Risk Homeostasis is back in the news.
We have previously written about how we accept a certain level of risk then use risk protection measures not to be safer, but to increase our risk taking so our net level of acceptable risk stays the same. That is risk homeostasis.
It has been broadly reported recently that there has been a huge increase in traffic fatalities in the United States in the first half of 2016 compared to the same period in 2015: 10.4%. Understandably, many are gravely concerned.
How does this relate to risk homeostasis? By any estimation, vehicles and highways have become safer. Significant effort and resources have gone into design improvements that have increased safety. Cars have airbags, ABS breaking systems, crumple zones and even some now have automatic emergency driving features to help avoid accidents. Highways have many more barriers that give way on impact to reduce the chances of injuries or fatalities. Yet traffic deaths are up dramatically.
This is risk homeostasis. The safer things become, the more we take risks. Knowing that we are less likely to die while driving a safer modern vehicle, we take more risks such as texting while driving. Sad but true.
The administrator of the National Highway Traffic Safety Administration recently announced a goal of eliminating traffic fatalities in the U.S. – all of them – within 30 years. A laudable goal but exceedingly unlikely. All the safety features in the world will not change human nature.
Under Armour founder and CEO Kevin Plank is nothing if not an entrepreneur. He started the company in 1995 in his grandmother’s basement. His inspiration was to find an alternative to the cotton shirts he wore under his pads when he played football at the University of Maryland. Those shirts got soaking wet, heavy and slowed down the players.
His creation now has nearly $4 billion in annual sales, 13,500 employees and is an innovation superstar. Not satisfied, Plank is setting out to create an entirely new component at Under Armour. He is leading a charge into fitness technology. Along the way, he has invested nearly $1 billion buying three activity-tracking and diet-tracking mobile app companies. He sees this effort aligning well with the Under Armour’s mantra to “make all athletes better.”
Whether he will succeed in this effort is unknown. What is fascinating is the culture he has created in the last twenty years that so thoroughly embraces innovation to the point that it created an entirely new market segment – high performance athletic wear.
Not surprisingly, Plank is into continually sending the message that innovation is prized and desired. (As obvious as this seems, my experience with client organizations shows that this is astonishingly rare.) One of the ways he continually sends the message is by having admonitions prominently displayed around the Under Armour headquarters in Baltimore. They include:
A simple but powerful concept he promotes at Under Armour is called “guardrails.” He promotes the idea of providing his people with figurative guardrails that establish the boundaries within which they operate. Presumably some guardrails apply to all and some are specific to individuals. Regardless, it is a brilliant concept. Guardrails allow creative and motivated team members the latitude to do exciting things with boundary clarity. Brilliant. The results of the organization speak for themselves.
In a recent column, the Wall Street Journal’s chief economics commentator Greg Ip decried the cost of risk aversion. He presents a convincing case that risk aversion by corporate leaders is reducing investment which leads to reduced productivity and wages.
He goes on to make the point that resources that should be invested in new technologies and products are instead being used to fund mergers and acquisitions, buy back shares, and pay dividends. Ip asserts that the impact goes beyond the future growth prospects of the companies.
These executive are paid to lead. The resulting lower productivity and wages leads to “growing worker dissatisfaction and political upheaval.”
Square in the cross hairs of this strategy is innovation which Ip artfully attributes to efficiently and creatively combining capital and labor. The impact of suppressing innovation is profound. Ip references New York University economist Paul Romer’s work in which he makes a fascinating observation:
Unlike a machine or a worker, an idea, once conceived, can be reproduced and shared endlessly for free. The determinant of growth then is both how many ideas a society creates, and how quickly and efficiently they are distributed.
Contemplate how many valuable ideas have not yet surfaces due to excessive risk aversion.
Why are business decision-makers taking the more comfortable but ultimately less rewarding path? Beyond basic human nature that cherishes safety, Ip identifies a short-team mindset, the demands of activist investors, excessive government regulation and the challenge of getting sufficient returns on investments in technology.
Who is doing it right? Who is allocating capital well so they do not suppress the future growth if the companies they have been selected to lead? Today, it is very hard to tell. A few years from now, it will be apparent. That will be when the bill for excessive risk aversion comes due. And in many cases, the executives who ran up the bill will be nowhere to be found.
Contemplate this statement for a moment:
“We cannot respond [to threats or risks or change] with pure emotion, but leaders can’t omit emotions entirely. If only because people need validation of their legitimate fear and anger before they will listen to arguments for measured action.”
While this was written in reference to political leaders responding to threats from terrorism, it offers interesting insights about leading organizations through change and innovation. These words, slightly paraphrased, were written by Washington Post editorial writer Charles Lane. The bracketed phrase is my addition.
Change is rarely welcomed or well-received. I have long contended that people ascend to leadership positions within organizations in part because they have superior risk-taking talents. Part of utilizing those talents is helping those they lead to move past their limiting fears – to embrace the changes the leaders realize are unavoidable.
It is easy to say that taking risks well requires removing the emotion from the process and being more empirical. And you would be right. But Lane provides us with a valuable insight. You will be well-served to acknowledge and honor the fears and concerns of your team before moving forward with analyzing and deciding.