Leadership and Risk Taking

Mike Idziaszczyk asked:

 

Most of us could bring to mind someone we think of as a good leader and we could even describe certain characteristics they exhibit, such as being charismatic, inspiring, driven, etc. But are these characteristics enough on their own and do they make a leader successful? Life generally requires us to take a certain amount of risk, for some people more so than others. In certain businesses risk taking may be seen as more desirable than in others. But what makes one leader take a calculated risk when nine out of ten others would walk away? And how do we know which leaders will take the right risks (the ones which pay off) and who will take the wrong ones?

 

Risk taking can be defined as…

 

“Undertaking a task involving a challenge for achievement or a desirable goal in which there is a lack of certainty or a fear of failure.”

 

Having the capability to take risks effectively could be the key to success for many leaders. A review of the literature suggests that factors involved in this include background, willingness to take risks, seeing risks as opportunities, personality characteristics, emotional intelligence and industry specific factors.

 

Interestingly there is a lack of research into risk taking amongst leaders. The literature, instead, focuses more heavily on entrepreneurs. This may partly be explained by the nature of each of these roles; an entrepreneur being characterised as someone who takes risks to set up a business as opposed to a leader who guides and inspires others. These roles do also have similarities though. Leaders may at times need to take risks to achieve company goals and entrepreneurs may need to guide and inspire others.

 

Research into the backgrounds of entrepreneurs suggests that they see themselves as more resilient, usually due to significant events experienced during childhood and challenges during their career. This resilience comes in handy for leaders when overcoming setbacks in their career. We tend to think of entrepreneurs as always successful and yet many of them have faced setbacks and even bankruptcy. Having the resilience to overcome this and start again enables them to become successful later.

 

But is effective risk taking just explained by resilience and how amenable someone is to taking risks? It appears that entrepreneurs, particularly those focused on the growth of their company, and chief executives who have built their own business rather than running a family company, are more likely to take risks. Past successes and failures in risk taking also have a part to play but all of this is not sufficient to explain risk taking behaviour on its own.

 

Entrepreneurs tend to assess risk in different ways to others. They tend to see opportunities rather than risks because they are overconfident and generalise from past experiences and other information. They may also engage in different thinking styles (e.g. creating numerous options to solve problems), which enables them to spot more opportunities.

Another factor to consider is the personality of leaders. The ability to adapt to new situations and sustain good relationships is key to the success of leaders. Other characteristics of effective leaders are extraversion, drive for results, ambition, competitiveness, independence, optimism and high levels of emotional intelligence.

 

Overconfidence is often an attribute associated with leaders and something which often helps them to get to the top. However, it may also play a large part in their derailment if they are unable to adapt appropriately.

 

A lack of self-awareness, reduced emotional intelligence and inability or unwillingness to adapt are some reasons why leaders may have derailed whilst possessing the same qualities as they had on their way up. However, more research is needed to help us to understand more about how or when leaders start to derail.

 

It is useful for us to understand the personality characteristics associated with effective leaders and how amenable someone is to taking risks, but we must also remember the needs of the organisation in question. In order for this information to be useful to companies who either want to select an effective leader or develop existing leaders they need to also understand the organisational context. Risk taking behaviour is more desirable in some companies than others.

 

Industry specific factors are likely to influence leaders’ and entrepreneurs’ approach to risk taking, what they consider to be most important when deciding to take a risk or not, their willingness to take risks and the type of risks they take. For example, in the banking industry they tend to be more risk averse, take a more structured approach and be primarily concerned with exerting control over all factors within the risk to avert potential losses. Whereas in the oil industry the primary decision making criterion is expected value, implying a balance of risk and return. In the software industry their primary concern is about the impact of taking a risky decision on their business, whether this is positive or negative.

 

Further investigation is needed into what different industries consider to be the most important factors in deciding to take a risk and comparisons between industries. It may not be just the type of industry but how well the industry is performing. Organisations in low performing industries are likely to take more risks, possibly in an attempt to increase their profitability. This research would be useful to further understanding of the different conditions under which effective risk taking occurs in different industries.

For organisations, knowing what conditions lead to effective risk taking would enable them to select the most successful leaders and shape an environment conducive to making themselves extremely profitable. Some key conditions that are related to successful leaders and entrepreneurs are:

 

· Resilience and tenacity

· Risk seeking behaviour

· Assessing risks as opportunities rather than risks

· Personality characteristics

· High levels of emotional intelligence.

 

However, a set of conditions is too simplistic. The way these factors interact is as yet not entirely clear. Furthermore, industry specific considerations have a role to play and the most desirable individual characteristics are likely to vary somewhat depending on the industry.

 

It appears that we know more about what does not work rather than the exact conditions for what does work. With that in mind, there are implications for how organisations can minimise the likelihood of poor risk taking behaviour.

 

Individual assessment (for senior roles)

In terms of individual assessment, the individual differences (e.g. personality and willingness to take risks) associated with effective risk taking can help to inform part of the selection process. Understanding these differences can help organisations to make more effective selection decisions for successful leaders.

Coaching

The emergence of derailment characteristics amongst leaders can be a worrying signal to organisations. Derailment characteristics can be closely linked to characteristics exhibited by leaders as they made their way to the top. Therefore providing coaching for individuals at the right time is key to helping them to develop adaptive behaviours and halting derailment characteristics before they have a negative effect.

 

It has been suggested that derailment characteristics can
be reversed with sufficient time and development. Coaching provides an excellent forum for increasing awareness of adaptation to new situations and
ineffective behaviours. This can help leaders to realise the benefits of better adaptation and work on behaviours more effective in building and sustaining relationships.

 

Leadership development

Leadership development techniques can be used to enable individuals and organisations to understand the different requirements that are made of today’s leaders. Increasing awareness of effective individual characteristics (e.g. resilience, willingness to take risks, results drive, motivation, action-orientation and risk assessment techniques) as well as industry specific considerations and requirements. Leadership development then requires individuals to live out these requirements in their day-to-day business environment in order to develop their skills.

 

Talent management

Applying an understanding of what makes leaders effective risk takers and the associated conditions enables organisations to develop their talent management strategy in terms of what potential looks like and how to measure it. Understanding what motivates these leaders will also help organisations to retain the leaders with the greatest potential. Furthermore, the ability to recognise an effective risk taker at an early stage in their career will enable organisations to encourage and develop these individuals into effective leaders for their organisation. Developing talent from within reduces the likelihood of having to recruit leaders externally and is therefore likely to save the organisation money in the long term.

 

Mike Idziaszczyk

Psychologist

http://www.pearnkandola.com

 

 

 

 

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