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How culture determines your appetite for risk

~This article, contributed by Fons Trompenaars, Charles Hampden-Turner and Peter Woolliams, was originally published by the Harvard Business Review.~

How much control do you have over the risks of your business?

Your answer to that question is very closely linked to the culture in which you grew up. If you’re an American or European, you’ll tend to feel (in varying degrees) that you have quite a lot of control. Risk is a specific “thing” capable of being sold to those who wish to carry it. The greater the control you have, the more finely you can judge the risk, and the more money you can make.

In consequence, your approach to managing risk will be very much inner-directed. You’ll rely as much as possible on decisions made internally, and you’ll feel most vulnerable to the decisions that competitors make. The risk calculus essentially revolves around the simple question: Who’s in charge here?

There’s a lot of literature about this, much of it dating back to the 1960s. A great deal of it was predicated on an assumption that American social norms and values were strongly correlated with modernization and economic growth. Risk events that could not be influenced by one’s choice of values and norms were simply random and could be managed through mathematical modeling. Good risk management, therefore, was about being American and having good math — at least until the Great Recession.

There is, however, a different school of thought. Asian cultures, in particular, assume they have a far lower degree of control over risk than do Americans and Europeans. In this alternative worldview, our fates are settled by outside forces, our knowledge of these forces is limited, and we expect to be surprised by patterns that are not in our personal control. These cultures tend to socialize risk by sharing hazards with as many other people as they can: customers, suppliers, employees, investors, the government, and the community. The parties involved do this because they believe that it is possible to sidestep the impact of unfavorable events provided that members of the ecosystem warn each other in time. Risk, in this environment, is outer-directed.

Both approaches have their strengths. In the early stages of an industrial revolution, it pays to be inner-directed. A pioneer could not do otherwise. Outer-direction in this context would be a form of fatalism. But as the world economy fills up with more competitors and more events move beyond our control, being part of a large industrial ecosystem starts becoming a competitive advantage. Partners who share your risks are unlikely to exploit or betray you.

It’s possible to measure quite precisely the degree to which a culture is inner- or outer-directed. Our firm has been tracking cultural differences among a sample of 100,000 managers in 100 countries over the last 25 years. In a recent survey, we asked them to rate their level of agreement with the following proposition: “What happens to me is my own responsibility.

The degree of agreement with this proposition for the 19 countries represented is shown in the following table:

There’s a big range — from an 89 percent agreement rate from New Zealand managers down to a mere 51 percent from Chinese managers. But it’s when you correlate these numbers with other data that you start to see interesting implications. Using forecasted levels of growth for 2012 published by The Economist, we can see that the nine most inner-directed nations average 0.8 percent growth, while the outer-directed nations average 3.2 percent growth — more than three times faster.

On the face of it, this is hardly a ringing endorsement for the risk culture of traditional Western capitalism, especially at a time when the global economy has become so interconnected and in view of the global environmental challenges already coming around the corner.

Download the white paper, The Art of Balancing Risk and Reward. This paper outlines the board’s role in setting, implementing and monitoring risk appetite – developing a risk culture from the top down.

NOTE: Originally published by Harvard Business Review in 2012.  Copyright 2012 Harvard Business Review.  All rights reserved.  Reprinted by permission.

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