The implosion of the home mortgage industry that has impacted the fortunes and careers of many on Wall Street provides a cautionary tale on risk taking. It's a tale that is far from new. Take, for instance, the case for James Ling, who in the late 1950s and throughout the 1960s created the fastest growing company in the United States: Ling-Temco-Vought Corporation (LTV). Ling was one of the early proponents and beneficiaries of the conglomerate movement that swept the business world of the 1960s. Through dozens of unrelated acquisitions over 14 years, Ling built one of the largest industrial companies in the United States by the end of the 1960s. Through creative debt financing and very bold acquisitions, Ling rode the wave of heavy profitability that was fueled by the conglomerate business model.

He became so enamored by his success. Thirsty for new risks, Ling was not able to -- or more likely chose not to -- read the signs of a new economic climate in the early 1970s. Despite an impending recession and changing global events (namely the impact of the oil embargoes), Ling steadfastly continued his acquisitions, eventually extending the company to the point that it could not longer service its debt. The resultant sell-off of several assets was the precursor to the forced resignation of the former financial maverick. Ling was superb at reading the glory days of the 1960s, but was unwilling to mitigate his risk-taking nature when the environment changed. The high-stakes gambler eventually took one risk too many.

Through my research on great business leaders, I found that a business leader’s fiscal approach is highly correlated with his risk tolerance levels. The more risk-averse the business leader, the more fiscally conservative he is with the company’s capital. Knowing when to be fiscally liberal and opportunistic is critical to being able to successfully take advantage of the times. It can also be disastrous when the context of the times changes sharply. The extravagant spending and liberalism of the 1920s had run its course by 1929. Business leaders of the 1930s were forced to adopt a fiscally conservative approach if they were to survive the Great Depression.

A similar, though less dramatic, retrenchment process unfolded between the 1960s and 1970s. The conglomeration movement of the 1960s resulted in unwieldy debt levels in the decade that followed. To extract value in the 1970s and 1980s, business leaders abandoned the unrelated diversification approach and undertook a massive sell-off and “company busting” campaign. The individual parts became greater in value than the “sum of the whole.” Understanding and orchestrating the appropriate risks at the appropriate times were often the keys to maximizing the potential of businesses and, in some cases, whole industries. Ling, for one, was clearly unable to make this transition. It seems that many Wall Street business leaders are learning -- or not -- the same lesson again.

Read all of Tony Mayo's "21st Century Leadership" posts.

MORE ON RISK MANAGEMENT:
A Framework for Risk Management (Supply Chain Strategy Article)
Risk Intelligence (Hardcover)
Reputation and Its Risks (HBR Article)
Strategic Risks: How to Embrace Them for the Growth Opportunities They Afford (Collection)