MT Round-table: Risk taking - damned if we do and damned if we don't?

If heady carelessness brought us to our current pass, the exercise of great caution may not be the way out of it. Entrepreneurs taking calculated risks could be what the doctor ordered.

by MT Staff
Last Updated: 09 Oct 2013

Matthew Gwyther: Although it may have been an excess of risk on the part of bonus-crazed bankers that led to the calamities of 2008, the paradox is that it's going to be individuals in business taking risk that gets us out of the difficulties we're in and back to the sunny uplands. We need to expand our economy and that will only come about through businesses and entrepreneurs saying: 'Look, I have had enough of this gloom and austerity, I can see a really good opportunity there and we are going to get out and have a go at it.' That's a very important thing to have in the back of our minds. I'd like to start by going round the table and for you to introduce yourselves and to talk about risk in the broadest sense.

Erik Britton: I used to work for the Bank of England but I left, along with a colleague, to start a small independent entrepreneurial company, Fathom Consulting. The economist's way of putting this is 'weighing up the risk against the return'. The expected return is probably much the same as it was at the Bank of England, but the risk is much larger. We do that because we like risk: it's an important realisation. It is odd for an economist to say this, as the text books I grew up with told me that most people are averse to risk. But I don't think that's an accurate picture of how the world works, as the past 10 years have shown. There are as many people who like risk as there are who do not. That's a challenge for an economist.

Sally Roff: In order to get out of the position this country finds itself in, we need to have an entrepreneurial attitude, but it has to come with some measured account of what the risks are. I have no problem with people taking risks - in fact I think it's very exciting. But it's sensible to understand those risks before you embark on the opportunities. I'm there at the outset, so when people buy new businesses, I'm involved in the diligence side of looking at those risks. I suspect in the past lawyers have been negative. Very often, people have said to me, 'we are buying this business with our lawyers. I suspect it will go no further' - because as soon as the lawyers are involved, it is seen as a real dampener and a damp squib. I think - and I hope - that's changing.

David Benson: There's a much broader perspective on risk in financial institutions today than previously. Perhaps, most importantly, we have this concept of earnings at risk or earnings volatility. We should be able to articulate to our shareholders and creditors the probability that we would exceed a given level of loss at a certain frequency. To state that with confidence, you need to have a clear understanding of what drives volatility and thereby we actually create a much better discipline of how we develop our strategy. When the firm formulates its strategy, it has to take into account its risk appetite in a way that is much more explicit than it has historically ever done, which can only be a good thing.

Jonathan Clark: I work as a loss adjuster, so I spend most of my time meeting people who've had things happen that perhaps weren't what they planned at the start of the day. I've become fascinated in the past two years by how organisations learn from what happens and the way they make decisions in times of crises. What we see is organisations that make decisions quickly and effectively have responded well. It's often a very tough moment because to recover well you're going to have to take some risks and you'll not always have a complete picture.

Caroline Plumb: I started my business at 21. It was dotcom time and there was a culture of big opportunity. My business partner and I turned down job offers and started the business with £250 each. Today we have three agency businesses in marketing services and over 100 people. We do take more risk than perhaps the average person - but we like to think we don't take that blindly. We're not lemmings over a cliff throw ourselves headlong into opportunity. We are quite good at focusing on what I think of as the upside. We look at the downside and we investigate it, but do not worry about it too much. We still take insurance out.

Steve Green: How businesses manage risk is very important for us as a major insurer because we deal with the consequences of failure all the time. That's why we use lawyers. There's no doubt that a business's attitude to how it manages risk is the most critical factor we need in understanding whether we want to expose our capital. What is the quality of the management that leads that business? That's what we want to know in a time of crisis. Business isn't devoid of risk; we want to understand that the management of that business may well have already met a loss adjuster before an event.

Angus Robertson: In 1989, I decided to leave the City. I took my two children out of school and went sailing. Then I made the worst decision of my life, which was to build a sailing boat. I got financing and in Florida bought the largest sailing sloop in the world at the time. Having spent five years building it, I sailed her across the Atlantic, but on the way back she got damaged. She went into dry dock and, as she was not supported when they took the water out, the whole boat banana'd. From a value of £20m, it ended up being sold for £3.25m.

Matthew Gwyther: How did that change your outlook psychologically on risk?

Angus Robertson: The interesting thing is if you work for a large organisation, which I did, you have a very comfortable life and a steady salary. Then suddenly you decide to be your own boss. In the first few months of leaving that very secure job, I was absolutely terrified.

Matthew Gwyther: Let's go on to the noughties. Just before we entered the recession, the view was that we were entering a new era of paradigm where risk had sort of disappeared and that it was terribly unlikely that things would go wrong. Is that an accurate picture?

Angus Robertson: I think the Bank of England had no understanding of derivative markets. It said: 'Well as long as we put it off balance sheet we don't have to worry about it.' So it was a licence to those people who were inventive and very innovative. I congratulate the banking system for finding innovative ways to make money, but the point is that the restraints were taken off back at the end of the 1980s - and by the Bank of England. That was the start of the rot, internationally, I think.

Matthew Gwyther: David, did you think the party could go on forever?

David Benson: No, I'm a glass half-empty sort of guy. Throughout the noughties, if not before, people spent freely in our industry. They thought that every time things go wrong, Uncle Alan Greenspan will come and bail them out. That led to excessive risk-taking. The scale of leverage that unwound and is still unwinding is beyond my comprehension, I have to say. As a commercial organisation, you're competing against people who are doing things that maybe you think aren't right, but you still have to compete to stay in the game. The gathering of pace came courtesy of the Fed. When I was learning my finance, the Fed's role was to take the punchbowl away.

Erik Britton: Not spike it with vodka.

David Benson: Exactly. From 1987 onwards, whenever there was a problem, the Fed flooded the market with liquidity.

Caroline Plumb: Entrepreneurs particularly are glass half-full people. We're optimists. You don't want to live your life with a negative outlook, worrying that things might happen to you. Which is the interesting thing about being an entrepreneur - your personal risk and your business risk are very closely aligned. If the business has a big problem or a boat goes down, then that's a massive personal financial hit. Perhaps one of the challenges that the general public has, and particularly with the financial services sector at the moment, is that when there's a downside or big negative hit, that personal risk is zero. It becomes a one-way bet for people within that. The public doesn't mind great payoffs if you're taking the personal risk and you share in that equally. However, if it's a one-way bet for some people and not for others, I don't think there is any sympathy.

Matthew Gwyther: I came across this great quote in Peter Bernstein's wonderful book about financial markets, Against the Gods -The remarkable story of risk: 'The information you have is not the information you want, the information you want is not the information you need, the information you need is not the information you can obtain and the information you can obtain costs more than you want to pay.' That summed up for us the triple A-rating nonsense from the credit rating agencies, because when you get down to analysing risk, it gets lost in a myriad of corridors which are frequently very difficult to find your way to the end of.

Erik Britton: Absolutely, regarding mortgage-backed securities and all those structured packages that put together differently risked assets into one package, which was then rated by an organisation. There was another whole purpose to that, which was to obfuscate, to disguise what was actually underneath it.

Matthew Gwyther: There's another tremendous quote, from James Morgan in the FT: 'A derivative is like a razor; you can use it to shave yourself, or you can use it to commit suicide.'

Erik Britton: We've used this analogy - we've been here before. When we built the railways, there was a massive boom associated with it and a subsequent collapse, a recession. During the collapse, everybody hated the railway owners and said: 'These guys are evil, they are wicked.' It's really so familiar with the bankers now. What we did not do is rip up the railways. We kept them and we should keep the true innovation that is underneath this, which is genuine.

Sally Roff: I'm interested by the difference between women and men. As I understand it, trading floors at the moment employ more women, because they are more risk-averse and probably more cautious. Certainly in the insurance industry, women can purchase insurance more cheaply.

Erik Britton: I think it's quite likely, given insurance premiums, for example, for cars and for driving.

David Benson: There's the archetypal distinction between 'hunters' and 'farmers'. The evolutionary psychologists would have it that men are hunters and women farmers. In some way, that explains some of the general characteristics we're talking about.

Caroline Plumb: It's interesting that there are certain traits people seem to perceive as male or female. If you talk about aggression or risk, these are seen as being quite male; whereas things such as nurturing, good managerial skills and process are seen as being quite female. I don't know if there is evi- dence supporting the idea that people have more of one or the other characteristics, based on their gender.

Steve Green: I have to say that if we're going to see large corporate clients in a boardroom, we like to see women. We like to see a balance. That is definitely what we look for when we go to see a customer - to see whether or not we think that they have a balanced, consistent team. We don't like mavericks, particularly; we like predictability.

Matthew Gwyther: Let's talk about where we are in our country, primarily. We seem to have a case of the glums in Britain at the moment. Do we need a re-energising of the business community here, which means an ability to take on more risk again?

Erik Britton: I absolutely concur. We're on a really interesting cusp in the UK economy, as it can go in a negative direction, with spending cuts and so on. If we respond with fear and anxiety, and no appetite for risk, the whole economy's going to plough a furrow much like the one Japan has for 10 to 15 years.

David Benson: It looks like the UK is okay, but the banking system will be contracting - arguably a good thing - so credit provision is going to be tougher.

Caroline Plumb: There will be challenging times ahead, but the risk of continuing with the old methods is greater. This is a great opportunity for the UK to innovate and to be bold. The world might be changing and there are opportunities to change with it. It's a massive opportunity for businesses.

Angus Robertson: We should embrace weak sterling instead of saying how expensive it is to go on holiday. We should build up our manufacturing base and our jobs - and we should drive hard to set an example in the green sector, with Government and private sector support. I'm completely optimistic about the future as far as the UK is concerned.

Matthew Gwyther: I'm going to finish with an amusing tale from Bernstein's book, which I can't recommend highly enough. He tells a rather good story about the portfolio managers at BZW Global Investors, who once built the whole risk dilemma into an interesting story about a group of hikers who went into the wilderness and came across a bridge that would greatly shorten their return to their home base. The bridge, however, was incredibly high, narrow and rickety. So in order to ensure that they did not come to any harm, the hikers kitted themselves out with ropes, harnesses and every other safeguard that they could think about before starting to cross. They painstakingly made their way across to the other side of the bridge, where they found the hungry mountain lion patiently awaiting their arrival - and who promptly consumed them. The fact that a cautionary tale like that could come from a financial institution such as BZW should, I hope, give us cause for some hope for the future. Even then, there were some people who had a cautious attitude.

For a full round table transcript, visit: managementtoday.co.uk/go/riskybusiness/

THE PANEL

  • Matthew Gwyther - Editor, MT
  • Caroline Plumb - Co-founder and CEO, Freshminds
  • Erik Britton - Director, Fathom Consulting
  • David Benson - Global chief risk officer, Nomura
  • Sally Roff - Partner, Beachcroft
  • Steve Green - Head of corporate business, broker division, Zurich
  • Jonathan Clark - Director, corporate and technical risks, Cunningham Lindsey
  • Angus Robertson - Founder and CEO, powerPerfector

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