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 / Summer 2006 / Issue 43(originally published by Booz & Company)


The Captain’s Challenge

At sea or in business, a smart leader copes with turbulence by building the risk tolerance of the crew.

Illustration by Lars Leetaru
As we tacked Coeur de Lion out of San Francisco Bay into thick fog and a stiff wind, with 3,200 miles to go to the Panama Canal, I was as happy as I have ever been on a boat. The passage would cap my years of sailing: a childhood cruising around New England, two solo roundtrips between San Francisco and Hawaii, and a recent race from Newport, R.I., to Bermuda. I had just bought and reconditioned this 65-foot Swan ketch — a fabled Sparkman & Stephens design whose sister ship had won the first round-the-world race. Everything was moving according to plan. We were leaving the Golden Gate just after noon on November 1, 2005, technically the end of the Pacific hurricane season: right on schedule.

I came to this passage not just as a sailor, but also as a corporate consultant with a specialty in scenarios — the use of alternative futures to inform strategy. In both roles, I have learned to take many calculated risks, and to operate in uncertainty. People almost never get where they think they’re going on the timetable they imagine when they set out, and it’s almost always for reasons they don’t expect. But this trip would challenge my leadership in ways beyond the ordinary. There would be a test of wills with one of my crewmates — a disagreement about the dangers, real and perceived, of our voyage. Ultimately, we would land at an unexpected destination, very different from the one that I had in mind as we exited San Francisco Bay. And this trip would have a permanent impact on my understanding of leadership under risk-taking conditions.

Financial professionals generally aim for a theoretical zone called the efficient risk frontier, a zone where the chances taken appropriately match the potential returns. But in today’s economy, who can say in advance where the efficient risk frontier will lie? The global economy in 2006 is in a sweet spot of sorts, with low interest rates and low inflation, high levels of growth and liquidity, and a momentous application of technologies as markets open around the world. Great opportunities abound. We would say in sailing that the wind is up and the barometer is holding steady. But the dangers are also immense. The liquidity, the global competition, and the speed at which information is arbitraged in the market all make returns harder to achieve. Others’ investments can blow up in ways that will affect your own. The enterprise can press on with all sails flying and risk being more vulnerable in a sudden storm, or it can shorten canvas at night (when information is uncertain or just plain scary) in case something unexpected happens. How does a leader decide?

In investing circles, the capacity to make good decisions under that type of pressure is called risk tolerance. Risk tolerance is a kind of index of confidence and courage: the willingness to go forward into uncertainty and operate there at length. When decisions are made collectively, the risk tolerance of the group is a measure of mutual trust. It shows what the members believe they can accomplish as a group if conditions become turbulent during, say, a difficult merger or acquisition. But it’s also a test of leaders and what they can elicit from their colleagues — whose tolerance and capabilities may be sharply different from the leader’s own. Can the members of a team be motivated past their own resistance and fears, to results they might not be able to achieve otherwise?

In assembling my crew, I had looked carefully for four people with enough offshore ability for the voyage ahead. Pete had extensive offshore sailing and yacht-delivery experience, and now worked as the commercial captain/engineer on a 100-foot power yacht. Diane, his girlfriend, had helped him prepare Coeur de Lion for this trip under the eye of a professional shipwright, and she knew the boat well. Frank, my first paying client in a nascent adventure-charter business aimed at corporate executives, was a moderately experienced sailor, quietly enthusiastic and generally competent at anything he tried, so he promised to be a good presence on the boat. Joe, a sailing instructor in his 60s, came along with Pete’s recommendation as an able deckhand.

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