Most of us could remember someone we consider to be a good leader and we could even describe certain characteristics that they exhibit, such as being charismatic, inspiring, motivated, etc. But are these characteristics enough on their own and do they make a leader successful? Life generally requires that we take a certain amount of risk, for some people more than others. In certain businesses, risk taking may be considered more desirable than in others. But what makes a leader take a calculated risk when nine out of ten would walk away? And how do we know which leaders will take the right risks (the ones that pay off) and which ones will take the wrong ones?
Risk taking can be defined as…
“Undertaking a task that involves a challenge for achievement or a desirable goal in which there is uncertainty or fear of failure.”
Having the ability to take risks effectively could be the key to success for many leaders. A review of the literature suggests that factors involved in this include background, willingness to take risks, viewing risks as opportunities, personality characteristics, emotional intelligence, and industry-specific factors.
Interestingly, there is a lack of research on risk-taking among leaders. The literature, on the other hand, focuses more on entrepreneurs. This can be partly explained by the nature of each of these roles; An entrepreneur is characterized as someone who takes risks to establish a business as opposed to a leader who guides and inspires others. However, these roles also have similarities. Sometimes leaders may need to take risks to achieve company goals and entrepreneurs may need to guide and inspire others.
Research on the backgrounds of entrepreneurs suggests that they view themselves as more resilient, often due to significant events experienced during childhood and challenges during their career. This resilience is helpful to leaders as they overcome career setbacks. We tend to think of entrepreneurs as always successful, and yet many of them have faced setbacks and even bankruptcy. Having the resilience to get through this and start over allows them to be successful later on.
But is effective risk taking only explained by resilience and how willing is someone to take risks? It seems that entrepreneurs, particularly those who are focused on growing their business, and CEOs who have built their own business rather than running a family business, are more likely to take risks. Past successes and failures in risk-taking also have a role to play, but all of this is not enough to explain risk-taking behavior on its own.
Entrepreneurs tend to assess risk differently than others. They tend to see opportunities instead of risks because they are overconfident and generalized from past experiences and other information. They can also engage in different thinking styles (eg, creating numerous options to solve problems), which allows them to spot more opportunities.
Another factor to consider is the personality of the leaders. The ability to adapt to new situations and maintain good relationships is key to the success of leaders. Other characteristics of effective leaders are extraversion, the search for results, ambition, competitiveness, independence, optimism, and high levels of emotional intelligence.
Overconfidence is often an attribute associated with leaders and something that often gets them to the top. However, it can also play a significant role in their derailment if they are unable to adjust properly.
Lack of self-awareness, reduced emotional intelligence, and an inability or unwillingness to adapt are some of the reasons why leaders may have gone off the rails while possessing the same qualities they did on their rise. However, more research is needed to help us understand more about how or when leaders start to go off the rails.
It is helpful for us to understand the personality characteristics associated with effective leaders and how willing someone is to take risks, but we must also remember the needs of the organization in question. For this information to be useful to companies that want to select an effective leader or develop existing leaders, they must also understand the organizational context. Risk-taking behavior is more desirable in some companies than in others.
Industry-specific factors are likely to influence leaders’ and entrepreneurs’ approach to risk-taking, what they consider most important when deciding whether or not to take a risk, their willingness to take risks, and the type of risks they take. For example, in the banking industry they tend to be more risk averse, take a more structured approach, and are primarily concerned with exercising control over all factors within risk to avoid potential losses. While in the oil industry the main criterion for decision making is the expected value, implementing a balance of risk and return. In the software industry, your main concern is the impact of making a risky decision on your business, whether positive or negative.
More research is needed on what different industries consider to be the most important factors in deciding to take a risk and cross-industry comparisons. It may not just be the type of industry, but how well the industry is performing. Organizations in underperforming industries are likely to take more risk, possibly in an attempt to increase their profitability. This research would be useful for further understanding of the different conditions under which effective risk-taking occurs in different industries.
For organizations, knowing what conditions lead to effective risk taking would enable them to select the most successful leaders and shape an environment conducive to becoming extremely profitable. Some key conditions that relate to successful leaders and entrepreneurs are:
o Resilience and tenacity
o Risk seeking behavior
o Assess risks as opportunities rather than risks
or personality characteristics
o High levels of emotional intelligence.
However, a set of conditions is too simplistic. How these factors interact is still not entirely clear. Additionally, industry-specific considerations have a role to play and the most desirable individual characteristics are likely to vary somewhat depending on the industry.
It seems that we know more about what doesn’t work than about the exact conditions of what does work. With that in mind, there are implications for how organizations can minimize the likelihood of bad risk-taking behavior.
Individual evaluation (for senior positions)
In terms of individual assessment, individual differences (eg, personality and willingness to take risks) associated with effective risk taking can help inform part of the selection process. Understanding these differences can help organizations make more effective selection decisions for successful leaders.
Training
The appearance of derailment characteristics among leaders can be a worrisome sign for organizations. Derailment characteristics may be closely related to characteristics exhibited by leaders as they moved to the top. Therefore, giving people counseling at the right time is key to help them develop adaptive behaviors and stop derailing characteristics before they have a negative effect.
It has been suggested that the derailment characteristics can be reversed with enough time and development. Coaching provides an excellent forum for increasing awareness of adapting to new situations and ineffective behaviors. This can help leaders realize the benefits of better adaptation and work on more effective behaviors to build and maintain relationships.
leadership development
Leadership development techniques can be used to enable individuals and organizations to understand the different requirements placed on today’s leaders. Increase awareness of effective individual characteristics (eg, resilience, willingness to take risk, drive for results, motivation, action orientation, and risk assessment techniques), as well as industry-specific considerations and requirements. So leadership development requires people to live these requirements in their everyday business environment to develop their skills.
Talent management
Applying an understanding of what makes leaders effective risk takers and the associated conditions enables organizations to develop their talent management strategy in terms of what potential looks like and how to measure it. Understanding what motivates these leaders will also help organizations retain the leaders with the greatest potential. Additionally, the ability to recognize an effective risk taker early in their career will allow organizations to encourage and develop these individuals to become effective leaders for their organization. Developing talent from within reduces the likelihood of having to hire outside leaders and is therefore likely to save the organization money in the long run.
Mike Idziaszczyk
psychologist
