CEO Coaching: Is It Your Job To Eliminate Risk?
I’ve previously written about the value of “optimizing” conflict in an organization rather than naively trying to minimize it. (Here is the link if you are interested.) Conflict and risk both have bad raps, but eliminating either would be a disaster!
The historical bank runs (e.g., Silicon Valley Bank in 2023) and the resulting “bail out” of the depositors highlights the complexity of risk. While those who short a stock hope for others to lose money, most of us don’t like to see others punished by bad luck or poor due diligence. One of the key questions, of course, is that of moral hazard. Do we create more bad behavior if we attempt to eliminate risk? If you threaten your child with punishment for bad behavior and never follow through, guess what happens?
Capitalism and business require risk. Neither works without it. How much and what type are questions that often don’t get discussed enough. Many firms foolishly don’t consider risk and get themselves in trouble. That type of risk is easy to see the moment it is uncovered. Dangerous working conditions would be an example. A simple approach is sometimes good enough.
But there is a flip side. If you don’t take some risk, you likely are growing at a rate much lower than you could and probably generate low returns on invested capital. Typically, only firms with highly protected assets or intellectual property can make high returns without taking much risk. (Even then, there was likely large risk in the initial acquisition of the assets or the development of the intellectual property.) At some point, you must either count on luck or try something to move ahead.
I was an executive at Kinko’s (now FedEx Office) years ago and our founder frequently berated us to take more risk. We had, at that point, extremely high gross margin and were “printing money.” (No, not counterfeiting! Spinning off cash at a high rate.) “If you fail, so what!” he would shout.
On the other hand, I’ve worked with executives who are terribly risk averse. They can shepherd the company, noodling in the margins—sometimes for long periods if there is little change in their chosen market—and produce pretty good results. That is often appreciated by shareholders. But what opportunities have they missed? You can see failure, but you can’t see the missed opportunity. It doesn’t show up on the income statement or balance sheet.
Taking “good” risk, has requirements. Your product development process must be robust and anticipate market need. You must have good process around capital allocation. If you’re acquisitive, you better have a buttoned-up M&A process. You need an ideation process that is way better than mere whimsy. You must have good market and competitive intelligence. You must identify and kill losers quickly. You must allow people to fail!
Sometimes an entrepreneur can do much of that in their head, innately, and not verbalize it. In an organization that prospers beyond the startup phase, it requires good process management. Even then you’ll fail, perhaps even frequently. But that might be O.K.!
Given your business model and need for additional growth, what is your risk profile? Do you have the right tools in place to assess risk? What is your comfort level with taking good risk? If you are the CEO, you have set the tone around risk, intentionally or not. What is it?
coaches CEOs to higher levels of success. He is a former CEO and has led teams as large as 7,000 people. Todd is the author of, Never Kick a Cow Chip On A Hot Day: Real Lessons for Real CEOs and Those Who Want To Be (Morgan James Publishing).
Connect with Todd on LinkedIn, Twitter, call 303-527-0417 or email [email protected].
