep the ball in play. While swinging, I only focused on striking the ball with an easy, smooth rhythm.
But does playing it safe and risk-free make you a winner in the long run? I played easy golf and scored well but for some reason I didn’t feel very satisfied.
My key objective was to consistently follow a process. I wanted to assure good form for each and every swing, every strike, every ball flight. I didn’t want to hit a stray shot, lose a ball, or exhaust myself beating the club into the ground.
For the next game, I went for the gusto. I took every risk I could. My focus was to make birdie on every hole. No, I wanted to make eagle on every hole. My objective was to sink every putt. Never leave a putt short. I didn’t care what my swing looked or felt like.
Indeed, I hit some majestic shots. Soaring, flying, drifting, fading, hooking, slicing, everywhere you could imagine. I lost nine balls that round and received nine penalty strokes. I was exhausted by the end.
I set my expectations so high that when I failed, I was angry and frustrated. The angrier I got, the harder I swung. The harder I swung, the less accurate I was.
When I compared the two games, I absolutely scored better by playing it safe. I hit the ball easily and it went where I expected it to go. I didn’t lose any balls and therefore didn’t have any penalty strokes. Because I set my goals with the process in mind, I didn’t care that I didn’t make par on every hole.
But does playing it safe and risk-free make you a winner in the long run? I played easy golf and scored well but for some reason I didn’t feel very satisfied. I had this nagging feeling that I could have done better. I didn’t feel as though I pushed myself. I played the easy route. Less risk meant less reward.
In the full throttle game I played as hard as I could and my voracious risk appetite caused me to score quite poorly. But somehow that form of play left me with more optimism. I imagined harnessing my best holes and repeating them for 18 consecutive holes next time. It was aspirational play.
So when it comes to defining risk appetite, I realized it is a truly tricky concept. In business, we routinely have to balance risk and reward in the pursuit of organizational perfection — the aspiration of all leaders — the perfect round, the perfect deal, the perfect presentation, the perfect opportunity.
If we don’t strive to be the best we can be, if we settle for mediocrity we may never maximize our potential.
And we may never win the green jacket.
In all of our relationships, either business or personal, we establish trust — at some level — in one another. In some cases, we have trust thrust upon us. In other cases, we have to earn it.
Promises, implied or explicit, are routinely made between us. They can be written, spoken or assumed. We often depend on these promises to make other decisions. If the promise-maker breaks their promise, distrust, catastrophe and chaos can ensue.
A few months ago, Argentina defaulted on one of its debt payments. Last year, Detroit was forced into bankruptcy and has defaulted on and renegotiated its obligations.
General Motors recalled thousands of cars in the past 12 months. Another company, somewhere, failed to meet a supply agreement and shipped parts below specifications. Someone, somewhere, broke their marriage vows and filed for divorce. In a bar, someone sits waiting for a companion to arrive, having been stood up.
As a promise receiver, how solid is our due diligence and risk management when it comes to accepting promises at face value?
Why do we make promises and then break them? Do we over-promise? As a promise receiver, how solid is our due diligence and risk management when it comes to accepting promises at face value?
How much faith should we place in someone who makes a promise? Are we deserving of the adverse results that may come from these broken promises?
How much responsibility should we take when accepting, or relying on the other party’s promises? Can we influence our outcomes by making better partnership decisions?
In the case of Argentina, I find its actions particularly troubling. Its default almost seemed strategic. Its history corroborates this. Strategic defaults are damaging and have cascading adverse effects. The fallout rolls through the banking sector as the default rolls from one bank to another. The result of not collecting interest payments triggers a series of shortages that, like the credit crisis of 2008, jeopardizes our financial security.
Will time and our willingness to forgive allow Argentina to rebuild its credit rating? The answer is probably yes. We tend to minimize past acts and expect or assume that people, countries and companies will become good corporate citizens and do the right thing and fulfill their obligations.
GM has had a recent rash of recalls. It may have known about the issues or not, but either way, cars with defects were shipped.
I do, however, respect the fact that GM owned its failures and has done what’s right for the customer. I also expect GM consumers will rationalize and forgive GM its transgressions and hope they get it right next time.
In all the above relationships, what I find interesting is that trust and faith are the underpinning elements of a risk decision.
The suitor makes himself or herself look desirable and reliable. The borrower trumps up their financial position and presents a rosy, reliable, responsible outlook. The manufacturer boasts about integrity and quality initiatives.
If a partner of high integrity and quality fails me, I am sympathetic. Sometimes the circumstance of the breach is beyond our control and we fall victim to a series of events that are like dominos falling.
The decisions we make and the partners we trust have a direct impact on risk and the outcomes we expect and realize.
As we strive to make the best partnership decisions, we should look more into the history, character and integrity of those sitting across the table.
We will make better choices and produce better outcomes by doing so.
Service Is Value
Those who know me in the risk management industry know that I am a real stickler when it comes to using vague words or terminology. Ironically, my word obsession first started when I explored the true meaning of the word risk.
We use this word everywhere in our industry but do we really understand what it truly means? Moreover, do we in the industry all use the word consistently and with the same intention?
How is value derived from your risk management programs? I recall an expression that resonated with me: “Value is created by being of service.”
Another choice nebulous word that often makes me crazy is the word, safe. Honestly, what does that mean? To add to continued aggravation, a new word recently made me pause — the word is value. My word definition quest started when someone asked me: What value was my risk management program providing? It is a fair question, but if only I truly knew what it meant.
An accountant sees value as the monetary worth of something. Economists view value as the utility of something and its power of trade. Marketers understand value through the eyes of the consumer and their perception of the worth of something.
So, how do risk managers recognize value? How is value derived from your risk management programs? I recall an expression that resonated with me: “Value is created by being of service.”
Think about an item or service that you own that you simply couldn’t live without. I think of my smartphone. It is my portable email, calendar, music system, calculator, flashlight, etc. — and let’s not forget, my mobile phone too. This gadget truly serves me and without question, I truly value it. Value in this case is a measure of the sheer size of the hole it would leave if I lost it.
In much the same way, risk management must serve an organization in an essential way for it to truly be of value.
Imagine having a program that forces the clear articulation of an organization’s strategy and goals. Which brings forward intelligence that enables more sophisticated operational and strategic decisions that can drive optimized and sustained performance.
Information that was derived from the program allows an organization to become more agile and respond more quickly. This allows an organization to avoid unwanted situations or seize opportunities before its competition does. What a program. What a service. What value.
This is the value of a solid enterprise risk management program.
An enterprise risk management (ERM) program creates a neutral centralized line-of-sight to risks and issues. This consistent rendition and single source of truth around sensitive risk issues allows the organization to avoid confusion or misinterpretation of risk events with stakeholders.
The risk intelligence created by an ERM program helps to defend the allocation of scarce resources on risk management activities.
By having a logical and consistent means of understanding risks, the organization can more easily defend its decisions around investments in risk response activities and its allocation of scarce resources.
Also, by centralizing decisions around risk management activities, the ERM program forces governing entities to truly recognize their organization’s risk position.
By making centralized decisions around which risk controls to institutionalize, leaders can examine and follow a collective, not individual, risk appetite or tolerance for risk and protect their shareholders.
That is what I call valuable service. But I guess the best way to measure if your ERM program is truly valuable, is by seeing how many people would miss it if it was gone.