A 2011 report by Willis outlined attitudes to risk management and warned that companies should understand which approach is most applicable to them, or risk the consequences of ‘natural selection’.
Companies that are best able to adapt to change will enjoy the greatest success. No firm can be all things to all customers, all of the time, but a firm that too severely limits its offering, focusing on too narrow a market segment, may wind up making itself irrelevant. And the same applies to philosophies of risk management.
That was the conclusion of a 2011 report by broker Willis examining companies’ attitudes to risk management. Authors Alice Underwood and Dave Ingram analyzed four different perspectives on risk: maximizer, conservator, pragmatist and manager.
“In order to remain relevant and help firms flourish in all risk environments, risk strategy must embrace an adaptive approach, drawing from the entire palette of strategies to suit the changing environment,” the report said.
These four basic risk perspectives were first identified in the 1980s in research about the variety of human groups. Clear patterns emerged in the data and have proved quite resilient over time. Within businesses, most people tend to identify with one of these perspectives.
This perspective does not consider risk as very important. Rather, profits are regarded as more important. Businesses managed according to this perspective will accept large risks, so long as they are well compensated. Managers who hold this perspective believe that risk is mean-reverting—gains will always follow losses—and the best companies will have larger gains and smaller losses over time.
According to this perspective, increasing profit is not as important as avoiding loss. Holders of this view often feel that the world is filled with many dangerous risks that they must be very careful to avoid.
This perspective is not based on a specific theory of risk. Pragmatists do not believe that the future is very predictable—so, to the greatest extent possible, they avoid commitments and keep their options open. They do not think that strategic planning is especially valuable, but rather seek freedom to react to changing conditions.
Careful balancing of risks and rewards is the heart of this perspective. Firms that hold this view employ experts to help them find risks offering the best rewards, while at the same time managing these risks to keep the firm safe. They believe that they can balance the concerns of the first two groups, plotting a very careful course between them.
Each of the different perspectives prefers a different strategy for dealing with risk, the report said. Firms led by maximizers seek out risk, believing that no risk is inherently unacceptable—every risk presents an opportunity, and the trick is to negotiate appropriate compensation. Conservator firms shun risk of all sorts.
Manager firms carefully manage and calibrate both the amount and type of risk. Pragmatist firms seek diversification but otherwise have no overarching strategy—they operate tactically, reacting to each new development.
The report said that while there are varied reasons for companies to adhere to a particular risk perspective, an attitude can be tough to change. “Corporate culture tends to be self-perpetuating: individuals are drawn to employers with a perspective that makes sense to them—and those in a position to make hiring decisions typically prefer to hire staff whose views mesh with their own,” it said.
But it also warned that businesses should be aware of which culture is embedded in their organization. The wrong alignment at the wrong time can be disastrous for a firm.
“Since many of the poorly aligned firms shrink, die out, or change perspective—and since new firms tend to be well-aligned with the current risk regime—the market as a whole adjusts to greater alignment with the risk environment via a process of ‘natural selection’,” the report said.
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