Defining your risk threshold and knowing when you are
nearing it, is the crux of managing risk.Alas, the onset of risk is not always apparent.Moreover, some managers tolerate excessive risk without taking action.When losses don’t follow immediately, we are lulled into taking even
more risk.The mere absence of loss
doesn’t imply a lack of risk.Far
from it!
An analogy: wet roads dramatically cut the grip of your
tires. Above 60 mph, you are likely hydroplaning, your tires not even touching
the road.Many people don’t
realize how little braking and steering control they have, only because they
often don’t have to brake or steer suddenly.(In another irony, anti-lock brakes, air bags and large vehicles also
make us overconfident.) The ultimate deception is that everything seems OK until
it’s much too late.You may be at
the edge of your risk threshold -- or far beyond it -- before you realize you
have no control.A small mistake
made by a driver up ahead can put you to the test.The results can easily be catastrophic, if not deadly.
The
situation at work is similar. Without the pain of recent loss or the ability to
foresee its many consequences -- we tend to take ever more risk.Under financial, production or other pressure, the threshold of
‘acceptable’ risk gets incrementally relaxed.Risk becomes ‘normalized’ as Diane Vaughan put it. For organizations
with fiduciary or public safety responsibilities, this is playing with dynamite.Ask Ford. Ask
Firestone.
Risk thresholds need
to be set well in advance. Reducing risk buffers requires rigorous
justification. Corporate governance mechanisms must be part of the monitoring
system and this needs to be rapid, accurate and reliable. If
potential consequences are serious and irreversible, ambiguous signals must not
be left unchallenged or unchecked.
Senior management’s
job is to flush out hidden risks by asking tough questions and challenging
invalid assumptions.Threshold
violations must be dealt with swiftly, but no one should ever be punished for
telling the truth -- this would only destroy the integrity and effectiveness of
the monitoring system. Staff also need to know what is expected of them in
identifying, fixing and reporting violations.There are times when intelligent deviations are the wisest course of
action, but these should be rare. If not, the limits aren’t valid and need
changing.
Loss
Should Not Be Your First Indication of Risk
If it is, your risk management program needs a good overhaul.Your system should give lots of warning before you get near the edge.Monitoring risks in other industries can also help minimize your own.
So, what is your risk threshold? How
close are you? Is this assessment accurate?How do you know?
Recommended Reading for Risk
Managers
Fundamentals
of Risk Analysis & Risk Managementedited by Vlasta Molak.This
472 page collection of learned papers, on the theory and application of risk
analysis, a section of perception, law, politics and risk communication and a
section on risk management is one of the best in the field. The paper on the
Basic Economics of Risk Analysis by James A. Swaney is excellent.
One page, once a month. Also available by fax or e-mail.
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Mike
Murphy has been a risk management consultant for the last four years. Prior
to that, he spent 17 years (78-96) with Transport Canada, his last five as Regional
Director General, Aviation
in Winnipeg. Originally trained as a professional pilot, he is the
author of an internationally acclaimed 500-page report entitled "An
Evaluation of Emergency Response Services at Airports in Canada."
He is also the
Chairman of the Air Passenger Safety Group (APSG) www.transport2000.ca/APSG
, a Director of Transport
2000 Canada www.transport2000.ca,
a Director of the Ottawa Chapter of Christian Businessmen's
Committee (CBMC) www.cbmc.net and the Secretary General of the Peugeot Club of North
America (PCNA). www.peugeotclub.org
Managing
Your Public Risk, now in its second year, enjoys a 99.7% acceptance
rate. If you have any comments, suggestions or criticisms, please let
us know.
Murphy thanks
esteemed colleague Brian Lesiuk for his peer review and suggestions on this
edition.
Managing Your Public Risk