A few months ago a client asked me how he could reduce risk to zero. He was planning to launch a new product and wanted to be sure that he would get regulatory approval.
My answer was that he could minimize the risk, but not all the way to zero, by learning the regulator’s perspective about the product’s new features and building a strategy based on the company’s current knowledge and new information they could gather.
Experienced field staff had a different view of the regulatory risks. They made comments like: “It will be difficult because…”, “it will take time, but there’s an approach that might work”, and finally “here’s what I recommend ….” They saw the regulatory and political obstacles very clearly and became problem solvers applying their knowledge to achieving the goal.
Absolute guarantees of success are rare in business and in life. The best prescription for risk is knowledge and clear-eyed decision-making.
Armed with knowledge, you can choose to navigate the minefield or alter the course. On the other hand, you can be certain of not achieving a goal not pursued.
The ultimate risk for a public institution
A recent strike by Toronto Transit Commission workers presents an interesting case demonstrating how unexpected behaviour can swiftly damage reputation.
From sigh of relief to gasp of disbelief
Last week, city of Toronto residents, collectively, took a huge sigh of relief. The city and union officials, representing the Toronto Transit Commission (TTC) workers, had just negotiated a deal that promised to advert a crippling strike.
Granted, the deal had to be ratified by the union executive and accepted by members. However, given that the deal seemed generous, and that negotiations seemed long and arduous, most residents did not expect a strike. Union spokespersons had also made it clear that any possible strike would be preceded by 48 hours of notice.
So when transit workers walked off the job on Friday evening (April 25th 2008), without notice, creating havoc for thousands of people whose plans depended on the service, the collective sigh of relief became a gasp of disbelief. A diverse mixture of views and emotions about TTC workers, union leadership, and city officials got thrown into a public pot that started to brew early Saturday morning.
Cogito ergo sum. (I think, therefore I am) This famous quotation and the drawing of a brain section are from RenÃ© Descartes.
RISK DEFINES WHO WE ARE
If you have an image in your mind that risk management is a negative subject, always focused on bad things, you need to read Mumsipus Revisited by Felix Kloman and experience the humanity of the man who believes that “taking risk is the defining element of human existence.”
Kloman’s update on Descartes’ famous quotation is “perilitor ergo sum,” I risk, therefore I am. Life with no risk would be sterile and dull. It’s a clichÃ© to say that risk and reward go hand in hand. It’s ironic, then, that the common perception about risk management omits the positive aspect to focus only on the negative. Kloman argues persuasively that risk management addresses both situations.
The essays in this book are from a 15 -year period since 1974 during which Kloman was editor of the newsletter, Risk Management Reports. You can order a copy from Seawrack Press.
The essays offer many thoughtful insights about the nature of risk and the discipline that has grown up around it.
The essays are organized by themes (chapters)– a few of which are noted here:
- History of risk management
- Issues in risk management (including a discussion of broad public policy issues)
- Risk communication: difficulties in this area and why it’s so important
- Insurance (Kloman is a critic of the industry that provides a tool for “sharing risk.” His views may be of interest to insurance regulators, and other regulators who oversee specific-purpose “captive” insurance plans)
- Catastrophes, the ultimate challenge for risk managers and regulators.
Kloman’s authority as a commentator stems from the perspective, independence, clarity of thought and humanity he brings to every essay. He’s been an practitioner and respected commentator throughout the development of the risk management profession: it’s a young profession; He reads widely and shares his sources; He loves good writing and his writing reflects the obvious care that he takes; And, his passion for risk management reflects his values and conviction that this discipline can improve outcomes for society.
It’s worth reading just to discover what he considers to be valuable. In the risk literature field, Peter Berstein’s book Against the Gods: The Remarkable Story of Risk is but one example.
The title of the book, Mumpsimus Revisited, makes reference to the story of a monk whose erroneous use of latin in the Mass was of little matter to him.The story is a reminder that we need to revisit our assumptions, especially as they relate to risk.
They’re all connected
Risk management is most successful when the regulatory authorities and their stakeholders trust that they can count on each other. When you’re the regulator, your reputation not only precedes you but can also determine how successful you are in achieving your objectives.
Reputation is what other people believe to be true about you. Reputation is built over time by walking your talk. Eventually (ideally) your stakeholders know they can count on you to perform what they think is your role. If you fail to meet those expectations, your reputation suffers. Trust goes down and regulation becomes less effective. Continue reading
The article Principles work better than rules by Neil Reynolds presents the convincing argument that attempting to solve an ethics problem in business by implementing rules is a wrong-headed approach.
A rules-focused approach lays a heavy burden on the ethical players. It diverts the resources of the regulated business to non-productive report writing. It diverts regulatory resources to non-productive reviewing of reports. Continue reading
Risk management recognizes that you need a “Plan B.” You can’t eliminate risk. With a good “Plan A” you can do your best to prevent something bad from happening. But not always.
A good Plan B mitigates the consequences when plan A fails. Plan B prepares for the inevitable, creating resilience to deal with the shock of a negative event.
This abstract concept was made very real to me this week. I was a passenger in a car that collided with a large deer on a remote section of a freeway. It was late Sunday night. The weather was good, the four lane highway was clear with an average amount of traffic. Suddenly, we saw a white flash as a deer jumped in front of our vehicle. There was no time for reaction. The crumpling of the hood seemed to happen in slow motion compared to the split-second between the time we saw the flash and felt the thud of the collision. Continue reading
1. Identify key risks so that you can focus your limited resources on the risks that matter most
It’s the interplay of factors that differentiates risks. Breaking a rule or breaching a standard is just a starting point in determining risk. Going over the speed limit on the freeway is a standard that most of us break routinely. If this is the only risk factor, it’s not a very good indicator of risk. However, it’s a much more risky situation to be going over the speed limit, weaving in and out of traffic, failing to signal, and driving an unsafe car. This driver is reckless and can kill people. Continue reading