Our appetite for risk is increasing, is this a problem?

Of late, much has been written (and spoken) about the level of risk (for instance, that taken on by banks) and what is a ‘healthy’ level of risk for an organisation. The following is a heavily truncated report by the Hay Group which talks about the mismatch between the level of risk organisations are prepared to let their staff take on, the level individuals want to take on and the implications of this gap, which has remained stubbornly consistent throughout the recession.

The stubborn gap

During the recent years of recession, companies have made concerted efforts to reduce the gap between the amount of risk employees would like to take, and the amount that their company allows them to take (staff consistently want to take more risks than leaders or policy allow), yet the gap remains consistently high. In the five years leading up to 2011, according to Hay Group data from about 20,000 respondents each year, it stayed at around 20 per cent.

Is the gap a problem?

A large gap can indicate that the company’s efforts to manage the overall risk appetite of the business and to develop a shared view of risk-taking across the workforce have been ineffective. In some companies, the risk appetite varies wildly in different parts of the business. This leaves branches of the organisation pulling in different directions, reducing the effectiveness of the risk management process. This might encourage frustrated employees to circumvent the existing means of control, both formal and informal, and take matters into their own hands, for example, a salesman anxious to close a deal might make delivery promises that cannot be fulfilled, potentially destroying the client relationship, or a trader familiar with the back office might commit fraud. Equally, it might indicate that the risk function has applied the brake too sharply, pushing the risk appetite of the company lower than it should be to generate the returns it seeks.

Why is there a gap?

Hay have identified two significant reasons for the persistence of the gap, the hard-wiring of risk, and the over-reliance on compliance.

For many years, companies have been hardwiring the desire to take on more risk into their organisations by recruiting and developing people with a high achievement motivation. The achievement motive embodies the satisfaction or reward we feel from getting things done – from achieving goals, innovating or excelling – and is synonymous with a desire to hit targets and take short-term wins.
Of course, the desire to achieve has beneficial results for businesses –employing people with a high achievement motive and desire to take risks may help results and profits. Alongside this, however, companies require a range of effective formal and informal systems to manage that behaviour and prevent it getting out of control. Successful risk management also relies on managers being able to extend their influence beyond the confines of the risk function itself.

From a development and recruitment perspective, this means the power motive plays an equally important role to that of achievement. Persuading other business areas to take ownership and responsibility for risk management at a local level is a hallmark of success.

The second reason for stubbornness of the gap, is that efforts to reduce or more effectively manage it appear to have been unsuccessful as the economy emerged from deep recession, and companies ‘took the brakes off’ and increased their risk appetite.

This is largely due to an over-reliance on compliance, education and enhanced systems rather than a coherent approach to risk management that aims to build common shared understanding of risk throughout the organisation.

How to reduce the gap

Hay suggests that an organisation needs to: measure the size of the gap, investigate its causes and reshape the company to bring the gap down to appropriate levels.
This involves understanding employeees’ attitude to risk as well as understandign the attitude to risk encouraged by the company at a group wide and more granular, local level. This may inovlve looking at reward and job design which are significant drivers of attitude to risk, as are policy, formal controls and processes and the environment created by your senior executives and managers.

Understand the size of your gap, how it compares to benchmarks and the degree to which your gap is appropriate given your company’s absolute tolerance for risk-taking and the perceived riskiness of your company by investors.
Ensure messaging is coherent. An expanding gap is often a consequence of rapid organisational change or headcount reduction. This can inadvertently damage the ability of senior management, central control and supporting functions to send messages about risk as well as strategy into the operating parts of businesses. Companies need to ensure that structures, roles and processes are aligned to embed the desired risk appetite throughout the organisation.