News & views
How to optimise your organisation’s attitude to risk.
14 February 2023
P3M & Data
What is a risk? Most people would probably agree with a definition along the lines of ‘an uncertain event or set of events which, should it occur, will have an effect on the achievement of objectives.’ So, if we can agree a definition, why do people and organisations react to risk in so many different ways?
For me, it’s a combination of nature and nurture.
At the individual level, some people are naturally more comfortable with risk taking than others who are inherently more cautious. These predispositions can be modified by life experiences and the environment in which people live. For example, someone who loses money in a high-risk investment may grow wary of involvement with similar schemes in the future while a natural introvert could become more outgoing working in a friendly, garrulous team.
An organisation’s attitude to risk (or risk appetite) is defined by its culture and the attitudes of its staff, particularly its leadership. This, in turn is modified (or reinforced) by the organisation’s experiences and the environment in which it operates. For example, a company producing safety-critical equipment such as body armour may be loathe to try anything new without significant testing. Alternatively, an experienced venture capital firm may fund a high-risk start-up company given the high returns on offer.
Setting the right risk appetite is difficult. Firstly, there is the link to culture and human nature. Encouraging sceptical staff to take more risk for a higher return without frustrating the more adventurous may be a complex change project in its own right. Secondly, the results of getting it wrong can be significant. Setting too low a risk appetite could mean missing out on the larger rewards of high risk opportunities while too high a risk appetite could mean lives lost, legal action or huge financial consequences.
Finding the sweet spot that balances risk and return is therefore key to managing you and your organisation’s fortunes and securing its long-term future.