I’ve recently read the book “To Risk It All: Nine Conflicts and the Crucible of Decision” by Admiral Stavridis and have also got “Risk – A User’s Guide” by General Stanley McChrystal on my desk. Both books are fascinating – and show me also the effect of luck on the outcome and some need to “just do it”, as Nike tells us.
This brought me to think about how we deal with Risk (or stress if you want) in Family Councils. How are Families embracing, and encouraging risk-taking within the family? Is risk bad, a necessary evil, or something that needs to be embraced?
This article is a feeble attempt to bring to you a bit closer my thoughts on Failure Resilience.
What is Risk?
“Risk – A User’s Guide” defines risk as follows:
Risk = Threat x Vulnerability
The nice thing about this definition is that it moves away from risk being described as something we do not want to happen to something that is – somewhat – likely to happen and a factor to reduce the risk is to reduce your Vulnerability, being the impact, the Threat can have on you.
Additionally, we can then also think about Threats themselves. Are we always aware of all the Threats out there? Here Donald Rumsfeld’s “Known Unknowns”, etc. comes to mind.
So, let’s untangle this a bit further.
We may or may not be aware of all the Threats out there. If we cannot fully know all the Threats, we can take a Stoic philosophical approach and stop worrying about it as it is futile to try to identify all the Threats out there.
As we can assess and work on our Vulnerability and this is in my mind methodically discernible (we are either Vulnerable and we know to what extent or we don’t know we are Vulnerable, in which case we are 100 % Vulnerable; or, more simply: we are 100 % Vulnerable to everything except in cases where we know our Vulnerability to be less than 100 %) we should only work towards reducing our Vulnerability.
Armed with the above-mentioned definition of risk we can then untangle the truth behind Mike Tyson’s famous quote: “Everybody has a plan until they get punched in the mouth.” Now, I am paraphrasing here a bit out of context, but how many times have we made plans to mitigate a risk only to see that we didn’t quite think it through or did not anticipate the detrimental outcome?
The interesting thing here is that with our new definition of risk you can start to think about your vulnerability and how you can reduce it to have an overall positive impact on your risks.
Let’s revisit Vulnerability: Vulnerability catches nicely the ability to withstand a Threat. The less Vulnerable I am, the less an impact a Threat will have. In finance, we can see this – letting the impact of Behavioral Finance out of the discussion for the time being – families with a higher level of wealth can take on higher levels of (well-diversified) risk. The threat is the same as an investment, no matter your wealth bracket. The deciding factor is Vulnerability: the lower your wealth, the higher the Vulnerability to a sudden shock to the investments you have. Hence it should not surprise too much, those wealthy families can invest in more volatile and – very important – longer delayed payoff investments (longer investment horizons).
Now, let’s add an element that is, in my view, missing to make this concept work for Family Councils and Family Offices: Failure Resilience. For me, Risk is not a one-time thing that is statically set at a certain point in time. Risk is ongoing. Just because a Threat x Vulnerability has happened once, doesn’t mean that it will never happen again. We have a choice to either stand up again and continue, albeit with more experience and hopefully a better understanding of the Threat and the Vulnerability or let it be and never engage in that Risk again.
Adding Failure Resilience to the formula we get:
Risk = Threat x Vulnerability
Ongoing Risk Exposure = Risk x Failure Resilience
Failure Resilience is a measure of how many times we are going to engage again in the Risk which gives us the total Ongoing Risk Exposure.
What Needs to be in place for Failure Resilience?
to embrace Failure Resilience, we need to take a risk with a plan: If we see the risk unfold in a way we don’t want to, is it going to be the end or are we going to try again and continue?
Effectively, without Failure Resilience, we will let a failure be the end of the project and failure becomes “not an option”.
If failure is not an option, the overall risk tolerance will be low. Who would want to do an ambitious project if you’ll have your head chopped off once things go sideways? Why not keep your head down and hope you don’t get selected for the project?
We can’t have it both ways: we can’t have all the successes without at least some failure. If we let our heads hang upon the first failure, we will not even get to a point where we can try again (now with more experience).
I do not advocate that Failure Resilience needs to be static. An intelligent way forward would be to adjust the Failure Resilience as a plan progresses: define phase lines upon which the Failure Resilience is tweaked. Also, consider that a project has a certain risk profile, which is a function of each phase’s risk profile. For instance, the development of an MVP (Minimally Viable Product) is more about internal procedures and tasks, and it has its own set of risks attached to it. The Failure Resilience of this phase may be higher than at a later stage when the MVP hits the market… and tanks; or it might be justifiably higher because the risks are now more external than internal. What I am trying to say is that if you think about this in advance, you have some level playing field where you are all playing the same game. The worst is that the rug is pulled from under your feet just as you see the project pass through the worst but a lack of Failure Resilience results in no headroom left for the slightest inevitable setback.
The Failure Resilient Family Council
A Failure Resilient Family Council or Family Office should think about risks in another way.
- Threats are infinite, and we can only assess a limited amount of them;
- Vulnerability to a Threat can be tweaked and this should be improved; and
- Failure Resilience should be defined before the project is started.
Strictly speaking, I would use the above concept on entrepreneurial engagements a family undertakes.
Cases I have seen are all eerily similar: children are given a blank cheque of x million dollars and, with a pat on their back, sent off Rudyard Kipling style, as in his poem “If-“, with a faint “you’ll be a Man, my son!” exclaimed as he walks into the sunset.
Two years later, the money is spent with nothing to show for it, except regret and a sense of failure (which sometimes one gets reminded of). A pretty straightforward way to stymie a young person’s entrepreneurial spirit.
What is a Family Council to do?
- Look at the Risk and the Ongoing Risk Exposure as a whole and broken down into phases of the projects. For this you need to have a good plan in place beforehand;
- Be clear and communicate the Threats you see. Try to match them with the young entrepreneur’s set of Threats he or she sees;
- Communicate the Vulnerability and match that with the young entrepreneur’s view;
- Define Failure Resilience together. When is enough, enough;
- Draft an exit plan if it goes well and when it doesn’t;
- Share progress regularly and openly. Think about how the progress will be shared with the wider family;
- At each step think about how the Family Council can help the young entrepreneur in non-financial terms. High Net Worth Families have extraordinary networks at their disposal that can be leveraged for mentorships, etc.
Also, be clear that if you are introducing the new method for that it is going to be a learning process for both parties involved.
A methodical decomposition of Risk allows us to better understand what to focus on. Adding Failure Resilience to Risk gives us the tools needed to take on measured risks and think about where the off-ramps are. This requires a Family Council to be more strategic in their risk-taking; and more diligent in assessing their Ongoing Risk Exposure.
With these concepts, a Family Council should be in a position to improve their exposure to risks, assess and handle their fashion more proficiently, and, most importantly, allow failures to happen without it causing a rupture in the relationships within a family, when a young entrepreneur faces failure, or “partial success” if you want to give it a more positive spin to it.