The Rise of Risk

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It’s something that corporate chiefs may dread at times and embrace during others: risk. They know full well that most businesses and markets don’t grow without taking bold moves. After all, where would Netflix be if it hadn’t poured billions into the unorthodox step of making its own television shows and movies? Or Coach, if it hadn’t expanded well beyond its ubiquitous style of leather bags?

But rarely has the decision to open corporate wallets ever been so hard. A revived global economy has many leaders feeling it’s the perfect time to be bold. But activists and stockholders are chomping at the feet of boards and CEOs, questioning higher costs. Is there any right move? “Risk-taking is perhaps the most difficult decision a leader will make,” says Elizabeth Schaefer, senior client partner in Korn Ferry’s Industrials practice. “It’s even more difficult in a good economy like this.”

At the moment, many companies seem to be in a dice-rolling mood. The headlines say it all, with multibillion-dollar mergers almost common, global hiring up, and stock markets breaking all sorts of records. Last year, capital spending at US firms rose 4 percent, after years of being flat (and the year before actually falling), while the country keeps adding jobs. Clearly, it’s game on at one company after another.

But should leaders be so confident—and, more importantly, how best to make such a critical call?

4% Increase in US firms’ capital spending in 2017.

Certainly, many analysts are nervous about a number of economic developments across the globe that they feel will bring down all these cheery results. They believe any savvy CEO needs a very clear strategy and process for determining risk—a playbook of sorts.

According to Christopher Metzler, CEO of the wellness consulting firm HFW, that playbook starts with a simple but often overlooked step: looking inward. He suggests CEOs make sure to ask their own charges and C-suite members for guidance, and invite dissent. Studies have shown, in fact, that hearing dissenting voices can provoke more thoughtful decision-making. “I lay out my vision and let them rip it to shreds,” he says. “The result is stronger decisions in real time.” Even hearing the same opinion from people of different backgrounds helps. Simply adding social diversity to a group makes people believe that differences of perspective might exist among them, and that belief makes people change their behavior, says Katherine Phillips, a professor at Columbia Business School.

Experts say leaders also shouldn’t let their own personal circumstances cloud their risk-taking decisions, because their natural preferences may not be what’s best for the organization. That may sound obvious, but there’s a library’s worth of research showing that CEOs are, well, human. Older CEOs invest less in research and development than younger CEOs and tend to make acquisitions that diversify the company’s business, rather than buying direct competitors, says Matthew Serfling, a professor at the University of Tennessee who has studied how age affects CEO decision-making. “Risk-taking decreases as CEOs age,” he says. Other research shows how female leaders take fewer risks than male counterparts, and that CEOs who served in the military take fewer risks than those who didn’t.

Finally, before the leader makes a move, he or she has to ask whether the organization has the workforce to pull off the risk-taking endeavor. Indeed, experts say getting the talent right within the organization is about as important as the decision to take the risk in the first place. A lack of a talent strategy has scuttled calculated risks in good and bad economic times. “It’s not just about filling open positions—a CEO must step back and determine specific talent requirements that need to be filled in order to execute business strategy,” says RJ Heckman, a vice chairman of Korn Ferry.