Risk – the good, the bad and the necessary

Here's a seemingly simple question – Is risk good or bad?

As we stated in an earlier post, risk creates value, so it can't be all bad. Without the expenditure of something of value, such as time or money, it is impossible to build something of greater value. The decision to make that expenditure is based on a calculation of potential reward evaluated against the likelihood of success or failure (the risk). That balancing act forms the basis of an entire industry – risk management.

Determining what risks are acceptable (the good) from those that are not (the bad) is the first consideration of the risk manager. Not so easy. It is said that the higher one rises in the organization the more subjective the decision-making; by the time you're in the C-suite it's often a high-wire act. (And you wonder why CEO turnover is so high...)

Nevertheless, it is the responsibility of management to operate within an agreed framework that defines acceptable risk. This definition must remain in alignment with actual corporate behavior, yet achieving consensus on quantification of risk and its limits can prove elusive.

Compounding the challenge is personal bias – some people are simply more risk averse than others. To the pessimists, the glass is always half empty. The optimists, on the other hand, are more likely to bet the ranch.

The notion that you can evaluate risk with a high degree of precision is somewhat illusory as it's impossible to disprove a negative; you simply cannot know all potential outcomes. But concerted effort should be expended to identify and understand the range of adversity that could be encountered and to reasonably attempt to measure its impact on the organization.

It is instructive to look at all sides of the risk. Our inclination is to view risk as something to be eliminated. Instead, examine the cost associated with the risk and its related reward. After all, if priced correctly, even a sinking ship might be an attractive risk to underwrite.

So, to answer the original question, risk is both good and bad. And it is necessary. Risk is essential for growth, but you must also know how to manage and evaluate (price) it. Avoid uncompensated risk, transfer risk whenever possible, such as through ensuring contractual compliance with third parties, and be certain to have sufficient and appropriate resources matched with the risks taken.