Transforming Organizational Mindsets on Risk
The following contribution is from the University of Melbourne website and was written by the team.
A common problem for many organizations seeking transformation is that risk aversion is so ingrained in the culture and decision-making process that it hinders progress and prevents adaptation to new approaches, practices, and ways of working.
“Change starts at the top” may be a cliché, but it’s also true when it comes to overcoming risk aversion.
If your leaders are hesitant to change or lack the experience and skills necessary to drive transformation, that mindset will filter down to employees, who may be unwilling to show initiative or even complete basic tasks for fear of overstepping perceived boundaries.
The possible consequence? Business inertia.
Your decision-making capacity will slow to a virtual standstill, and you’ll soon be overtaken by more forward-thinking competitors prepared to balance risk with long-term reward.
Below are three proactive ways to foster a culture of innovation that allows you to push boundaries without jeopardizing your organization’s long-term future.
Create a practical risk management framework
Having a robust risk management framework is also excellent for attracting investment, as most investors will feel confident in companies with sound policies that limit the possibility of sudden losses.
Your management team should define the primary objectives of your framework, agreeing on the internal and external risks, threats, and challenges you are likely to face in the future.
The risk management team tasked with creating and maintaining your framework should also be responsible for conducting risk assessments relevant to your organization’s environment and implementing mitigation strategies based on their findings.
A well-structured risk management framework should function as an evolving system that promotes a culture of risk awareness throughout your organization. Anyone can contribute to this culture by identifying risks relevant to their expertise.
Rethink Your Decision-Making Processes
Introducing decision-making processes to encourage innovation and gradually granting your teams greater autonomy will create a less risk-averse and more flexible culture.
Here’s how you can achieve this:
– Recognize current risk barriers
– Identify the elements of your current decision-making strategy that are holding your organization back and preventing you from making proactive decisions. These could be excessive bureaucracy, siloed teams, fear of failure, or a lack of tools and training in data-driven decision-making.
– Consider risk thresholds and empowerment
– Implement decision-making frameworks that allow teams to take calculated risks without long approval chains.
For example, you could establish an agile decision-making model that emphasizes speed, adaptability, and delegates decision-making authority to the teams closest to specific projects.
A great way to implement this approach is through sprints or cycles,
which allow you to test new ideas and focus on outcomes rather than lengthy planning sessions.
If you plan to give your teams more autonomy, it’s critical that you also create financial thresholds that determine the decision-making authority of different teams without the need for additional approval.
Failing to establish financial thresholds could result in uncontrolled spending and make it difficult for individuals and teams to hold themselves and their teams accountable for their budgets.
Run and Test Pilot Programs
Testing new ideas in small-scale pilots will allow you to be creative in your decision-making while minimizing risks in a controlled and relatively risk-free environment.
It’s important to create systematic and cohesive pilot programs, as this will allow you to collect and analyze valuable data and feedback that could be used to advance potential ideas and reject others.
Other benefits of implementing successful pilot programs include building trust among stakeholders and senior decision-makers to tackle new challenges. They can also provide valuable insight into future resource allocation for initiatives you’ve planned for full implementation.
Develop a Culture of Trust and Innovation
Do your KPIs and recognition programs encourage risk-taking and innovation?
By incentivizing employees to explore new approaches and think creatively, you not only ensure your company is better prepared to respond to market changes, but you also give your employees more compelling reasons to stay.
One reason decision-makers hesitate to encourage risk-taking is that we continue to view failure as a negative, when it can often be a positive learning experience.
Obviously, you don’t want your teams to constantly fail to meet their goals.
However, by subtly reframing your approach to failure, you can create space for employees to confidently experiment with your products or services.
Here are three ideas to consider:
– Share key learnings
After completing a project, you can encourage everyone involved to share their thoughts on what worked and what could be improved in the future. You can also create a repository that documents lessons learned for future use.
– Turn mistakes into challenges
When failure occurs, challenge your team to develop solutions to overcome them. By reframing mistakes as solvable problems, you shift your team’s focus from what went wrong to how they can improve, identifying setbacks as new opportunities for growth.
– Include failures in your success stories
Celebrating big wins can also be an opportunity to highlight the setbacks that contributed to the final positive outcome. By including mistakes, you emphasize that failure is nothing to fear and is part of the path to success.
Leading by example is crucial to successful risk-taking.
Normalizing failure is key to building a workplace culture that encourages risk-taking and innovation.
While risk management frameworks, innovative decision-making processes, and employee recognition are valuable tools for overcoming risk aversion, the success of these strategies still depends on having leaders committed to driving change.
Open and honest conversations
Your leaders are in the perfect position to set the tone by having honest and open conversations about their own failures and lessons learned.
This approach not only presents them as relatable, vulnerable, and grounded, but also fosters greater trust and transparency.
As a result, your employees are more likely to share innovative ideas and take calculated risks that can yield long-term rewards.
The University of Melbourne offers customized training for organizations looking to equip their leaders with essential skills to drive change and empower their teams. Learn more.
Why Powerful Leaders Take Risk Instead of Managing It
The following contribution is from Sumit Gupta’s portal
I’m telling you a story that will forever change the way you think about risk.
In 2007, while every bank was hiring more risk managers and creating sophisticated models to manage their exposure, a small hedge fund manager named John Paulson was doing something completely different. He wasn’t managing risk, he was taking it. Enormous amounts of it.
While Goldman Sachs had an army of PhDs calculating risk metrics, Paulson bet $15 billion against the housing market.
Risk managers called him crazy.
The models said he was wrong. But Paulson understood something they didn’t: sometimes the biggest risk is listening to risk managers.
When the dust settled, Paulson personally made $4 billion in one year.
The banks, with all their sophisticated risk management? They needed public bailouts to survive.
That’s the difference between studying risk-taking and studying risk management.
Paulson took risks, not managed them. He took risks with enormous upside and few downsides.
And that’s why Nassim Taleb’s straightforward advice—»You should study risk-taking, not risk management»—should keep any leader awake at night.
For example, I left a lucrative tech career after 16 stable and successful years. People told me I was crazy: «Why risk it all?» they asked.
The downsides? Short-term uncertainty, some financial instability, maybe losing my identity. But I could always go back to a job in a few months or years (limited downsides).
But the upsides were endless: I was betting on my purpose, my passion, my freedom. Today, I can’t even measure how much this decision has impacted me and the lives of countless people who now believe in their own power because they saw me embrace mine.
What if the biggest risk you’re taking is not taking enough risks?
The Problem with Playing It Safe
Here’s what no one wants to admit: most people are afraid of making mistakes.
They’ve built entire careers based on not screwing up, and now they’re in charge of organizations that need to make important decisions to survive. This isn’t wrong. It’s not a judgment. It’s an honest look at how most of us live our lives, and I don’t exclude myself from this.
Take Kodak, for example.
They had brilliant risk managers who could calculate the probability of various market scenarios to the nearest three decimal places.
They had committees, processes, and approval chains designed to minimize risk.
They also invented the digital camera in 1975.
But their risk managers said digital technology would cannibalize their profitable film business. Too risky. Better to manage that risk… by doing nothing.
Meanwhile, a pair of Stanford students named Larry Page and Sergey Brin were creating something called Google. No risk management department. No sophisticated models. Just two guys willing to bet everything on a crazy idea about how to organize the world’s information.
Kodak went bankrupt. Google was valued at a trillion dollars.
The lesson? When you obsess over risk management, you often overlook the biggest risk: becoming irrelevant.
For example, I openly shared provocative and confrontational e-books, such as «The 6 Silent Killers of Organizations» and «The 5 Invisible Lies That Hold Us Back,» that challenged CEOs to see uncomfortable truths.
There was a clear risk of backlash, misunderstanding, or alienation. Few people blocked or ignored me. The downsides were limited.
But the upsides? They became a powerful filter, attracting only those leaders willing to face reality. Now, these frameworks work for me, even when I sleep, attracting precisely the kind of bold, committed clients I want to serve.
Example
Another example of a risk with limited downside and unlimited upside: a friend of mine who had just founded an NGO in 2011 contacted 30 celebrities and asked them for their brand endorsements.
They all advised my friend to do this when he had money or a few years of credibility. He did it anyway. 29 people didn’t even respond (limited disadvantages).
One person, a famous cricketer, said yes. (Unlimited advantages).
As a result, they achieved in 7 months what the state government couldn’t do in the previous 7 years.
The Big Data Trap That’s Making You Dumber
Everyone thinks more data automatically means better decisions. It’s like saying more ingredients automatically make better food. Sometimes it does. Sometimes you end up with disaster.
Netflix realized this early on. They could have created incredibly sophisticated models to predict which shows would be successful.
Quickly weed out what doesn’t work
Instead, they developed a different approach: create many different shows, see what works, bet on the winners, and weed out the losers quickly.
Their risk wasn’t that a single show would fail; that was predictable. Their risk was not trying enough different things.
Compare that to traditional TV networks, which spend months analyzing market research, focus groups, and demographic data before greenlighting a show. With all that analysis, all that risk management, most shows still fail.
The difference? Netflix treats content creation like a portfolio of smart risks. Traditional networks treat it like a series of bets they’re trying not to lose.
For example, I recently advised a founder whose company was only a month old, and I didn’t ask for any payment. I risked not seeing a penny for my efforts. I was advised against it: «You’re crazy. You’re giving too much.» (Unattractive.)
But I knew the benefits were invaluable: trust, reputation, and a genuine human connection.
That founder then told others about my commitment, cementing my reputation as someone who supports leaders even in their toughest times. (Big plus.)
The Two Types of Risk (and Why Most People Have It Backwards)
This is where most leaders completely screw up.
They worry about the wrong risks and ignore the ones that can actually destroy them.
Think of it this way: there are two types of risk: ruin risk and volatility risk.
Ruin risk can destroy you. Betting your entire company on a single product. Going so far into debt that one bad quarter kills you. These are the risks you should consider.
There are legitimate situations where a defensive risk management strategy is appropriate:
– When you’re protecting something valuable that took years to build.
– When the consequences of failure are truly dire.
Volatility risk only complicates your life, but it doesn’t destroy you. Trying a new marketing channel that might fail. Launching a product that might flop. Hiring someone who might not work.
Most companies do this the other way around. They’re extremely cautious about small decisions (volatility risk) while making big bets that could sink the company (ruin risk).
Take WeWork, for example. They were incredibly flexible with small operational decisions; that’s fine, that’s just volatility.
But they also made huge real estate commitments based on projected growth rates that were basically a fantasy. That’s risk of ruin disguised as a business model.
Smart risk-takers, like Amazon, do the opposite. Jeff Bezos was famous for making a lot of small bets (most of which failed, known as expected volatility). But he was obsessively cautious about anything that might threaten Amazon’s core business (risk of ruin).
Why Crises Create Opportunities (If You Know How to Analyze Them)
Every crisis divides people into two groups: those who panic and those who see opportunities.
During the 2008 financial crisis, most companies adopted a survivalist approach. Cost cuts, hiring freezes, defense. Understandable, but unwise.
Meanwhile, companies like Apple and Amazon went on the offensive. Apple launched the iPhone in 2007, just before the crisis hit. Instead of retreating, they redoubled their marketing and innovation efforts. Amazon took advantage of the crisis to acquire talent and technology at low prices while its competitors cut costs.
The result? Both companies emerged from the crisis stronger and more dominant than before.
The thing about crises is that they don’t just destroy value, they redistribute it.
Resources become available. Talent becomes available. Market share becomes available. But only if you’re positioned to take advantage rather than simply trying to survive.
That’s why risk takers thrive during crises, while risk managers only try to minimize the damage.
For example, one executive leader I advised had a habit of jumping into every crisis, putting out fires daily.
