How Leaders Today Should Approach Risk

September 16, 2024

https://triplecrownleadership.com/leaders-approach-risk/How Leaders Today Should Approach Risk

When it comes to leadership and risk, there’s a Hollywood version that tells a stylized story of maximum risk-taking leading to mind-boggling gains.

Think of the way Amazon scaled, transforming from an online book-seller to an online everything-seller—now with about 40% of all U.S. retail ecommerce. Recall how Jeff Bezos talks about their “day one” mentality—always acting like a hungry startup and making quick decisions while jumping on trends.

Think of how Google employs its “moonshot” approach. Consider Facebook and its famed “move fast and break things” approach.

“The biggest risk is not taking any risk. In a world that’s changing really quickly,
the only strategy that is guaranteed to fail is not taking risks.”
-Mark Zuckerberg, Co-Founder, Facebook and Meta Platforms

Amazing results, without question. But there’s a risk of faulty thinking here due to “survivorship bias.” It’s a mistake to focus on wildly successful ventures while ignoring the countless others that failed.

No doubt many of those failed ventures had similar mindsets and approaches. Also, reasons for the successes of the winners include many factors beyond their approach to risk. Think business model, strategy, resources, culture, execution, timing, and more.

Alternatively, it’s folly to ignore the big successes. They have much to teach us.

So, how should leaders today think about and approach risk, including risk-taking and risk management?

Here are key ways leaders should approach risk, organized into two topics: 1. a leader’s mindset and approach, and 2. organizational culture and processes.

Leadership Derailers Assessment

Take this assessment to identify what’s inhibiting your leadership effectiveness. It will help you develop self-awareness and identify ways to improve your leadership.

A Leader’s Mindset and Approach to Risk

Distinguish between risks you can’t afford to take and the ones you can’t afford not to take.

Here, we draw on the great business thinker, Peter Drucker. First, try mightily to avoid the peril of making a choice that could devastate your venture. But also watch out for complacency and stagnation.

Stay above the “death line.”

In his book, Great by Choice, Jim Collins wrote about leading above the “death line,” taking a cue from mountain climbing. That means maintaining big margins of safety on critical resources (e.g., cash reserves for a business, oxygen cannisters for a high-altitude climber), shunning uncontrollable and asymmetric risk (where the downside is wildly bigger than the upside), maintaining “productive paranoia,” and more.

Don’t ignore red flags.

Leadership comes with pressure. Examples abound: Hitting your numbers that investors expect or demand. Achieving your fundraising targets. Meeting your budgeting ratios, or your sales, customer satisfaction, or hiring metrics. In the heat of the moment, will you pause and reconsider when things seem too good to be true? Or will you be seduced by the situation and go against your instincts, core values, and better judgment?

Don’t go it alone.

Are you engaging enough with your trusted colleagues when it comes to choices about risk? Or are you falling into the trap of the “lonely leader”? There’s great value in surrounding yourself with trusted colleagues committed to the venture’s shared purpose, values, and vision. A good group can help you take a broader perspective and avoid missing key ingredients—as long as you don’t let “groupthink” creep in.

Don’t stray from your personal core values.

As we said in our book, Triple Crown Leadership: Building Excellent, Ethical, and Enduring Organizations, “leadership is tested most under duress.” Often, tough choices have an ethical dimension. Think of how Theranos founder Elizabeth Holmes, in her drive to revolutionize blood-testing technology, misled investors and patients about the capabilities of the firm’s technology. The result: painful personal and professional losses.

Think of how Adam Neumann embraced aggressive expansion, driven by a desire for white-hot growth and an inflated vision of WeWork’s potential. The result: a failed IPO, an epic implosion, massive financial losses, and colossal reputational damage.

Consider the CEOs so focused on growth and market share that they cut corners on product safety or data security. It may work for a while but eventually backfires with product malfunctions, security breaches, customer backlash, and nasty legal battles.

Personal Values Exercise

Complete this exercise to identify your personal values. It will help you develop self-awareness, including clarity about what’s most important to you in life and work, and serve as a safe harbor for you to return to when things are tough.

2. Organizational Culture, Processes, and Risk

Make it safe for people in your organization to take risks.

In their classic book, The Leadership Challenge, James Kouzes and Barry Posner note that doing things the same way you’ve always done them won’t lead to anything new or extraordinary. You have to break out of the norms, test unproven strategies, venture beyond standard limitations, try things, and take chances.

“Leaders must take this one step further,” they write, by getting “others to join them on these adventures in uncertainty. It’s one thing to set off alone into the unknown; it’s entirely another to get others to follow you into the darkness…. leaders create the conditions where people want to join with them in the struggle. Leaders make risk safe, as paradoxical as that might sound.”

“Make it safe for people to experiment and take risks by promoting learning from experience, debriefing successes and failures, capturing lessons learned and disseminating them broadly.”
-James Kouzes and Barry Posner, The Leadership Challenge

Develop a culture that strikes a healthy balance between risk-taking and risk management.

How? Use what I call the “4 Ts of an innovation culture”: talent, trust, time, and thanks. First, develop a talent machine that attracts, hires, develops, rewards, and retains great people. Second, extend what author Stephen M. R. Covey calls “smart trust” (not blind trust). Third, give them time to think deeply, plan, and experiment. And fourth, thank them for their efforts, with appropriate recognition and rewards.

Use smart innovation processes to ensure that risk-taking is working well.

Examples include:

lean startup methods (including “build-measure-learn feedback loops” minimum viable products, pivots, innovation accounting, and more)
agile software development practices (collaboration, flexibility, customer-centricity, and “sprints”)
Skunkworks projects and/or “tiger teams”
dedicated time for innovation and passion projects (e.g., Google’s “20% time”)
incubators
accelerators
hackathons
innovation outposts
a welcoming of “intelligent fast failure”

Alignment Scorecard

When organizations aren’t aligned, it can reduce performance dramatically and cause frustration and dysfunction. With this Alignment Scorecard, you can assess your organization’s level of alignment and make plans for improving it.

Employ risk management systems rigorously.

Adopt and employ a risk management process that helps you do the following: identify risks (both internal and external), assess their probability and likely impact, prioritize the risks you’ll want to address (what order? with what resources?), determine ways to mitigate the risks, and measure key metrics that give you early warning signs of emerging risks. (See my article, “A Painful Leadership Lesson in Managing Risk.”)

For example, you could complete, monitor, and update a simple risk table like this:

Create a “deliberately developmental organization.”

In their book, An Everyone Culture, Robert Kegan and Lisa Laskow Lahey describe a “deliberately developmental organization” (DDO) as one that intentionally integrates the personal and professional growth of its workers into its core operations and culture. In a DDO, the development of people is a fundamental focus, not just an ancillary goal.

What does it entail in practice? Workers engage in learning experiences as part of their everyday tasks, rather than in isolated training sessions. They receive regular, constructive feedback to help them understand their strengths and areas for improvement. Workers get many opportunities to reflect on and discuss their performance and development.

The result: DDOs build a dynamic and resilient workforce better suited to smart risk-taking and high performance.

“What if a company did everything within its power to create the conditions for individuals to overcome their own internal barriers to change, to take stock of and transcend their own blind spots, and to see errors and weaknesses as prime opportunities for personal growth?… Better Me + Better You = Better Us”
-Robert Kegan and Lisa Laskow Lahey, An Everyone Culture: Becoming a Deliberately Developmental Organization

Build “organizational ambidexterity.”

An “ambidextrous organization” is one with the ability to exploit its existing competencies while simultaneously exploring new opportunities. Most organizations are either good at optimizing their existing business model through efficient execution or at exploring and creating new business models via innovation—but not at both. Organizations that do both well can thrive even in a challenging macro climate like the one we face today. Executing well on core operations leaves more leeway for risk-taking with new approaches.

Protect the “ugly baby” from the “hungry beast.”

In his book, Creativity, Inc., computer scientist, animator, and Pixar co-founder Ed Catmull uses the metaphor of the “hungry beast” to describe the constant growth and financial success that companies often chase. Their business model and operating structure can be ruthlessly efficient. That helps them execute their plan today, but it can strangle innovation and risk-taking in the crib.

Meanwhile, the “ugly baby” represents the initial, imperfect creative ideas that require nurturing, risk-taking, learning, collaboration, and honest feedback to evolve into successful projects. They start out ugly but can become beautiful with the right kind of nurturing. Thinking of the messy creative process involved in so many of the hit movies from Pixar and Disney, Catmull says that leaders must “protect new ideas from those who don’t understand that in order for greatness to emerge, there must be phases of not-so-greatness.”

“Originality is fragile. And, in its first moment, it’s often far from pretty. This is why I call early mock-ups of our films ‘ugly babies.’ They are truly ugly: awkward and unformed, vulnerable and incomplete. They need nurturing—in the form of time and patience—in order to grow…. How do we balance these forces… when it always appears to be such an unfair fight?….
The Beast cannot be sated…. The Beast takes over.” -Ed Catmull

Conclusion

Leaders, take note: Adopt these mindsets and approaches for risk-taking and employ these processes. When you do so, you’ll get much better outcomes from your risk-taking.

Reflection Questions

Are you and your colleagues in need of an upgrade in your mindset and approach to risk?
Are your organizational culture and innovation processes optimized for smart risk-taking?
What improvements will you make, starting today?

(This article is the second in a three-part series on risk and leadership. The first article: “A Painful Leadership Lesson in Managing Risk.” Stay tuned for a future article on “What Leaders Need to Know about Risks and Cognitive Biases.”)