Focus on the Upside of Risk

It's only natural that we want to first do what we can to minimize, if not prevent bad things from happening. After all, no one wants these things to happen if they can be reasonably avoided or controlled.

By Christopher E. Mandel

The key is "reasonableness" typically measured in return on risk investment, though sometimes not measured at all. With what I call prudent risk taking in mind, why not take a more positively oriented focus on risk and its potential to contribute to our key goals rather than detract from them?

Don't misunderstand; most would agree that we must first address the mitigation of the things which can do the most harm. Many, if not most management teams and boards want assurance that these "bad things" are being appropriately addressed (meaning they're effectively mitigated within reason). And while this may often absorb the majority of a risk manager's time and resources, that is no excuse to ignore the numerous other, very real opportunities presented by the upside of risk.

Ineffective at Managing Risk (05/01/13)
RIMS Attendees Talk Drones, Product Recall (05/01/13)
Uprooting Terror (06/01/13)
Companies Lack Supply Chain Visibility (05/20/13)
Focusing on Risk Management (06/01/13)

Interestingly, I know of one risk manager that worked for two years to convince company leadership to modify the way it defined risk, to account for this duality of risk. There were many reasons for the time it took to accomplish this seemingly simple task, paramount among them was the narrow paradigm that had been embedded in management's thinking over time. Their risk paradigm was driven by self preservation as the dominant concern leading to a myopic view of their priorities, namely that the "bad things" are the most influential component of continued, uninterrupted employment. Reinforcing this view and its associated behaviors was a company with a relatively consistent record of meeting and often exceeding its strategic and operational objectives. Unfortunately, this success trend blinded these leaders to the opportunities to achieve even better performance and thus cheated the key stakeholders out of their performance outcomes. To exacerbate this issue, most if not all of the stakeholders in this particular company were completely oblivious to the lost opportunity.

Perhaps both management and the other stakeholder's complacency was a reflection of their underlying and largely unarticulated appetite for risk. After all, everyone has their own level of risk they find acceptable. That manifests itself in the form of "dividends" that usually reflect the risk and reward tradeoff of their decisions to invest in, work for, provide supplies to, buy products or services from, lend money to, etc., such companies. However, pure capitalism suggests maximization of returns as one of its central goals. That being the case, perhaps our risk and reward tradeoffs are infused with numerous, more subjective variables that complicate these decisions and contribute to a result which ultimately reinforces the focus on the downside of risk. That leads to a strong tendency to ignore or minimize efforts to leverage the upside of risk and benefit from the enhanced performance outcomes that they make possible.

No worries. It is clear that firms that take a balanced view of risk are the firms that secure substantially greater performance outcomes that truly enlightened risk stakeholders understand and expect. Can you say Apple or Google? Consider your definition of, appetite for and approach to risk before deciding on your approach to managing risk for your company. It can make a significant difference in results.

CHRIS MANDEL, a long-time risk management leader, is a former president of RIMS. He is also the president of Excellence in Risk Management LLC, and an executive vice president with rPM3 Solutions LLC.

February 21, 2012

Newsletter Sign-up