Risk Aversion

This corporate disease comes in many forms -- from the rank and file, who see no equivalent reward in sticking their necks out; to the professional who throws safefy factor on top of safety factor effectively preventing almost any project from gaining altitude; to the manager who observes success shrugged off and failure punished.

What is the source of corporate risk aversion?  Perhaps it is a survival skill rationally applied at the level of the individual, which, in aggregate, creates an organization that seems to merrily take a million very small chances, but few that would actually make a difference.

My observation is that the cause is rooted in corporate politics -- the celebration of mediocrity (happy, friendly, much admired mediocrity, but mediocrity none the less), the shrugging off of successes as if they were expected as a matter of course, and the visible punishment of failures.

A few comments on failures.  Every organization has them.  Some are the result of a mis-estimation of resouces or circumstances.  Some failures come when those circumstances change in a way that can not be managed.  Other failures are the result of unclear initial goals or targets.  Still others come from lack of effort or foolish mistakes (although, in my experience, this is rare).

Failure is the province of every manager.  Show me a manager who claims to have never produced a failure, and I'll show you either a liar, or someone who is skating by on someone else's coatails.  Yet when the organization regularly sacrifices managers at the altar of failure, the message gets across pretty quickly -- take few and limited risks.  Those of you who have followed this blog know I've written extensively on this subject.

But why do companies do this?  Or more particularly, why to chief executives have such an intolerance of failure?

I imagine it is because their bosses -- shareholders and the board of directors are also intolerant of failures.  So CEO's manage the companies exactly the way they are expected to by their superiors, and, in turn, impose the same expectations on their management teams.  This all stems from a belief system which has a few key precepts.

1.  Employees are largely interchangeable and can mostly be easily replaced.

2.  There are a few superstar employees out there, which everybody is chasing after.

3.  If an employee makes a large or visible mistake, they are not a superstar, and should be traded out immediately for a future draft choice.

Investor believe this (look at the intolerance they demonstrate for less than perfect performance).  Board members have bathed in this environment their entire careers.  CEO's clearly buy in or they aren't hired.  Managers get their indoctrination to the system by observing.

But no board ever says to a CEO "Don't take any big risks -- we don't want any big failures".  Instead, the messages are communicated by what is rewarded and what is punished.  The same is generally true inside the company.

I suppose the ultimate question is -- are those precepts correct or not.

In the small company, risks are an everyday part of running the business.  And since the owner is putting his or her own assets on the line with each decision on taking risks, he or she has no one to answer to but themselves.  That doesn't necessarily mean they will be less risk averse than a large corporation, but there are certainly fewer institutional barriers.  On average, I'm sure small companies are much less risk averse.