Working with risk

14 September 2014

Trudi West asks what risk means to you and examines the myriad factors that might get in the way when it comes to risk management

Take a moment to ask yourself: what do you understand risk to be? And then follow this by asking: is your understanding of risk shared by those around you?

Recent research by Ashridge Business School asked senior managers these questions and found that not only do managers define risk in many different ways, but only a few are confident their definition is shared with others. Here, we explore the complexities of risk by looking at how managers think about and work with risk.

Don’t make assumptions Check for common understanding with colleagues of what is meant by risk. When managers spoke about risk, the subject fell into two approaches. One is formal, objective and evidence-based, and the other is informal, intuitive and experience-based. These two approaches can work side by side and even overlap. In fact, where managers found most challenges and where they had the most influence was where the approaches crossed or merged. Each approach has its merits and needs to be considered.

Assess formal risk This involves an assessment of risk using objective, quantifiable and evidence-based information. Often in response to regulations, such as compliance, governance, legal or industry standardisation, the focus is on accuracy and timeliness in an attempt to reduce subjectivity. Importantly, formal risk provides a frame for procedure where process and individual accountability are as important as the outcomes themselves. For example, formal risk often occurs where there are high-stake outcomes that make an impact on physical safety, financial survival or regulatory standards, and it is essential where there is a requirement to comply with regulation and governance, either by choice or by obligation.

Informal risk makes use of wide channels of information to scan the environment for abstract connections

Evaluate informal risk Informal risk is multi-dimensional and makes use of wide channels of information to scan the environment for abstract connections. Sometimes referred to as instinct, gut feeling or common sense, it requires an inherent responsibility to consider what is at stake by identifying threats and opportunities. Any and all information has the potential to influence informal risk, and information flow is encouraged. Trust and communication is key, as while decisions may not be based on objective and quantifiable data, the reliability and credibility of the individuals and the decisions they make is vital. In pursuit of innovation and growth, there is a freedom to fail.

Be wary of illusions Both formal risk and informal approaches to risk can create the illusion that risk is being dealt with when, in fact, it is not. The illusion stems from an assumption that someone is dealing with risk. With formal risk, the process itself can become a proxy for individual responsibility as individuals delegate risk, responding to the process rather than potential outcomes of harm or opportunity. With informal risk, there is a potential illusion that common sense is enough when making judgments about risk. However, common sense for one person may not make sense to another.

Check for conflict of principles Working within a framework of principles, such as ethics and integrity, is important to many managers, as they can play a key role in decision-making. Individuals who were able to explicitly draw on their own principles to support their rationale in decision-making were better able to provide clarity for others.

Watch for accountability that inhibits effectiveness Accountability played a key part in dealing with risk and we identified two types. Individual accountability is used as a mechanism to ensure essential parts of a process are administered without gaps, with transparency and correctness. There is a greater focus on enforcement as the individual is ultimately answerable for his or her activity. Collective accountability is much less about enforcement and takes a relational approach. Trust and communication play a vital role in drawing out what is at stake and what influences outcomes.

Unlock change A major challenge facing managers is that people perceive risk in change. Progress can become constrained by formal approaches to risk as it can be bound by a process that inhibits change; while informal approaches suggest a greater freedom to enable progress, but often lack the required checks and balances. Progress and process need to be considered together, as taking a one-size-fits-all approach to process can get in the way of making progress, whereas a short-term focus on progress can undermine communication and limit learning.

Discover your leadership approach to risk Of particular importance was that managers say leaders should be held responsible for the management of risk and provide the frame for others to understand and act. Challenges occurred when leaders did not appear to take this responsibility, undermined the efforts of others managing risk, or created confusion through inconsistency.

Enable people to take responsibility for risk It is often assumed that risk is being taken care of by someone considered expert. However, unless that person is able to communicate well, risk does not translate to other people. Distributing expertise and responsibility for thinking and working with risk beyond minimum requirements provides greater scope for people to participate meaningfully.

Trudi West is on the faculty of Ashridge Business School in the UK

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