Corporate Risk taking….and why large organisations gamble away their future by avoiding risk
Are large organisations risk averse?
According to Harvard Business Review the answer is an emphatic “YES”; at least as far as middle managers are concerned. Interestingly it points to research that shows most managers in large organizations are significantly more risk-averse than the CEOs of the same, who consider each investment in the context of a greater portfolio.
* https://hbr.org/2020/03/your-company-is-too-risk-averse
“In current practice……. executives in large corporations are reluctant to propose and advocate for risky projects. They quash new ideas in favour of marginal improvements, cost-cutting, and “safe” investments.”*
As we all know, without renewal and new business lines, the corporation will ultimately fail. What can be done?
Jack Welch, General Electric, once said “When the rate of change inside an institution becomes slower than the rate of change outside, the end is in sight. The only question is when”.
The difficulty faced by so many managers in large organisations isn’t that they are somehow incapable of seeing the “bigger picture”, it’s that they themselves are penalised by not allowing to benefit from that same view. After all, what is the point of being a large strong company if you are personally rewarded entirely on the basis of your own little bit of it? You might as well just work for a small company. If you come up with an idea, are told to go for it and then penalised for its failure then…well…you are hardly likely to be encouraged by the process. And that is, often, exactly what happens.
Years ago, I was on the hunt for a company acquisition that I knew was not only the potential saviour of my own part of the big global business but could seriously contribute to the success of the whole wider global company. I am not going to describe here the utter pain of trying to make this happen, pain that took several years and almost, quite literally, almost converted me completely into one burnt out wreck. Suffice it to say I did do the deal and it was a fantastic success. What was interesting about it was how I was treated during the process.
As always with an investment there are no guarantees. This was no exception. It would be an understatement to say that I was bullied, harassed, belittled, ignored, and finally threatened throughout the whole effort. The threat here caps my point. The global CEO told me very clearly, “Andy, if this goes wrong I’ll fire you…and I’ll do it when you are on the other side of the world and cancel your return ticket”. “I know” I replied. And I knew he absolutely meant it. At the time I just mentally banked it, along with all the other abuse, and treated it as the inevitable cost of getting something done. I believed the deal would make the organisation I worked for a huge return but I couldn’t be 100% certain. Nothing ever is. But would I share in even a fraction of that return? Of course not - in any financial way. In effect I had to take a personal risk in order to achieve a non-personal ‘reward’. The reward I would gain was that I would be proven right and that I could be happy to have made a valuable contribution to the organisation. I would also be able to keep paying the mortgage. And so would the colleagues in my team. If I failed, I would not have the satisfaction of contribution. Neither would I be able to pay the mortgage. It would have been far better not to bother with starting the process at all. Nobody would have been any the wiser. Except myself. For a missed opportunity. I wonder how many people do exactly that? Choose an easy life.....over a challenging one. I wonder.
So what if I didn’t bother at all? What if I didn’t take all the abuse, stress and pressure and simply ignored the opportunity? I would certainly have been frustrated. But, in all probability, I would still have continued to pay the mortgage. At least until the organisation as a whole had to face the inevitable cuts as its market share gradually evaporated for the lack of innovation and risk taking.
And therein lies the issue. If the incentive of taking risk is pretty much only downside, then why take a risk? Now I know the reader will be wondering: “but Andy, you still took the risk” and you would be right. Sheer bloody mindedness, determination and perseverance combined with a touch of madness drove me on. I never said my decisions were based on universal logic.
One thing did help me. Without it I would have unquestionably failed. I was able to get a small (very small) team around me. In essence we were a team of 3 to 5 people working on this project. They were truly the best motivators - indeed the only motivators - I had. Frankly they were brilliant. Without them I couldn’t have led this project to a successful conclusion. I often think that they saved my health - certainly my mental health.
If you want to create an organisation that can actually embrace risk taking then you need to avoid shoving everything on one person’s shoulders. I don’t mean the downside risk. At the time I was completely accepting of the fact that if it failed then I and I alone would be fired. I don’t think that is healthy. What I mean here is that you need a team that can share the frustrations, brainstorm solutions along the road, laugh with and cry with. Without that I just don’t think that you will be successful in creating a culture accepting of failure.
Question: who do you have that you can turn to on a bad day? I mean at work. Anybody? Second question: if your employee has nobody to turn to, a shoulder to cry on so to speak, will that make them a better or worse employee? More likely to take a chance – and possibly fail – or less? I'll leave that with you.
The concept of being financially killed on the downside but not somehow rewarded on the upside cannot be right. The CEO who gave me my termination ultimatum was totally wrong. Wrong in the sense of it made NO SENSE to isolate the project risk in its entirety to me personally. He had the benefit of the risk being manageable from his portfolio and the reward being a substantive contribution to his future success - as it did indeed prove to be – beyond even our own wildest imagination. To enjoy the upside himself but push the entire downside to me wasn’t right. I vowed there and then never to do the same to anyone in my team. Whatever happened, I would protect them. So should you.
It reminds me of the story of a lovely, sadly no longer with us, CEO of old. His name was Sir John Harvey Jones and from 1982 to 1987 he was the Chairman of Imperial Chemical Industries, a UK headquartered global conglomerate,. He found fame and public appreciation for fronting a TV series called “Troubleshooter” where he visited several companies in difficulty and skilfully got them back on track. While at ICI he followed a doctrine of “speed rather than direction", on the assumption that "once travelling a company can veer and tack towards the ultimate objective." You can see he was previously a navy man. He also believed in putting more power in fewer hands "to reduce the number of those who can say 'no' and increase the motivation of those who can say ‘yes' ", maintaining that "there are no bad troops, only bad leaders". Now come on admit it. You are warming to him already aren’t you.
His story, as a young manager of a factory in some far flung reaches of the global empire is both revealing and enlightening. He made some fateful decision - I forget now what it was - suffice it to say that his mistake cost the company a substantial sum - probably several million in today's money. He was duly summoned to London for a one to one meeting with the Global Managing Director. In his memoirs he reveals how he thought his time was up with the company. He told his wife what happened. He had to go to London to 'face the music'. Sure enough, when he arrived he was directed to the top floor of the grandiose tower block and told to sit down in the oak panelled boardroom. After what seemed like an hour, but was probably no more than a few minutes, the MD arrived and promptly gave Harvey-Jones a real dressing down. In essence - how could he have been so stupid....does he realise how much this has cost the company etc etc. After he was thoroughly chastised the MD told him that he had better get back and make amends. Harvey Jones was totally taken aback. 'What do you mean, go back?' he said. 'Surely you are firing me'. 'Firing you? Why on earth would I do that?' replied the MD. 'Your mistake has cost a small fortune which is therefore effectively invested in your education. Of course you are not fired. You are going to back to prove how good you really are'. And with that the meeting was over.
It was a salutary tale of looking at failure in a completely different way to what was the norm in those days. It wasn't just the mistake that shaped Harvey Jones' future success; it was the enlightened way his boss realised that failure is an essential part of learning and that in turn underpins future success. This event took place some 60 years or more ago. Its a pity that so many companies still dont understand it.
When confronted by managers who are strongly incentivised, for the sake of their monthly pay cheque, to always say no then you are simply not going to get the risk taking you need to survive. But it’s not just incentives, it’s also culture.
In my career I have had the luck and privilege to have worked for a variety of companies with wildly different corporate cultures. Ranging from the “laissez-faire Wild West” (typically East Coast American) to the rigid, control driven order taking, risk averse business (typically Teutonic). There is a reason why the USA is the home to the world’s leading tech and software companies. There is also a reason why Germany is the home to the best engineered, if uninspiring, metal goods in the world. In fairness, for a few moments, it did look as if Germany gave birth to a successful new-fangled fintech in New World style. But let’s not dwell on Wirecard.
My experience of American global organisations was that they were arrogant, culturally ignorant with an incredible ability to pass responsibility on to people. And then to reward them and kill them in equal measure about as quickly as I have typed these words. In one famous organisation I worked for I felt privileged when I survived more than one calendar quarter - for each quarter would carry the inevitable company sole searching of why the organisation hadn’t met its quarterly forecast. Everything else seemingly was irrelevant. Strategy changed every three months - something at the time I found strange if not very frustrating. But when we reached year end and changed the strategy back to the one we had in Q1 I realised the concept was more than fatally floored. After two years I was the longest serving employee in the local business. I have no idea why. But I realised my mental health couldn’t take all this nonsense, so I left and joined a different company. At least with the new one I could stick to a strategy for more than a few weeks. To my surprise it seemed to work better. Certainly, I can characterise the American corp as one that didn’t so much encourage risk as insist upon it on pain of death. Pay was good while it lasted but the threats were far greater. No wonder people left…or were frequently fired. It was a mess.
Basically, the philosophy was this – ‘You see that door there? Well, here is a cheque book, just go and run through it.’ If, on opening the door and running out you were to discover a 200 metre drop then so be it - it would be up to you to figure out what to do next. Whilst it was certainly educational, if not rather brutal, I am not sure the near deliberate ignorance of facts in planning for the future was such a good idea. Not at least if one valued life. I don’t recommend this approach.
My experience of the Teutonic organisation was at the other extreme. Faced with a closed door the approach was painstakingly different. Here I was required to acquire vast quantities of information, which would then be analysed, cross referenced, discussed and debated with the ultimate conclusion after many months of careful deliberation that what was needed was….
.......more information.
This process would then seemingly continue for months if not years by which time the circumstances on the other side of the door, that nobody really understood anyway, would be wildly different so that we would either have to forget the whole thing or start again all over. Sounds familiar? Trust me…I wasted what felt like a lifetime on such futile exercises. My best decisions were the ones where I just told people “Just do it” and kept the information away from the nay sayers in HQ. Yep, that was my risk taking. I just needed to ensure nobody in HQ found out. I don’t really recommend this approach either; albeit it was all that was available to me at the time to get anything done.
You might not be surprised to learn that what I am advocating is something a bit more balanced. One where the whole business is both financially and culturally aligned to take a balanced risk. What does 'balanced' mean? It means that opportunities are assessed based on the facts available at the time, the best assessments of the unknown future, within a portfolio approach to risk.
Allocating some “fun” money for wild ideas is a great idea if it forms a part of a portfolio of different levels of risk and reward. By “fun” money I don’t mean invitations to a pub crawl in the Reeperbahn in Hamburg. I mean crazy business ideas with a high likelihood of failure. Certainly, a near impossibility to measure the rewards. An inability to quantify the benefits should represent a massive green light to give it a go. If you find those kinds of investment projects, they are priceless. Quite literally in fact. If you don’t see it like that then forget trying to change the culture. Just get back to reading your compliance manual.
This needs to be balanced with more traditional investments but also requiring risk, perhaps with a more measurable reward.
The closest I ever got to this kind of approach was an initiative from my boss at the time that instituted a new investment methodology - basically people would be invited to put forward ideas, costed with financial benefits identified. The idea had the best of intentions. An ‘ideas’ forum if you will. These would be discussed and, hopefully, some approved, by the Leadership team. Unfortunately, it was doomed to failure from the start when someone proposed the name for this initiative should be the “Innovation Board” The minute someone said “Board” I knew it would fail. We were already hiding behind the board meeting. Let’s be honest, mention a “Board Meeting” and you are l are
likely to be….well…bored. Board Meetings simply do not engender the word “risk” in any shape or form. It conjures up an image of a dusty old room with ancient men discussing things about the business that stopped happening three generations ago. This “Innovation Board” proved no different.
The answer to the projects submitted was either “no” or “need more information”. The fact that benefits should be identified, quantified and costed immediately prevented the really interesting ideas from ever getting off the ground. It did succeed in one way though. It reinforced the leadership team with a sense of its own self-importance as it “sat” to discuss the latest project status in the “Innovation Board”, projects all neatly categorised in a vast spreadsheet of doomed to rejection ideas. If you want to avoid people being scared of failure, then don’t set up an 'Innovation Board'. When I say the Innovation Board ‘sat’, it certainly did, but it would have been far better if we all had a lie down. We could have had a decent nap. At least that would have been more productive.
Vast spreadsheets of accountancy nonsense massaging the egos of overpaid executives that are out of touch with any sense of entrepreneurial spirit isn’t going to cut it.
You want the organisation to take more risk? Then get out more. You are not going to get more risk by meeting in “Boards”. You are not going to find opportunities by reciting your latest compliance update. Neither are you going to engender new thinking by complaining about yet another budget gap.
Which part of inspiration do leaders not understand?
Inspire and you will get ideas. Encourage and you will get people trying. Get people trying and failing and you will be on the right road - all you then have to do is help them get up and encourage them to try again.
We live in a world where not even the quarterly result is good enough. Now everything must be instant. Set up a website we need it to have a million hits a day within…well…a day. Start a business and it needs to hit the ground running, yesterday. Want to learn a new language? Well someone out there can sell you the “new system” that will, apparently, get you speaking perfect Japanese within a week. If I had a pound for every time my boss told me it ‘it needs to be profitable within one accounting period’….
The simple truth is that life isn’t like that. We can’t grow potatoes faster than the seasons allow us to. The sun doesn’t rise any quicker if I subscribe to the latest weather app on my smartphone. The result? Young people get disillusioned faster than ever. Take a skating lesson and fall over? Your ambition as a world leading professional skater is over. Or so it seems. It’s simply not reality.
JK Rowling was rejected 12 times by publishers before Bloomsbury agreed to publish 500 hardback copies of ‘Harry Potter’. Henry Ford's first two automobile companies failed. Oprah Winfrey was fired from an early job as a television news anchor. Jerry Seinfeld was booed off stage in his first stand-up comedy appearance. Sir James Dyson suffered through 5,126 failed prototypes before he landed on the first working Dyson vacuum.
The simple sad reality is that had any of these people been working for a major corporation they would, in all probability, never have succeeded. At best they would have been invited to submit their ideas onto a costed spreadsheet – to be criticised and then rejected – after 43 requests for ‘further information’ of course. Certainly if by some miracle they had actually got to make their idea into an investment and it had failed – as the examples above did at first – they would have been either castigated or fired or probably both. That is the reality of modern corporations - unless leaders take a radical new path.
Leading a fancy zoom meeting to talk about more entrepreneurial behaviour in the organisation is like NASA asking its astronauts to leave their oxygen packs behind when going into space - to save weight.
Put your money where your mouth is.
Give it to people to get on with it.
Haven’t got the budget? Then stop talking about this nonsense and carry on with your budget / compliance / forecast. Stop trying to fool everyone because, whilst they won’t tell you, you won’t be fooling anyone. Above all stop fooling yourself that you are serious about change. Accept the fact that you are just too comfortable. Enjoy your monthly pay cheque. While it lasts.
But if you are serious then get out there and talk with people. Not your immediate managers. They are most likely already lost “Yes” men / women. Content to take their pay cheque. Unwilling to 'rock' the boat. Happy to attend 'Board meetings'. You need to go to the coal face. Talk to people who do the real work. The miners, the people who make the tea, or patch up the torn clothing. Talk to the person in reception, who talks with customers face to face or on the phone, or with the people who deal with customer complaints. Find out the problems - you know - the ones you never hear about because you are too far away from the coal face. Talk with angry customers - not just the happy ones. And talk with those weird employees. You know. Those that just don’t quite fit in. The ones that are just a bit too difficult to ‘manage’ because they don’t quite conform – to your spreadsheet. They might just have that extraordinary idea. Don’t have any of those people? Oh dear…you had better recruit some fast because your task just got a lot harder. You need a diverse organisation too if you are serious. Above all treat people with respect. Don’t belittle them.
Calling an idea in the far east “Russian Roulette” might make for a good laugh amongst self important ignorant people on a 'Board Meeting' telco that have never taken a risk in their life but they are not deserving of being in a so called leadership position. Such attitudes will not create the rewards that the business needs to survive in the future.
Talking of people, if an organisation is going to be willing to embrace risk, then it must have diversity. I’m not talking just about the mix of gender although that for sure is part of it. I am talking about a range of ages and above all experiences. Once I was visiting one of my businesses in central / Eastern Europe. It was a regular board meeting - a legality mainly - and accompanying me was the appointed board member representing HQ. He was a charming man - let’s call him Herr Stein, mainly because he had the sense of humour of a stone and the face to go with it. I had the opportunity to chat to him before the board meeting started - small talk if you will - although getting blood out of a stein would have been easier. I asked him how long he had been working for the company. “All my life” he answered “well…..since leaving school at 18 anyway”. It was interesting because he was 60 by this time…and to be fair looked more like 95. Time hadn’t been kind to him. “Wow” I replied, genuinely surprised, “and what jobs have you done in your career?” Without a flicker of regret or wistful reflection of a life that might have been he immediately and proudly proclaimed “book-keeping”. That was it. That was his epitaph. ‘I spend my life book-keeping.' Somehow I didn’t get the impression that this man would have been on the Mayflower had he been alive in 1620.
Unfortunately, it got worse. Emboldened now by his obvious pride in his glorious achievements he went on to tell me that his father worked for the same company - ours - all his life too from the age of 17. “Good grief” I said, “that is amazing; what did he do?” “Book-keeping”. By now my enquiry was faltering but he was in his stride. “And his father - my grandfather - also worked all his life for the company” he continued with great pride. I dared not ask him what work his grandfather did. Unfortunately, I inadvertently killed the conversation at that point when I said to him, quite seriously, “what I would do is actually pay you to go and work for our competitor for a year - just to get you out and experience something else - it would surely make you a more useful employee”. I didn’t mean to be rude. I genuinely meant it as a productive tip. As you can imagine it went down like a brick. Or perhaps I should stay like a stein.
Surrounding yourself with institutionalised people who would no sooner glance at a barricade let alone join a revolution and you are simply not going to change anything, let alone encourage an entrepreneurial spirit. Yes, they will obey orders. If that’s all you want and need then fine. It has its place. To be fair I suspect Herr Stein’s career peaked in 1939.
Personally, I will be going out to sea again in May. I’ll try and figure out, with my fellow crew, how to avoid those rocks, those storms, those foul tides and strong currents and unseen hazards. But I will never have perfect information. Weather forecasts change. Seas sometimes behave differently to what is on shown on the chart or the pilot book. Fishing vessels move. New obstacles float menacingly just below the waterline. The temptation to stay in the harbour is so strong. But I must cast off from the comfy safe pontoon. Eventually I will have to take THAT step. I think I know what I will find when I get outside of the protective harbour wall. But I can’t be 100% sure. But I know I will be with my friends. I will be at the mercy of my limited ability and mighty nature. Risk. Isn’t it also called adventure?
There are people who will stand by the shore looking out to sea. They will admire the blue sky and the setting Sun. They will soak in the turquoise waters and the golden sands. They will savour the green lands behind them. And they will be in the moment. Reflecting. Basking. Happy. You need these people. They will be the ones who will keep the moment alive. Who will maintain the status quo and be the rock onto which everything else depends. The friendly faces welcoming you back to a safe harbour. But in your team, you also need some crazy ones. The ones that look across the ocean, at the horizon and wonder what is on the other side. The ones that are not satisfied with the moment. The people who will say I don’t know but I need to find out. People who are curious, determined and mad enough to let go of the safety of the shore and take themselves to new places, new lands and new adventures. Without them there would never have been a Santa Maria let alone a Mayflower. Get that mix of people into your team, encourage them and support them, and you too will become that successful leader supporting failure and leading success. The one that can embrace the satisfaction of the now with the adventure and opportunity of the future. Your New World awaits.
© 2023 Andreas Swadlo
Would you like some help with Leadership issues? Do you need a leadership coach? Or some help with your business? If the answer is yes then get in touch. I won't be advocating management by spreadsheets or suggesting Russian Roulette but I can give you some ideas for for how to energise your business and create an entrepreneurial team.
Whether you want to totally transform your business, start a new one or simply refine a winning team then let me know. I truly believe that leadership matters....and that great leadership can make a great difference.
Comments