There’s a personal side to risk taking and so a personal side to governance of risk taking. Matthew Leitch offers nine suggestions for doing it well.
In this article ‘governance of risk taking’ is defined as controlling the risk taking aspects of management duties that have been delegated, without being personally involved in each decision. Often that means explaining what we want people to achieve and putting some constraints on how, but otherwise letting them get on with it.
The ‘everyday’ aspect focuses on the impact that we have from day to day, especially our influence on people we work closely with, rather than just through high level rituals conducted at board level in very large companies.
Whether your main concern is that people are reckless or that they are too timid to get things done, here are nine suggestions.
1. Consider all important decisions
In particular, look at all important types of decision, not just decisions about how to respond to perceived risks. Decisions about risk responses tend to be quite narrow, small and infrequent. The important decisions that make most difference to risk levels are bigger and broader, with many considerations.
Though you should think widely about what types of decision to focus on, that does not mean you can or should try to tackle them all with the same focus on governance. Look for types of decisions that carry a lot of risk either because they are individually risky or because the decisions are frequent and important in aggregate. Act when you think people are not responding intelligently to uncertainty.
2. Show and coach
A lot of your influence is with people you know personally and work with every week. Teach by example and by coaching, especially if you are good at making choices in the face of uncertainty. Obviously you should focus on what is important and helpful with each individual.
There is no such thing as a single objectively correct probability, though there can be objectively correct frequencies.
3. Teach about specific situations
For example, you might have someone who is responsible for producing management accounting reports but is overly reluctant to innovate with different analyses or methods of presentation for fear of them being rejected, confusing or incorrectly calculated. Coach the person to develop prototypes and choose suitable quality assurance (QA) methods so that new ideas can be tried out safely. Or perhaps you have someone who does not notice or respond to the difference between analyses whose arithmetic can easily be checked and those that cannot. Show them the difference and coach them to think of other ways to check when it is not easy. Or how about someone who does forecasting but never tries to reflect the impact of decisions that might be taken in the future? This is a more advanced technical issue but you could coach them to research the available methods and start developing the necessary skills.
These are all situations where there are smarter ways to deal with the uncertainty inherent in the situation.
4. Teach creative solutions, not just avoidance
Encourage them to use techniques that allow challenging things to be done more safely. For example, encourage use of innovative techniques for getting more information, for testing ideas quickly and cheaply, for delivering in an incremental way, and for sequencing work and cutting dependencies. Teach smart ways to make routine work more reliable through earlier QA, automation, and other seemingly slow ways to work that save time in the longer run, on average.
5. Recruit and reward
Encourage people to be skilled at dealing with risk and uncertainty in everyday situations, not just when filling in forms or a database to comply with some risk-related bureaucratic ritual. Reward and promote people who deal with uncertainty well. This is easier than it sounds because so much of management involves uncertainty. Really you are just looking for good managers.
6. Make rules specific to decision types
To use numbers to govern risk taking you need to identify a specific type of decision, clarify how it is taken and agree an approach with the people who take the decision. People have to remember to follow the rule and it may be helpful to have someone or something checking that they do.
Within that structure it is possible to embed quantitative guidance – usually as weights or limits. With this in place you can have conversations that are quantitatively precise.
7. Objective rules only
If you use a statistical calculation based on past data then changes to this method need to be carefully controlled, just as you would control changes to accounting policies or the definition and calculation of a key performance indicator. There is no such thing as a single objectively correct probability, though there can be objectively correct frequencies.
8. Do not ask people to take more risk
9. Embed through automation and information
In summary, whether you are the CEO of a huge company or the supervisor of a team of three bookkeepers, your personal influence on risk taking is important. Your example and coaching of others are crucial and, in some cases, it may be useful to be precise and quantitative about some decisions and design methods specifically for them.
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Nine steps to take risk well
Business & Management Magazine, Issue 280, December 2019/January 2020
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Update History
- 04 Dec 2019 (12: 00 AM GMT)
- First published
- 19 Aug 2022 (12: 00 AM BST)
- Page updated with Related resources section, adding further reading on risk taking for your business. These new articles provide fresh insights, case studies and perspectives on this topic. Please note that the original article from 2019 has not undergone any review or updates.