Sir Nigel Rudd on risk & reward

The words risk and business are often brought together to conjure up colourful stereotypes like Gordon Gekko, Bernie Madoff or the “Wolf of Wall Street”– an individual who is ruthless, excessive and above all a “risk taker”. Disapproving critics say the City itself is a place that shamefully encourages and rewards risk taking. And we hear journalists and politicians talk about ‘casino banks’ where traders gamble on the turn of the market’s wheel.

But these critics are jumping to a misplaced conclusion; a conclusion that risk is always a bad thing and that taking risks can only be irresponsible, foolhardy, and even amoral.

The truth is that risks are not all that easy to take - especially when the potential losses are significant. Indeed, it is not unusual to see senior executives rigid with fear and paralysed by data, when confronted by a serious investment decision.

We need more risk takers. Or more specifically, we need more individuals who understand risk and can work with it.

What is “risk”? Many would say it is the potential of losing something of value – physical health, social status, emotional wellbeing or financial wealth – as a result of a particular action. Of course it has many different applications but in financial contexts, it generally describes the possibility that an actual return on an investment will be lower than the expected return or at the cost of a greater return elsewhere.

There is plenty of evidence to show that it is easy to misjudge risk and for its careful assessment to be irrationally clouded by subjective factors – emotion, public opinion or prejudice. People often overvalue rare and infrequent occurrences such as epidemic diseases or aeroplane accidents and yet remain relatively unconcerned about high frequency events such as traffic accidents, household incidents, and medical errors.

A clear distinction must also be made between risk and plain old uncertainty, and arguably this comes down to the extent to which potential exposure can be measured. The ability to understand, calculate and offset that exposure with an appropriate return is critical – and it is an absolute requirement for a successful business. Fear, immobility or paralysis driven by aversion to risk can only serve to stifle enterprise. We only have lifesaving medical procedures or jet aircraft and long-haul holidays for instance because people took risks.

Putting capital on the line and investing in some of the UK’s most exciting growing companies, the BGF team has to know a thing or two about risk. Theirs’ is a calculated risk, a vote of confidence in an entrepreneur’s ability to build a stronger, more valuable business, and ultimately they stand to gain from shared success with management.

My message to British entrepreneurs is clear: more of them need to take a well-calculated risk on growing their businesses – not settling for merely “good”, but striving to become “great”, the business success stories of the future. Entrepreneurs should embrace the economic upturn with its latent opportunity, accept that now is a great time to invest, and keep an open mind about different ways to fund their growth.

Ironically, sitting tight and accepting the status quo is possibly the most risky option for a business because if you’re not careful inertia rapidly becomes a permanent way of life. Delaying investment could prove a costly decision as competitors across the globe raise their game.

The smart entrepreneur does not avoid taking risks but instead makes a proper assessment of them and looks for ways to manage or mitigate them. They ask “how can I take this step more cheaply (possibly by using someone else’s money); who can help me to get where I want to go (with contacts and learning); how can I do it faster; and how can I do it better than I had initially planned?”

Calculated risk taking is ultimately critical to business growth. There should be no shame in taking a risk, and indeed no shame in not always getting it right first time. Successful British enterprise requires a culture where calculated risk taking is encouraged, applauded and properly supported.

The UK needs more risk takers. The gamble we cannot afford, is to leave economic growth to chance.

Sir Nigel Rudd is Chairman of BGF