A short article in the Sloan Review discusses Gaining a New Understanding of Risk: “
In these days of uncertain markets – and an uncertain economy – risk can seem almost omnipresent in business. But how do you manage risk prudently – yet still grow your company? Harvard Business School Professor Robert S. Kaplan That timely question reminds me of an interesting talk I heard this past summer by Harvard Business School professor (and MIT alumnus) Robert S. Kaplan. Kaplan is perhaps best known for his work codeveloping the Balanced Scorecard concept.”
The article points out that risk management is hard:
On the other hand, it’s not easy measuring risk – something Kaplan acknowledged. What makes risk management so hard, he observed, is that you’re trying to quantify things that may have never occurred and may never occur. “You can’t rely totally on measurement,” he said.
The article discusses three types of risks and approaches to address them (listed below). The key take away for me is that some employees will take unauthorized actions to maximize their rewards. Organizations have to work more more diligently to control this behavior. I really like this quote:
“If you have high-powered incentives, you’d better have even higher-powered control systems”
We have often talked about problems with incentive plans (risk taking, performance, fudging results, etc). The common complaint I hear from executives about properly controlled incentive plans is that it is too hard to do. May be we need to remember this quote from Prof. Kaplan…