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Why it’s Too Risky Not to Understand Your Risk Profile

The risks facing senior leaders around decision-making are higher and more serious now than ever – the number of businesses that risk profile their leadership teams are sure to increase as a result.

The risks facing senior leaders around decision-making are higher and more serious now than ever – the number of businesses that risk profile their leadership teams are sure to increase as a result.

By Gaëlle Pritchard, Head of Assessment, SH Leadership and Sue Colton, Associate Business Psychologist

The amount of legal accountability is ramping up in senior leadership roles, as is the pace of decision-making and the complexity of the information that leaders need to process. As a result, understanding attitudes towards risk – your own and your colleagues’ – has never been more important.

Knowing your risk profile as a leadership group could have a direct impact on the success of your current project – or of the business as a whole. When considering an organisation’s culture, it’s the people that create it – especially the senior leaders. Their prevailing attitude to risk will filter down through the organisation and create the culture.

With regulatory accountability at an all-time high, it’s never been more important to take control of your organisation’s risk culture – and that starts with you and your team. But how can you really understand your risk profile? It starts by understanding what we mean by a risk profile.

What is a risk profile?

An individual’s attitudes towards risk impacts their decision making, the inter-personal dynamics of teams and potentially , as mentioned above, the entire risk culture and reputation of organisations. As the psychometric assessment solutions company PCL puts it: “Knowing how each individual perceives and reacts to risk and uncertainty – the way that they deal with the continual flow of conscious and unconscious decisions – provides invaluable insight into the vulnerabilities and effectiveness of decision making at all levels.”

Understanding our “risk nature” enables us to know our innate reactions to risk, including:

• Our risk tolerance – or how much risk we’re willing to take

• Our risk stability – or how much uncertainty we can cope with

• How we react when things go wrong

Meanwhile, our “risk appetite” is our capacity to manage risks in our environment and would take account of aspects such as:

• The impact of life experiences and personal circumstances

• The potential impact of an individual’s age and general health

• The extent to which our risk appetite may vary from situation to situation – adrenaline junkies who enjoy skydiving may still be very cautious when it comes to financial risk

There are psychometric tools out there that can be used during recruitment, or when assessing boards or senior leadership teams. Although the details are different, the concept of these is very similar to when independent financial advisors must assess the risk profiles of their clients before making investment recommendations.

Just as an IFA or an asset management firm must know their clients’ risk appetites, so increasingly should all firms understand the risk profiles and appetites of their senior people. After all, these firms’ future profitability – and possibly even viability – may well depend on it.

The practical benefits of knowing a team’s risk profile

While using a psychometric tool to assess an individual’s risk profile can be useful at the recruitment stage, this is only fully true if the leadership team that person is joining understands its existing risk profile at the individual and collective level.

Let’s consider an example of why this is true. One risk assessment tool – the Risk Type Compass developed by Geoff Trickey at PCL – categorises eight essential risk types. These are: wary, intense, prudent, excitable, deliberate, carefree, composed, and adventurous.

Now imagine a management board for a financial services firm on which five of the six existing members have adventurous or excitable risk types and one is categorised as prudent. Now say that board wants to recruit a seventh member. Doesn’t it make sense to look for an individual whose risk type would act as a potential counterbalance to all those who are excitable or adventurous?

Of course, you would only know what sort of risk type dynamic you will achieve if you had already assessed the rest of the individuals on the board. Every time we think about using tools in the context of assessment, it is to think about the future and where to go from where you are now. This is what we are like now, what do we want to be and so what are we going to do about it?

It is highly unlikely that any group you assess is ever perfectly balanced. There’s always something that needs to be redressed. So this knowledge helps with your future needs, for example by putting development plans in place or for future recruitment.

Our attitudes to risk and how we make decisions are also important in the context of diversity of thought. Your individual attitudes to risk will enable you to bring different perspectives as a group. Contrasting views between senior team members stimulate healthy debates on which strategies to choose. This kind of debate helps a business thrive.

What are the risks of not understanding your risk profile?

It’s important to recognise that risk, in itself, is not bad. Without risk, there would be no growth. Without risk-takers, companies would not grow. Yet of course we often think about risk and risk-taking as negative in light of the 2008 financial crash. The entire development of our regulatory regimes in the UK, Europe, North America, and elsewhere has been predicated on avoiding the same kinds of risk that led to that financial crash.

Take your authors as an example. We are both very rule bound and rule conscious and have a very deliberate risk style. Initially we approach risk by thinking through the worst and then mitigating for it. This can be useful in avoiding unnecessary risk. On the other hand, it also means we’re not especially creative.

If you want people who are highly creative, then you’d expect their risk tolerance to be higher. There are places – sales teams or marketing teams, for example – where a high-risk tolerance works well. In highly-regulated roles, you would expect the risk tolerance to be much lower.

Whilst your ideal risk profile at both the individual and group level does depend on the role in question and the nature of your organisation, one very real risk is that of so-called ‘risk drift’. This is where you have a board with a very high tolerance for risk, that can pull the more cautious risk

takers towards them, in that the minority are dragged towards the most prevalent people or attitudes on the team. That can be a risk in itself, but you get risk drift towards higher risk tolerance if they are of the majority view.

Again, this doesn’t have to be a bad thing in itself. The important point is to understand to what extent this may be true of your senior team, so you can take mitigating action if needed.

Balance is impossible without risk profiling

Again, we can see the importance of seeking balance. But a senior team can only achieve balance if it is aware of the gaps or imbalances in its existing team. And that awareness can come only via risk profiling –using a validated psychometric risk profiling tool.

In other words, if you don’t know your risk profile – and that of your senior leadership team colleagues – you are more or less flying blind.

As a business you need to know it. As a leadership team you need to know it, since you are dictating the company culture around risk. As an individual you need to know it for the good of your career. At every level you need to know.