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Risk Insider: Jack Hampton

Least Risk or Most Opportunity?

By: | March 12, 2018 • 3 min read
John (Jack) Hampton is a Professor of Business at St. Peter’s University and a former Executive Director of the Risk and Insurance Management Society (RIMS). His recent book deals with risk management in higher education: "Culture, Intricacies, and Obsessions in Higher Education — Why Colleges and Universities are Struggling to Deliver the Goods." His website is www.jackhampton.com.

For the second year in a row, the Academy Award for Best Picture went to a movie that was a controversial choice. In 2017, Moonlight prevailed over La La Land, the overwhelming favorite. In 2018, it was The Shape of Water, probably a narrower winner, over Three Billboards Outside Ebbing, Missouri.

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The winners of Oscars were chosen by a vote of the 7,000 or so members of the Academy of Motion Picture Arts and Sciences.

In 23 of the categories, the Oscar is awarded based on the most first-place votes. For best picture, a preferential voting system reallocates votes to reflect both the most and least preferred. Such a system rewards pictures that do not offend. La La Land annoyed people with its portrayal of Jazz. The harsh portrayal of police brutality had the same impact in Three Billboards.

The Oscar results remind us of a parallel situation with respect to the selection of chief executive officers of corporations. The CEO is chosen by a board of directors, partly based on past achievements and partly on their likely ability to advance the value of the company common stock. But yet another factor is involved; risk appetite.

The upside of risk is the pursuit of opportunity.

Few CEOs are directly responsible for whether companies succeed or fail. We focus on Apple, Google, and Amazon where CEOs made all the difference in the world. In the meantime, the vast majority of organizations have lackluster CEOs who have little if any impact on the success or failure of the company.

This situation may exist because of the perceived or actual risk appetites of the board and the candidates.

Board members are often satisfied with the status quo. Absent some real crisis, all of the top prospects will have suitable but similar credentials. Board discussions may mitigate promising strategies and focus on a continuation of current practices. That is, the board may make a final selection on an Oscar-like preferential voting process. The board members who are risk adverse may knock out the strongest aspirants for the top job.

The upside of risk is the pursuit of opportunity. This, too, may take a preferential hit after the CEO gets on the job.

Once in place, the chosen CEO often foresees only five to seven years until retirement. Is this a time to stir the pot or continue the course?

During the job interview, all the talk was about the future. Once in the chair, the negative consequences of bold changes impair the value of success. The CEO does not choose strategies based on their merit. Instead, a preferential decision-making behavior may choose lower-ranked courses of action with fewer risks.

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Why did VisiCalc invent the electronic spreadsheet and then hand it to Lotus 123 and MS Excel? Why did Nokia and Blackberry fail to respond to the threat from the iPhone? Why did Blockbuster cling to a flawed business model as it watched Netflix eat its lunch?

Can these behaviors be explained by a simple risk-return reality?

Thus, we have two lessons from the Oscars.

First, nobody likes physical abuse in Moonlight or romance with a fish in The Shape of Water, but these may be less bothersome to voters than the features of other films.

Second, preferential voting endangers our organizations if risk management does not accept the risks that go with bold strategies.

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The R&I Editorial Team can be reached at [email protected]