The Balance Between Risk and Caution

You Asked: Whom do you think make the best board members – people who are willing to take risks or people who are very cautious? Is there a group or profession of people which produces the ideal board member?

Answer: Both. A board needs members who can calculate risk carefully. It also needs people who take seriously their fiduciary responsibility and demonstrate more caution than the risk-takers like to see.

Some boards have erred in the direction of reckless and irresponsible “blind faith”. They have gambled the resources of others and have lost, putting their organizations in financial jeopardy. Other boards have suffered from analysis paralysis where a group is afraid to take the first step into the unknown. In this case opportunities for service have been missed and the organization lost the opportunity to make the contribution it was formed to make.

Each profession or group of people have a range of members – from high-risk entrepreneurs to low-risk cautious people. Thus, in any group of accountants, clergy, academics, physicians, lawyers and others, you will find a continuum of risk-oriented and risk-averse people.

Having said that, it has been my observation that some professions have a majority of its members leaning toward caution. Security is important to many academic people, for example. Permanent tenure is a concept that is welcome and comforting to people who want security in their jobs. An entrepreneur, on the other hand, thrives on risk. He or she has no need for any kind of a guarantee of employment.

A person who is extremely risk-averse or a person who thrives on risk will succeed on a board only if they are balanced by their opposite. However, a board that has both extremes will have some difficult times deciding on the amount of risk that it can accommodate as a group.

My experience is that the successful business person makes the strongest board member. Note that I used the adjective “successful”. Some business people may be unsuccessful because they lean too far in either direction – too risk-oriented or too risk-averse. The successful business person may have made mistakes in judgment, but they have learned to balance the internal strengths with weaknesses and the external threats with the opportunities.

Such a person does not require a counterbalance on the board, because they have balance within their own orientation. At the same time, I have to acknowledge that a successful business person has no patience for process. It can be frustrating for such a person to have to wait for others to decide something so obvious. Sometimes it’s enough to drive them to resignation, because things just don’t happen fast enough or they become too complicated by process.

Some boards, by the nature of the mission of the organization, require a certain number of people to come from a certain group or profession. Some church-related organizations, for example, will require a certain number of clergy on the board. When this is the case, it is advisable to select candidates carefully with their risk quotient in mind. It is fine to have cautious or risk-taking people on the board, but it is equally important to have a balance. Only in this way can the board produce balanced decisions consistently. Almost all strategic decisions involve risk analysis, even if that analysis is taken for granted and dealt with without ever mentioning risk analysis.

Les Stahlke, President/CEO
GovernanceMatters.com Inc.