A Resolution to Think About Risk
Organizations founder when they fail to take risk seriously. Here's why you need to talk about it.
It’s a week into the new year, and if you’re sticking with your resolutions, whether it’s hitting the gym or reading a book a day, congratulations. You recognized a risk to your well-being—your physical and/or intellectual health—and you came up with a strategy to address it.
Tossing my 2012 calendar into the office recycling bin last week, it struck me that January is a kind of “risk season” around here, and perhaps for associations in general. Associations Now publishes its annual Volunteer Leadership Issue this month, and among its goals is to exhort board members to take risk seriously—to see it as an investment in the survival of the organization, not something to be feared.
If anything, it’s failing to think strategically about risks that ought to keep association execs and their boards up at night a little more often. There are some hard numbers behind this. A report in Strategy + Business last November looked at the root causes of the decline of more than 100 companies that lost substantial value in the past ten years. There’s more than one way to wreck a business: regulatory shifts, fraud, acts of God, and other things a reasonable exec can say was out of his or her hands. But as the report makes clear, an overwhelming majority of failures are firmly strategic blunders, where the executive team failed to understand and respond to risks to its business.
Sometimes a business gets roughed up so fast it’s hard to mount an effective response, but not always. According to the article’s authors, Christopher Dann, Matthew Le Merle, and Christopher Pencavel, “About half the time, the loss of value occurred gradually—over many months, or even years if the company took too long to grasp a changed strategic environment or lacked the agility to react.”
Which is to say that a lot of businesses had no good excuse: The threat was there, it was approaching slowly enough to prompt an effective response, and still nothing happened.
What to do? The authors suggest that the solution of choice of many organizations—enterprise risk management teams—can exacerbate the problem. Execs convince themselves that risks are being addressed (“We’ve got the ERM team on it”) when in fact those ERM teams tend to focus on the risks inherent in decisions the executive makes, not the risks that should better inform the executive’s decision making.
A better solution, the authors suggest, is to force risk into more high-level conversations: “By conducting more conversations about risk at the top levels of the company, looping in key individuals as needed, management acquires a full understanding of the uncertainties—both upside and downside—inherent in strategic decision making.”
That’s a sensibility that may be lacking in associations as much as in multinational corporations with billion-dollar market caps. “We’re seeing boards of scientific associations with a lot of middle managers who think they need to run the association like a department,” Glenn Tecker says in the latest issue of Associations Now. That’s a real problem if your organization’s members are facing big changes in their industry.
As a leader, do you make risk a part of your decision-making discussions? If so, let us know in the comments how you do it.