Unrewarded risk represents what poker players call “table stakes”: you’ve got to ante up just to get into the game. The ante, of course, doesn’t guarantee success; it only ensures that a hand of cards will be dealt to you. Numerous examples of unrewarded risk appear in business. For instance, every public company in the United States must comply with payroll tax withholding laws, observe OSHA health and safety requirements, and pay bills when they come due. Yet companies that perform all of these tasks in a timely and competent manner don’t see their share prices surge as a result. These kinds of activities simply meet expectations of shareholders, regulators, suppliers, analysts and other stakeholders. The attendant risks can’t be ignored, but the primary incentive for addressing them is value protection, not value creation.
Conversely, rewarded risks represent the strategic bets that you place during your poker game. You’ve assessed your hand, sussed out the competition and wagered a stack of chips with the expectation of raking in many more than you’ve laid out. In business, rewarded risks are those bets you make as you develop new products, enter new markets or acquire new companies. The primary motivation for taking rewarded risks is to spur value creation.
Fixate on just one side of the coin and you’ll get a one-sided result. Focus on value creation (rewarded risk) to the exclusion of value protection (unrewarded risk) and you’ll quickly find yourself on the slippery slope of noncompliance, litigation, reputational risk and other nastiness. Similarly, address only unrewarded risk and ignore rewarded risk, and your company may survive but will never thrive.
Authors: Mark Layton, Steve Wagner
Source: Deloitte Review
Subject: Risk Management
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