Most of us could remember someone that we consider to be a good leader and we could even describe certain characteristics that he exhibits, such as being charismatic, inspiring, motivated, etc. But are these characteristics enough on their own and make a leader successful? Life generally requires us to take a certain amount of risk, for some people more than others. In certain companies, risk taking may be considered more desirable than in others. But what makes a leader take a calculated risk when nine out of ten others would walk away? And how do we know which leaders will take the right risks (the ones that pay off) and who will take the wrong risks?

Risk taking can be defined as …

“Undertake a task that involves a challenge for achievement or a desirable goal in which there is lack of certainty or fear of failure.”

Having the ability to take risks effectively could be the key to success for many leaders. A review of the literature suggests that the factors involved in this include background, willingness to take risks, viewing risks as opportunities, personality traits, emotional intelligence, and industry-specific factors.

Interestingly, there is a lack of research on risk taking among leaders. Instead, the literature focuses more on entrepreneurs. This can be explained in part by the nature of each of these roles; An entrepreneur is characterized by being someone who takes risks to start a business as opposed to a leader who guides and inspires others. However, these roles also have similarities. At times, leaders may need to take risks to achieve company goals, and entrepreneurs may need to guide and inspire others.

Research on the backgrounds of entrepreneurs suggests that they view themselves as more resilient, usually due to significant events experienced during childhood and challenges during their career. This resilience comes in handy for leaders when they overcome career setbacks. We tend to think of entrepreneurs as always successful, and yet many of them have faced setbacks and even bankruptcy. Having the resilience to get through this and start over allows them to be successful in the future.

But is effective risk-taking explained simply by a person’s resilience and willingness to take risks? It appears that entrepreneurs, particularly those focused on growing their business, and CEOs who have created their own business rather than running a family business, are more likely to take risks. Past successes and failures in risk-taking also have a role to play, but all of this is not enough to explain risk-taking behavior alone.

Entrepreneurs tend to assess risk differently from others. They tend to see opportunities rather than risks because they are overconfident and generalize from past experiences and other information. They can also engage in different styles of thinking (for example, creating numerous options for problem solving), allowing them to spot more opportunities.

Another factor to consider is the personality of the leaders. The ability to adapt to new situations and maintain good relationships is key to the success of leaders. Other characteristics of effective leaders are extroversion, seeking results, ambition, competitiveness, independence, optimism, and high levels of emotional intelligence.

Overconfidence is often an attribute associated with leaders and something that often helps them rise to the top. However, it can also play a role in their derailment if they cannot adapt properly.

Lack of self-awareness, reduced emotional intelligence, and inability or unwillingness to adapt are some of the reasons that leaders may have gone off the rails while possessing the same qualities that they had on their rise. However, more research is needed to help us better understand how or when leaders start to derail.

It is helpful for us to understand the personality traits associated with effective leaders and how willing someone is to take risks, but we must also remember the needs of the organization in question. For this information to be useful for companies that want to select an effective leader or develop existing leaders, they also need to understand the organizational context. Risk-taking behavior is more desirable in some companies than others.

Industry-specific factors are likely to influence leaders and entrepreneurs’ approach to risk-taking, what they consider most important when deciding to take a risk or not, their willingness to take risks, and the type of risks they take. For example, in the banking industry they tend to be more risk averse, take a more structured approach and are primarily concerned with exerting control over all factors within risk to warn of potential losses. While in the oil industry the main criterion for decision making is the expected value, which implies a balance between risk and return. In the software industry, your main concern is the impact of making a risky decision on your business, be it positive or negative.

More research is needed on what different industries consider to be the most important factors in deciding to take a risk and cross-industry comparisons. It may not be just about the type of industry, but how well the industry is performing. Organizations in underperforming industries are likely to take more risks, possibly in an attempt to increase their profitability. This research would be useful to better understand the different conditions under which effective risk-taking occurs in different industries.

For organizations, knowing what conditions lead to effective risk taking would allow them to select the most successful leaders and shape an environment conducive to being extremely profitable. Some key conditions that relate to successful leaders and entrepreneurs are:

o Resilience and tenacity
o Risk-seeking behavior
o Evaluate risks as opportunities rather than risks.
o Personality characteristics
o High levels of emotional intelligence.

However, a set of conditions is too simplistic. How these factors interact is not entirely clear yet. In addition, industry-specific considerations have a role to play and the most desirable individual characteristics are likely to vary somewhat by industry.

We seem to know more about what doesn’t work than we do about the exact conditions of what does. With this in mind, there are implications for how organizations can minimize the likelihood of poor risk-taking behaviors.

Individual assessment (for senior roles)
In terms of individual assessment, the individual differences (eg, personality and willingness to take risks) associated with effective risk-taking can help inform part of the selection process. Understanding these differences can help organizations make more effective selection decisions for successful leaders.

Training
The emergence of derailing characteristics among leaders can be a worrying sign for organizations. The characteristics of the derailment may be closely related to the characteristics exhibited by the leaders as they progressed to the top. Therefore, providing advice to people at the right time is key to helping them develop adaptive behaviors and stopping derailing characteristics before they have a negative effect.

It has been suggested that derailment characteristics can be reversed with sufficient time and development. Coaching provides an excellent forum to increase awareness of adaptation to new situations and ineffective behaviors. This can help leaders reap the benefits of better adaptation and work on more effective behaviors to build and maintain relationships.

Leadership development
Leadership development techniques can be used to enable individuals and organizations to understand the different requirements that are placed on leaders today. Increase awareness of effective individual characteristics (e.g. resilience, willingness to take risks, drive for results, motivation, action orientation, and risk assessment techniques), as well as industry-specific considerations and requirements. Leadership development requires people to meet these requirements in their daily business environment to develop their skills.

Talent management
Applying an understanding of what makes leaders effective risk takers and the associated conditions enables organizations to develop their talent management strategy in terms of what potential looks like and how to measure it. Understanding what motivates these leaders will also help organizations retain the leaders with the highest potential. Additionally, the ability to recognize an effective risk taker early in their career will allow organizations to encourage and develop these individuals to become effective leaders for their organization. Developing talent from within reduces the likelihood of having to hire leaders externally and is therefore likely to save the organization money in the long run.

Mike Idziaszczyk
Psychologist