How Much Risk is Right?
ASSOCIATIONS NOW - VOLUNTEER LEADERSHIP ISSUE,
|Summary: We all have our own levels of tolerance for risk, but to lead your association, it's your responsibility to tackle risks head on. A healthy dose of facts and a will to face a range of emotional reactions will ensure your board maintains the right balance between inertia and impulse.||
Entrepreneur Richard Branson knows a thing or two about taking risks. As a teen, he tried unsuccessfully to sell Christmas trees and parakeets before founding a student magazine. Before the age of 20, he had a business selling records out of the trunk of his car, which led to his mail-order record business, which developed into Virgin Records, and then into an empire that includes an airline, an online-gaming service, and space tourism.
Some of Branson's businesses have failed, and others have been wild successes. But one thing his efforts have in common is an oft-cited philosophy that risk equals reward. "You fail if you don't try," Branson said in a 1998 interview with strategy+business. "If you look at the history of American entrepreneurs, one thing I do know about them: An awful lot of them have tried and failed in the past and gone on to great things."
Branson and others have proven that personal risk taking can be good for businesses, but associations have often been branded risk averse, with board members and organizational leaders taking a more conservative approach to innovation and change. But as associations struggle to keep up with changes to the economy, some boards and volunteer leaders are taking more risks in hopes of reaping bigger rewards.
An Appetite for Risk
In the broadest sense, the term "risk" means the possibility of loss or injury. Association leaders face risk in a variety of ways, from hiring decisions, social media initiatives, and technological-infrastructure blueprints to investment assessments, strategic planning, and more. In fact, members of an association board might see an element of risk in the majority of decisions they are called upon to make.
According to Jamie Notter, vice president of organizational effectiveness for Management Solutions Plus, associations might be more reticent to take risks than for profits because of the layers of leadership that contribute to an association's decision-making process. "When it's five committees and a couple of hundred members or multiple member companies with a more complicated decision-making process, you end up having to go with the lowest common denominator and getting less risk," he says.
Melanie Herman, executive director of the Nonprofit Risk Management Center, says successful associations are creative, innovative, and interested in trying new things and are not necessarily more risk averse than for profits. The level of risk a board is willing to take has more to do with each board member's "risk appetite." Regardless of nonprofit or for-profit status, she says, "an organization is a collection of people. Individuals are going to have varying appetites for risk."
A Range of Reactions
Economists have long tried to quantify and analyze risk appetites with formulas, charts, and graphs. Scientists have mapped the portions of the brain that are active when a subject takes a perceived risk. Consultants administer tests and analyze scenarios to measure risks. But according to David Ropeik, author of How Risky Is It, Really? Why Our Fears Don't Always Match the Facts, risk is subjective and not measurable. He says that, when presented with the same set of facts about a potentially risky decision, board members will view the facts and data through their own subconscious filters.
"Facts are meaningless in the purest sense of that word. The meaning is in how we interpret them," Ropeik says. "Risk decision making that pretends to be perfectly rational is risky in and of itself, because it is denying the affective, emotional, instinctive way we subconsciously interpret information."
Notter says board members should recognize the emotions that arise when discussing particular decisions because they can help people get to the real reason a perceived risk makes them uncomfortable. "An emotional cue or an intuition about a piece of data could be really key in managing risks. You have to acknowledge it. Sometimes your emotions can cloud your thinking, and you have to use your emotional intelligence. But again, sometimes that emotional reactivity might lead you down a better road."
Notter and Ropeik say the data collected for decision making will pass through the board's personal and educational filters. But one challenge to helping board members get a handle on the potential risk of a new project is making sure the board receives the full picture, says Omnipress Vice President Paul Wehking. Omnipress works with associations to deliver content from their educational meetings in various media, and Wehking says some boards worry about the risk of alienating attendees and members when they switch from printed handouts to electronic versions. Board members are more comfortable with taking the risk if they fully understand what the members want and the true cost of their decision.
"Risk tolerance is directly correlated to an organization's ability to communicate. The more that an organization communicates among leadership and with the members, the less it feels like risk because everyone goes into it eyes wide open," Wehking says. "When there's little communication, there may be more perceived risk."
Sometimes Risk Is the Only Option
The search for revenue in the new economic reality may be helping to change associations' tolerance for risk. Michael Tuteur, CEO of Votenet Solutions, Inc., says since the downturn in the economy he has seen more association boards willing to switch from traditional paper ballots to online voting for elections. "We're seeing them being less risk averse overall, in part because of the need to be more relevant and innovative to survive, but boards and leadership are definitely striving for a healthy balance of risk so that they're not taking so many chances that they alienate their membership."
The Catholic Health Association knew the slow economy was affecting its members' ability to attend one of its flagship educational programs, the Foundations of Catholic Health Care Leadership, an in-person series that meets for two hours per week for six weeks. CHA leaders weighed the risks of a decline in attendance or taking the course online. As a faith-based organization, they were challenged by the task of replicating the in-person leadership training online. "Formation of leadership is focused on individual integration of the stated mission and values of Catholic healthcare, which includes an understanding of their work as a ministry, as a service, and as a vocation—a calling," says Brian Yanofchick, senior director for mission integration and leadership development. "For us part of the risk was how to effectively create formation experiences in an online setting."
Using a virtual conference environment, CHA developed a six-week online course that brings participants together to see presentations two hours per week and to interact via chat, voice, and small, electronic group discussions. Handouts and assignments for each session are available for download. "We also took a risk in terms of our willingness to try something new and our hope to achieve a high standard," he says. "The attitude was, ‘Let's try this.' We understood that we needed to carefully plan for it, to understand the methodologies to make it work well." With the launch of the online course, CHA increased the average program size by about 40 percent and noted that more staffers from individual organizations were able to take the course, instead of just the senior staff.
Wehking says sometimes when an organization sees too much risk in a change, the decision-making process comes to a halt. Other times, the risk of staying with the status quo is greater than the risk of moving forward. When the International Erosion Control Association board of directors hired Executive Director Russ Adsit in 2007, they asked him if he would be willing to move the IECA headquarters from Steamboat Springs, Colorado, to a larger city within two years. But Adsit says he soon realized the lease was almost up, and the board had to move forward with a decision within five months.
The risks surrounding the decision to move were high. The board could put off the major move by choosing temporary space in Steamboat Springs, but the high cost of office space in the ski resort area made that move (and staying in its present building) cost prohibitive. But choosing to permanently move the headquarters to Denver would involve massive staff turnover, complicated administrative logistics, and many more headaches. Within five months of hiring Adsit, IECA's first new executive director in almost 20 years, the board voted to go forward with the move.
"In hindsight, the board members do not consider that this move was a risk," Adsit says. "If we had remained in the high-cost, unproductive space in Steamboat Springs, we would have had to disband the association. With the economic conditions we are now enduring, this was the only way for us to survive, so their tolerance of risk becomes one of realizing that this was not a real risk after all, just prudent—even if it was painful—management."
Your Risk Filters
When board members get together to evaluate a proposition, Ropeik says many factors come into play about how they evaluate the risk individually and together. He says the board members want to be right personally and want to do the right thing for the organization as a whole: "Those are two different filters that may not coincide." In addition, he says, humans are inherently loss averse, and a choice that offers equivalent gain and loss will not feel equivalent; the loss will feel bigger. "We're instinctively defensive and protective with our health and with our resources.
That's magnified in the boardroom because the individuals have a fiduciary and legal responsibility to the organization," he says.
Notter says the best way to talk to a board that is risk averse is to make sure everyone is clear on the questions, the data, and the assumptions. "When talking to group about risk, the key word to me is ‘clarity,'" Notter says. "So many times there are 118 assumptions that go into that judgment that a decision is too risky. I stop and say, ‘Explain how you came to this judgment.' When you start sharing those things, then you have a more interesting conversation and people are clear about what they're debating."
Ropeik adds, "The most effective way to have a constructive discussion about risk is to understand the underlying psychological reasons why the other parties feel the way they do and to respect those feelings and try to present the choice in terms that don't conflict with those feelings. It's like any conversation; you'll do better if you understand where the other person is coming from and respect that, as opposed to arguing your point of view."
Risk Is Constant
As board members come and go, the board's overall risk tolerance may change, but Herman says an important step for understanding a board's risk appetite is to continue reviewing decisions and strategies that involve risk. In addition, new board members may recognize risks and issues that senior members might not see. Herman remembers one organization's new board member who stepped up to ask if the association had a succession plan in place for the executive director. The other board members suddenly recognized that he saw a potential risk they had overlooked.
"Change in the makeup of the board is a fact of life, but it's also a very good thing," she says. "Having new people in a governance role and bringing in their own filters and interests and views keeps the association fresh and helps them avoid continuing along the same path. With new people coming on, you're going to increase the likelihood that new issues will be brought to light."
Beth Ziesenis is owner of Avenue Z Writing Solutions in San Diego. Email: email@example.com
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Peter Turner , January 12, 2011
Commend you and ASAE on a highly appropriate topic. Not appreciating the upside of risk taking threatens to blunt the creative energy and market opportunities for many.
Given global trends, we shall look back on the present period when those who achieved long term sustainable growth will have done so in large part by encouraging a management culture that embraces "calculated risk."
Other comments below correctly point out the importance of considering risk as a "multiplier" for expanding one's influence and business growth.
Risk can be made to work for you. It requires a clear understanding of the market opportunity, customer need, how one's products and/or membership can become more locally relevant, and finally, an operational capability that aligns design, delivery, promotion, sales and service.
I recommend Rosbeth Kanter's book "Confidence" wherein she shows how managers cultivate management confidence to embrace risk and in return build strong business success over many years.
Would urge deeper exploration on how organizations can better use risk taking to their advantage.
David McKnight , January 06, 2011
Thanks Beth – great article!
The other end of the risk equation is “reward”. How much risk one will take depends on their perception of the potential of a reward. Some organizations take more risks because they perceive a greater reward…some are more inclined to protect what they have and are doing. These mindsets exist in both for and not-for profit organizations.
Association leaders, I believe, do have a heavy burden in that they do need to protect their organizations ability carry out their mission – it’s much bigger than any one of them are. So they need to weight risk “not serving some” for the reward “opportunity to serve more”.
Melanie Herman , January 06, 2011
Many association executives continue to associate the word "risk" with the potential for loss or harm. In my view this is a far too narrow approach. A "risk" is the potential for loss OR gain. We need to acknowledge that risk encompasses both threats AND opportunities. When we transition to this broader (and more optimistic!) view, we have the real potential to engage the leaders of our association in a thoughtful discussion of appropriate risk-taking and the association's risk appetite.
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