The Perils of Avoiding Risk

I read recently that some surveys are showing that the biggest fear amongst executives today is no longer loss of business or competitive position; it is laying themselves, and their organizations, open to risk. I suppose that is only to be expected in a business culture that places so much reliance on being right all the time. Compliance is also far easier to achieve—and prove—that almost any other category of achievement. And when things go wrong in a bureaucracy, people typically blame the system. Sometimes they’re right, of course, but it’s also a great way of avoiding personal accountability. Yet, aside from the ethical deceit of shifting the blame onto something else to avoid admitting your error, this habit of blaming the system and seeking to mitigate every risk has some nasty results. Avoiding risk too often means crippling the business altogether.

Suppose a team makes a mistake. If you blame the system that allowed that team the freedom to make their decision (and therefore any errors), the obvious response is to take back the authority to choose and limit it to higher levels (which you assume will not make mistakes). The first step strengthens the tendency to organize via top-down, command-and-control hierarchies. The second devalues everyone below the highest levels. In both cases, though it seems you have practical evidence for taking this step, despite the negative outcomes, neither choice has any validity.

When executives lay down rules restricting decisions to the uppermost layers in the hierarchy, the true reason is most likely to be based on the common reaction that they trust themselves, and those like them, more than they trust others.

Start with the notion that limiting most important decisions to senior people will remove unnecessary risk. Unfortunately, all human beings make mistakes. The assumption that more senior people will either not fall into error, or do so more rarely, or less seriously, is completely unfounded. One argument is that such people have more experience and this will hold them back from making mistakes. Not so. It may limit one class of mistakes (those based on lack of experience), but it will do nothing for all the other classes. Indeed, given that many senior people have outsized egos, they are more likely to make mistakes derived from arrogance and belief in their own infallibility. When executives lay down rules restricting decisions to the uppermost layers in the hierarchy, the true reason is most likely to be based on the common reaction that they trust themselves, and those like them, more than they trust others. It also sounds less risky to proclaim that key decisions—especially financial ones—are always taken by the most senior managers. But it does little to affect the true amount of risk in the system. Recent scandals have shown that even the most senior people in an organization can screw things up in a spectacular way.

Where once line managers ran their departments and sections with little more than one or two assistants (often not even that), corporations are now weighed down with offices full of expert “support” functions. Someone has to make the money to pay all these people.

The same process is at work when centralized, specialist staff functions assume decisions that used to be made by line managers. The stated reason may be that the line people are too busy to be bothered with such matters. The true one is a belief that they’ll get it wrong—or choose differently than the “experts” back at home office. The growth of legalism (defined as excessive adherence to laws and rules) further fosters the tendency to restrict anyone other than a few designated experts from doing or saying anything that might cause some imagined liability. This is great news for lawyers, who seem to be more common in the corridors of power than cockroaches in sewers, but it’s very bad news for corporate innovation or even profitability. Where once line managers ran their departments and sections with little more than one or two assistants (often not even that), corporations are now weighed down with offices full of expert “support” functions. Someone has to make the money to pay all these people. It is sometimes claimed that the finances of the Byzantine Empire collapsed under the weight of an imperial court packed with functionaries and emperors whose taste for spending knew no limits. Doesn’t that remind you of one or two well-known CEOs and their hangers-on?

It’s extremely common to find people treating something as an instance of a general principle when it is nothing of the sort.

Let’s look at the second result of trying to avoid all risk: passing an implicit message that subordinates cannot be trusted with important decisions. For a start, this reinforces the sense of “us” versus “them.” It also turns a specific event into a general principle. Instead of noting that more training or experience or help might be needed to avoid errors in future, the event is used to justify the principle that all significant decisions must be reserved for a small circle of “trusted” people. It’s extremely common to find people treating something as an instance of a general principle (In this case, “Line managers and junior staff cannot be trusted with important choices.”) when it is nothing of the sort. It is an extremely common human failing to take one or two specific situations and immediately build some universal ruling on this supposed “evidence.” That’s why science demands multiple studies by independent teams before admitting anything even to the provisional status of an established theory. Anecdotes are not proof. Nor is a pile of unrelated stories and examples, however tall it stands.

Don’t create an rule that leads you to keep all decisions in the hands of the people at the top and employ specialists to help them, unless you are sure that is truly the only way. Haste and lazy thinking make bad guides to decisions. Leaders need time to be certain about the causes of errors before jumping into action to prevent them in future. Too much avoidance of risk—especially the kind that exists only in the imagination—usually leads to avoiding other things, like trust, change, innovation, learning, and success. Business is all about taking risks to make profits. Life is the greatest risk there is. Only dead corporations, like dead people, are entirely risk free.

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