The Paradox of Risk

“The biggest risk is not taking any risk…In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks”. Mark Zuckerberg, Facebook founder A common misconception holds risk to be an inherently bad phenomenon to be avoided in most cases. Nowhere is the manifestation of this philosophy more […]

By Nicholas Hughes

July 9, 2015

“The biggest risk is not taking any risk…In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks”.

A common misconception holds risk to be an inherently bad phenomenon to be avoided in most cases. Nowhere is the manifestation of this philosophy more apparent than the current business climate and the banking sector which supports it. Nonetheless, without taking risk there would be insufficient appetite for innovation and limited opportunities for growth. What’s more, entrepreneurship would wither without the quests of the more adventurous at heart.

Arguably, if enterprise is the pursuit of risk for reward, it goes to reason that risk can’t be eliminated without foregoing profitability. In turn, survival is questionable without sustainable profitability and quite conceivably, insolvency is the mother of all corporate risks.

The King Report on corporate governance, published in South Africa, advocated a balanced approach which sought to protect investors without stifling enterprise. This ground-breaking report spoke of three corporate sins: sloth, greed and fear. While greed encourages excessive risk-taking, sloth and fear have equally risky consequences. For example, sloth causes a loss of flair where enterprise succumbs to administration, while fear erodes the drive for sustainability and enterprise.

“No degree of prosperity can be sufficient to eliminate all misfortune and sloth is impervious to opportunity”.

Dean Koontz, popular suspense writer

There can’t be a return to previous levels of risk-taking. However, enterprising businesses need to accept calculated and appropriately mitigated risks in exchange for measurable and commensurate rewards. Rather than misguided attempts to shun risk entirely, organizations should adopt an effective risk management framework embracing the following activities:

  • Carefully articulating a measurable tolerance and appetite for risk without neglecting the tradeoff between risk and reward;
  • Undertaking deliberate and systematic steps to identify risks using an approach that broadly views risk as anything that could prevent an organization from achieving its goals and objectives (whether strategic, operational or financial);
  • Assessing the likelihood, severity and correlation of identified risks;
  • Developing targeted risk-response strategies including, such as, designing and implementing appropriate internal control procedures and risk mitigation initiatives; and
  • Creating a system of ongoing review and monitoring which uses key risk indicators and trigger-points for timely identification and escalation of organizational threats.

In a nutshell, we face an interesting paradox worthy of reflection – while risk-taking ultimately brought about the financial crises, we won’t emerge from the doldrums that plague our economy without re-engaging risk in a meaningful way. For although history has shown a succession of pendulum swings, it is important to steer clear of the popular momentum toward either extreme. In time, the pendulum always reverts to the common ground occupied by reason.

Nicholas Hughes

Nicholas Hughes is a qualified accountant with over 15 years experience providing assurance and advisory services. He was also Group Financial Controller of an international reinsurance group before starting his own firm. He currently provides internal audit, compliance and advisory services to local and offshore clients in the financial services sector and has a key interest in the areas of corporate governance and risk management.