What Leaders Don't Understand About Risk


The Treasury are responsible for how Government spends Government money. They are, rightly, quite risk averse. However, their attitude towards risk is often surprising to many leaders.

In considering the hierarchy of an organisation we probably all recognise the labels (from top down) ‘Strategy’, ‘Policy’ and ‘Delivery’. 

The Treasury’s guidance on risk management explains that on the ground – at the Delivery level – there should be a relatively low level of risk.  But as the Strategic level is essentially about an unknown future, it is in inevitable that there is a higher level of acceptable risk here.  (Yes I did say ‘acceptable risk!)

So far so good, but the problem comes when leaders rise through the ranks and misunderstand what it means to lead an organisation.  Those who start at the ‘bottom’ of an organisation become familiar with the idea that the appropriate response to risk is always to mitigate and reduce it. These ‘bottom up’ leaders think that in order to be successful as a leader they need to do MORE of what they did at the lower level.

Of course, the total reverse is true! At the higher level it is necessary to have a much more tolerant attitude towards risk and uncertainty. What happens if you don’t, is this: either the people around you keep risk hidden – for fear of you confusing identification of risk with their incompetence. Or you have some sort of nervous breakdown as you attempt to manage down the uncertainty of an unknown future!

The Treasury’s model about risk management tells us a lot about leadership.  Effective Leadership is about knowing when to take risks, how to live with uncertainty and how to ‘let go’ of the need to have constant and total control over all aspects of an organisation. It tells us that your attitude needs to change as you rise through the ranks of an organisation. Success isn’t about doing more of what you used to do, or doing it better. Leaders who misunderstand their role in relation to risk become micromanagers, lacking strategic vision, with staff around them frightened to tell the truth.

Effective leaders welcome honest debate and discussion about risk, foster processes that encourage sharing and learning from mistakes, and know when to take opportunities despite the risks.
 
(N.B. Guidance on Risk Management issued by HMT is contained in the ‘Orange Book’ which is available to download from the Treasury website.)

Join the conversation & get the skills:

Does your organisation embrace the idea of ‘acceptable’ risk at the strategic level?  Are there open channels of communication for honest conversations about how to handle and manage risk?  Do you have any great examples to share about how make this work in practice?

I can help organisations and leaders become more effective in their approach to handling strategic risk. My Effective Leadership or Strategic Thinking courses might help you with this, or we’d be happy to discuss a bespoke solution for your organisation.

[This blog was first published by Government Knowledge].