Minimize lost opportunities
You must understand the risk you’re asking your credit union to take to achieve your goals.
Risk and return are inseparable. Every action and decision you make—from the minute to the strategic— carries a risk/return trade-off.
Organizations that understand this dynamic drive value for their members. Imagine the credit union that desires more sales from front-line staff but never achieves a real lift in numbers.
Imagine a credit union board that seeks first-class online and mobile tools but continues to lag the industry. Why?
The “why” is oft en the same: risk aversion and a lack of understanding.
It’s human nature to avoid risk because you don’t want to feel stupid and you don’t want to make mistakes that may count against you. We perceive (and, quite frankly, receive) no real recognition for the effort, or we receive confusing messages from the organization.
If a board focuses heavily on budgets, it will influence the types of investments management makes even at the expense of better investment opportunities because no one wants to disrupt the operating budget— or because you want to see short-term results that are more closely aligned with performance incentives.
Many employees will try to protect their jobs at all costs, even to the demise of the organization. They’re reluctant to try new things for fear of failed attempts that come with some element of scrutiny.
Most will avoid bringing up problems for fear of retribution—or simply having more work loaded on them.
A survey by the Harvard Business Review indicated that out of several hundred professionals in self proclaimed innovative organizations who were asked what would happen if they developed and tried “new and untested ideas,” only 17% said the behavior would be rewarded or approved. Nearly half (47%) said the reaction from their superiors would be unpredictable.
In another study, a survey of 1,500 executives in 90 countries demonstrated that executives are extremely risk-averse regardless of the size of investment.
Executives turned down opportunities even when expected net present value was positive at a 75% loss level.
Instead, they only accepted projects when the chance of loss was lower than 20%, regardless of investment size, area, and type.
Risk management and risk appetite involve so much more than looking for downside events. These concepts are really about the total collection of our governance, managerial, and organizational performance attributes.
In this context, think of all the decisions that are made annually and all the ideas and questions that go unspoken. Organizations miss out on substantial earnings potential due to fear of risk, according to an analysis by The Rochdale Group.
While this is unquantifiable and large-ranging, think about all the things you didn’t say or do—and where returns may have been muted because doing nothing was the easier option.
Organizations never live up to their potential due to this phenomenon. ERM more fully understood and more fully engaged and rewarded helps to minimize this lost opportunity.
Luck doesn’t drive great organizations. What does drive them is alignment and a relentless questioning of what they do and why they do it.
ERM and risk appetite will cause your ship to take on water or make adventurous voyages. Will you dock your ship in the relative safety of the harbor or make sail?
Adapted from CUNA’s soon-to-be-released 2015-2016 Environmental Scan.
Tony Ferris is managing partner of The Rochdale Group, a CUNA strategic partner. Contact him at 800-424-4951 or at email@example.com.