Risk-Taking and Responsibility in the Post-Enron Era

Booz Allen's partnership with Johns Hopkins is something we're very proud of — we talk about it in our recruiting brochures, on our website, and at conferences. So, I'm glad to have the opportunity to personally be part of the JHU-Booz Allen partnership and to be able to talk with you tonight.

As you may have seen on the flyers, my theme tonight is "Risk-Taking." Some of you may wonder if that was a typo. After all, isn't there too much risk in today's world, and given current events, shouldn't a CEO be talking to MBA students about reducing risks, not taking them?

Well, actually I did talk about reducing risk three months ago to a group of businessmen and women in Vienna. Specifically, I talked about strategy and security and how business leaders today need to own the problem of security and take an active role in reducing risk and enhancing resilience in today's fragile world.

I thought I'd made my points rather persuasively, and opened the floor for questions. Well, question #1 was a real zinger. A man stood up and said point blank, " I disagree with everything you've said. It's clear that there are two things causing instability in the world today — US policy toward the Middle East, and all the corrupt US executives ruining the global economy." So much for speaking about reducing risk!

Actually, the two concepts — risk-taking and risk management — are inseparable. Responsible risk-taking is key to risk management — we can't avoid risk, so we must learn to do a better job of deciding which risks to take and managing the consequences.

Life is risky business, and this realization has hit us especially hard over the past 13 months. But risk is not always bad. Quite the contrary, risk is essential to growth and success — for individuals, for organizations, and for the human race.

Today, I'd like to talk about "good risk" — specifically, good risk in the context of business, the discipline you are studying. "Good risk" might sound like an oxymoron in this post-Enron, post-Worldcom, post-fill-in-the-blank era.

But, I fear that one of the casualties of this era of irresponsibility could be a retrenchment and hesitation against taking important, responsible risks.

Imagine where the world would be if it were not for adventurous people willing to take risks to do something different or invent something better. Imagine where your own career would be and how far you could go in the future. Imagine where your personal life would be — if you were not willing to take risks.

There's a fascinating book called, "Against the Gods: The Amazing Story of Risk," by Peter Bernstein. In the book, Bernstein argues that "the revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: "the notion that the future is more than a whim of the gods and that men and women are not passive before nature."

Bernstein goes on to directly link the concept of risk to democratic capitalism when he says, "The capacity to manage risk, and with it the appetite to take risk and make forward-looking choices, are the key elements that drive the economic system forward."

So, if we accept that risk is an essential ingredient to daily life and to personal and business success — how did risk get such a black eye, and what can we do to re-establish risk-taking as a prudent and responsible course of action?

We can't pick up a newspaper today without reading amazing, even lurid details, about executives at WorldCom, Enron, Global Crossing, Tyco — unfortunately, that's just to name a few.

It appears that they have put their companies, their employees' careers, their shareholders' savings, and their own reputations — at risk. It appears they've also put their personal freedom at risk, given the number of indictments and charges being brought lately.

I try to imagine being in their position, and ponder what went wrong — How did otherwise smart, successful executives take such irresponsible and unethical risks?

What's happened at these companies goes beyond any enlightened definition of risk. It goes beyond choosing between legitimate business options. It goes beyond any normal fear of consequences or punishment. I believe these men were under extraordinary pressure from the expectation of "hyper-growth" that took hold in the late 1990s.

But, whatever the pressure or motivation — whether it was compounded by fear, greed, ego or stupidity — I think it's clear that, across the board, they divorced risk-taking from responsibility.

I firmly believe we need a new model for risk-taking that is guided by core values and a deep sense of responsibility for all stakeholders. In the interest of full-disclosure, I need to point out that this isn't really a "new" model — it's a recognition that it's time — past time — to re-learn some age-old wisdom. So, in that context, I offer this definition for a new model for risk-taking:

Prudent risk taking is directly tied to responsibility — the responsibility to make a deliberate choice, and the responsibility to own the consequences of that choice.

Let's look at both parts of this definition — making the choice and owning the consequences. First, the responsibility to make a deliberate choice: It's very easy to get caught up in things — whether it's the excitement of a win-streak, or the pressure to perform and deliver ever-higher earnings, or even the ego-satisfaction of our own position and intellect. When we get caught up in things, we can forget to make a deliberate choice ... at times, we can even loose sight of the fact that we have a choice ... and other times, our ego can blind us to the choices we're making.

When I think about the executives being pilloried in the press and on Capitol Hill these days, and those being led away in hand-cuffs, and wonder where they went wrong, I believe much of the reason is this: they failed to make a deliberate choice. In some cases, I believe the intense pressure from Wall Street and from investors to deliver ever-higher earnings pushed people to cross the lines.

Clearly, I'm conjecturing here — but I expect that the reported improprieties happened incrementally — and, as the pressure kept up, more accounting tricks were needed to deliver the numbers shareholders were demanding. Those involved — from the CEOs to the CFOs to their lawyers and outside advisors — appear to have abdicated their responsibility to weigh the pros and cons and make a deliberate choice.

As you move ahead in the world of business, consider the wisdom in this quote: "There's a choice you have to make in everything you do. And, you must always keep in mind that the choice you make, makes you."

The second element of responsibility after "making a deliberate choice," is owning responsibility for the consequences of that choice.

Every risk, every choice has consequences. Sometimes, we fail to see them — because we fail to look, because we get caught up in a sense of power or invincibility, or because the real issues and impacts are hidden to us. It's our responsibility to foresee potential consequences and to take responsibility for all the stakeholders who will be affected by the risks we take and choices we make.

Again looking at the news stories, and trying to conjecture about "what happened," I believe that many of those involved in the recent scandals failed to take responsibility for the consequences — and failed to consider the impact on the many who might be affected. When times are booming, it's easy to ignore stakeholders because, quite frankly, they tend to be quiet in good times. I venture to say that if the Dow was breaking new ground upwards and new 401 (k) millionaires were being minted every day, you wouldn't see the headlines, indictments, and outrage directed against the big guys. Employees and shareholders would probably be praising their leaders who were making them rich, and taking an attitude to the effect that "I'm getting mine, they can have theirs."

But, when the bubble burst, it exposed those reckless gambles that were masquerading as bold risks. And, it incited the anger of employees and stockholders who saw their savings and job security vaporize.

So, what are the lessons learned for us? First and foremost, to remember that we have a choice and we're responsible for the consequences.

Our choices are often hard, and may, at times, require us to take a radical step like quitting our jobs, or ending a relationship. But, we always have a choice. If you take away nothing else from tonight's discussion, remember that. Risk is not the whim of the gods, it is a responsibility largely in our own hands.

So in accepting that responsibility, let me offer five steps we can use as a "Guide to Responsible Risk-Taking:"

• Step 1 is "examine your motives." Do this honestly and thoroughly. Are you taking a risk to bring a new product to market, or to find a new answer, or to stand up for another person? Be very candid — and specific — about your motives. As a rule of thumb, the "seven deadly sins" — greed, envy, avarice, and so on — are bad motives. Achievement and wealth creation can be good motives if they spread the wealth and reach for the "greater good."



• Step 2 is "identify all the stakeholders who are dependent on you" — all those who will be affected by the choices and risks you take. Keep in mind that your responsibility increases as the number of people depending on you increases. This can be seen in a personal situation — a new mother or father who decides to give up a risky sport like skydiving — because a child depends on them now. And, it can be seen in a business situation in which a CEO or Chief Financial Officer owes a responsibility to millions of people: employees, shareholders, customers, the neighboring community and others. The choice may be yours to make, but many others will be affected by it — be sure you think through who they are, and how they may be helped or hurt before you choose.



• Step 3 "Think through what you — and your stakeholders — stand to gain." This may sound simple, but writing things down is always a good exercise. It highlights in black and white who's likely to benefit and how proportionate or disproportionate the gains might be. Even if a stock rises dramatically for a short period, sometimes the real benefits may only accrue to the knowledgeable insiders who can optimally time their purchases and sales.



• Step 4 "Think through what you — and your stakeholders — stand to lose." This step is often discarded as nay-saying or lack of nerve. But a very explicit accounting of the downsides — from reputation risk, to financial loss, to emotional distress, to civil and criminal liability — is essential to responsible decision-making.



• Step 5 "Consider the odds." If a choice is ethically or legally wrong, the odds are irrelevant. The risk, by definition, is irresponsible. But, if the choice is not between right and wrong, but between go and no-go — careful analysis of the probability of gain and the severity of loss — including real attention to the human cost — is key.

So, to summarize, the five steps to taking a responsible risk are to:

1. Examine your motives — thoroughly and honestly;
2. Identify all the stakeholders who are dependent on you — and will be affected by the risks and choices you take;
3. Think through what you — and they — stand to gain;
4. Think through what you — and they — stand to lose;
5. Consider the odds.

When I think back on some of the risks I've made in my career, a few come to mind: moving away from an established business in the Navy communications area to go after a new client called the National Communications System — taking on responsibility for Booz Allen's commercial information technology business in New York — choosing to put my hat in the ring as a candidate for Chairman & CEO.

I found the most important of the guidelines for me was the first one — to really understand my motives. Related to this, I found that often the impetus for taking a risk was quite different than my motive. The impetus for taking a risk can often be negative — external pressures like we were talking about from the headlines ... or perhaps just a sense of frustration or stagnation (that was the case when I decided to move away from the Navy business to take on something new).

Sometimes the impetus to take a risk is someone else is prodding you (which was the case in which our then-Chairman Mike McCullough pushed me to take over the NY-based commercial IT business). Motives need to go far beyond the original impetus for risk-taking. They need to be examined honestly, and in my opinion, for the risk to be worth taking — your motives need to be POSITIVE and they need to be YOURS.

Don't take a risk to run away from something. Take a risk to go toward something. If you can't articulate what you're running toward, you're not ready to go. And, don't take a risk because someone else is telling you to do it. Other people — mentors, friends, and the like — can be great catalysts for risk-taking and growth. But, they must not be your motive.

If you don't personally embrace — and take responsibility for — the risk, don't do it.

So, in closing, the point I'd like to leave you with is this: We need to put an end to the "headline" risk-taking that's led to bankruptcies and indictments, and recapture "good" risk-taking and the venturesome striving and achievement associated with it.

I'd like to finish by sharing a poem I found. It's called "Some Thoughts about Risk:"

To laugh is to risk appearing the fool.
To weep is to risk appearing sentimental.
To reach out for another is to risk involvement.
To expose feelings is to risk exposing your true self.
To place your ideas, your dreams, before a crowd is to risk their loss.
To love is to risk not being loved in return.
To live is to risk dying.
To hope is to risk failure.
But risks must be taken — Because the greatest hazard in life is to risk nothing.

Clearly, we can't control outcomes, or the external environment, or other people. But, we can control the choices and risks we take.

That is both our privilege and our responsibility. Let's be sure we use it wisely.

Thank you.