Managing Strategic Risk and Emotional Risk Within an Organization

Contrary to Supreme Court Justice John Paul Stevens’ Shakespeare conspiracy theory—see the news story a few weeks ago—the Bard did write, "To be or not to be, that is the question: Whether ‘tis nobler in the mind to suffer the slings and arrows of outrageous fortune or to take arms against a sea of troubles…" (Hamlet, Act 3, Scene 1, 55-58). As you might remember from your high school or college literature class, Hamlet is wrestling with decisions; he is contemplating, in essence, the management of risk.

As executives we all face the responsibility daily to make decisions and, not unlike Hamlet, to manage organizational risk. But what organizational risk are we really managing? And why are we choosing to avoid some risk while willingly accepting another, perhaps greater, risk?

As I have outlined in prior contributions to this column, in my former life I spent 23 years in one company, the last eight as Chairman and CEO. Being insulated within one company for that long bred an unconscious assumption that all companies pretty much operated like my company. It seems logical that there are some basic ways things get done and basic processes "rational" people follow to make decisions and advance strategy.

So that makes one more time in the history of my career where I couldn’t have been more wrong. Now as a consultant I have come to understand that there are no two companies really alike. While "business is business," how companies do business, and even more fundamentally, how leaders lead and make decisions, is truly unique to each organization. And even more interesting than how leaders make decisions is why they make the decisions they make.

Please bear in mind, my consulting practice is a small enterprise. There are only a few of us in the office and we are engaged with a handful of clients at any one point in time. But, what we are seeing is extremely consistent...in its inconsistency.

It appears to me that there are two types of organizational risk, similar to the types Hamlet was weighing in his soliloquy. The first type of risk we "C" level leaders face is what I will label Strategic Risk. This may come in the form of market risk, financial risk, competitor risk, regulatory risk, risk with employees and partners, or any other tangible and quantifiable variants. This type of strategic risk is "knowable." You can measure it, you can time bracket it, you can estimate outcomes and model the various scenarios based on the response the company offers to the strategic risk at hand.

The second type of risk gets a bit more nebulous and is quite subjective. Emotional Risk is the risk of enduring the psychological strain of being in the position of authority responsible for making hard decisions. Emotional risk is purely qualitative in nature and is absolutely unique to each person. No two people carry the same degree of emotional risk, feel the stress and weight of a decision the same way, or carry the aftermath of a decision as far or as long.

Strategic risk management is a learned skill. The analysis, the evaluation, the assessment of alternatives and the selection of the best risk/reward ratio, is all learned behavior. There are people who are really good at assessing strategic risk and people who become good over time. But it is purely unemotional. In the lexicon of today, "it is what it is."

But emotional risk management is in your wiring. The mirror image of "it is what it is" must be "you are who you are." You either have the stomach for making hard decisions and naturally (or through sheer will) putting your rational decision mind in charge of your emotional decision mind, or you don’t. Most people in my experience are simply not hard wired to subordinate emotional risk and make the right decision based on the rational risk reward equation. Most people simply become overwhelmed with emotional risk and become intellectually paralyzed when it comes to making sound strategic decisions. The few people who are either wired to fully manage and subordinate the emotions, or perhaps truly have few emotions, are, in my experience, more successful in leadership roles.

This is by no means to imply leadership is heartless. Far from it. In fact I strongly believe that great leadership starts with passion. But, leadership as it relates to decision making in business must emanate from the foundation of rational consideration and not emotional consideration for an enterprise to sustain and thrive. In essence, business isn’t and won’t be what you want it to be, it will be what you make it to be.

Let me tell you a true story. I have been working with a company for most of the last year. The company has been in existence for some time and had varying degrees of success throughout its history. They tend to do modestly well when the economic cycle is on the upswing while other companies are thriving, and struggle mightily when the cycle turns down. Needless to say, now is a time of significant struggle for them.

One of the two founders is the chairman of the board and the majority shareholder; a wonderful, intelligent, kind, caring and truly committed man. The other founder has overtime appropriately subordinated himself into a mid-level role. Over the past seven years the chairman and the board have allowed a management team to erode the stock value to less than a fraction of what it was at its apex when this team took control. This is not a publicly traded company so stock price is essentially a function of EBITDA (a factor predominantly controlled by management).

Year after year the board has emphatically emphasized that it is time to change management. There is no question the preponderance of the team needs to go. They are in way over their heads and have no answer for what to do next. Yet, year after year, the chairman has fended off the board and other advisors who are all calling for change saying he wanted to give them one more chance. All along the employee/shareholders wealth to a material extent, and the chairman’s wealth in its entirety, are evaporating.

After literally months and months of counseling with the chairman I finally understood the burden of the emotional risk for the chairman. The prospect of having to face the various constituents, be they the dysfunctional and incompetent management team, the board who has been calling for action, or the shareholders, is simply too great. He would rather bear the organizational risk, and by default force so many others to bear the risk, of total financial ruin than bear the risk of the emotional distress of making hard but necessary decisions and the emotional distress of confronting the problem eyeball to eyeball.

When it comes to managing organizational risk, ask yourself: "How do people in my company manage these types of risk? How do I manage these types of risk?"

As a "C" level executive there should be no quarter given to the preeminence of emotional risk management. This simply cannot be a driving factor in someone who carries the burden and the responsibility of making hard decisions on behalf of many others. The avoidance of emotional risk in deference to the acceptance of substantial strategic risk is wrong.

I will finish where I started, with Shakespeare. Hamlet completes his thought by saying "Thus conscience does make cowards of us all, And thus the native hue of resolution is sicklied o’er with the pale cast of thought, And enterprises of great pitch and moment with this regard their currents turn awry and lose the name of action" (Hamlet, Act 3, Scene 1, 82-87).

The role of "C" level executives is to drive decisive action. Whether that action is to stay the course, change the trajectory of our course, or to abandon the present course all together and proceed on a new course. But it is action and decisiveness we are charged with. And the discomfort, the fear, the trepidation we may carry over the conveyance of the message or the commitment to the decision has no place in our role. Being timid is not consistent with being in charge. And being in charge requires the management of risk, both strategic and emotional.