Which conditions, situations, events or people have the potential of posing significant hazard to a going concern, thus warranting the installation of a risk management function?
In business, the extent of one’s success and failure is measured in monetary equivalents. Consequently, risk is measured in monetary equivalents as well.
What is Risk?
Risk refers to unknown, uncertain, and unforeseeable future occurrences. Yet, we know there is a possibility of specific incidents taking place but we can only estimate the probability and frequency of their incidence, and the maximum amount of financial exposure they are likely to incur for a business within its operating environment.
This makes one wonder about the character and nature of conditions, situations, events or people that either increase or decrease the probability of a possible risk to strike. For example, studies into the methods of assessing Directors and Officers Liability insurance premiums[i] show that the personality of the insured and the organizational climate the directors and officers create are weighed more heavily than any financial statements.
What Statistics Tell Us
Ninety-four percent of ALL business outcomes―all successes and all failures―are the result of executives’ business governance decisions; i.e. how they chose to design, structure or organize, operate or implement, maintain, and manage the business system for which they assumed ultimate responsibility.
Only six percent of ALL business outcomes―all successes and all failures―are directly attributable to individual or groups of people.
Seventy-five percent to ninety-six percent of all incidents―accidents and near-misses―involve human error, which is not the cause of failure but a symptom of a failing system.
A Dutch study into marine incidents[ii] found that:
- There are six hundred near misses for every accident.
- Each incident has seven to fifty-eight distinct causes.
- Fifty percent of those incidents have at least twenty-three causes.
- Each incident involves two or more people, each making two mistakes.
The five steps of risk management—identify, analyze, evaluate, treat, monitor and review—sound so rational, but how practical are they really?
How does one identify, analyze, evaluate, treat, monitor and review the risk of human error, a.k.a. the symptoms of a failing system? Who can determine the potential risk of individual causes aligning themselves to create a trajectory of accident opportunity? How does one predict which (minor) event unleashes the chain reaction? How does one anticipate the course a chain reaction will travel and the potential damage it can inflict on the business?
We know that preventing the incidence of a single cause can break and stop a chain reaction from unleashing its detrimental force—turning an imminent accident into a near-miss. Yet, we have no method of predicting which causes are about to be activated. There are just too many variables. Therefore, any pro-active attempt at preventing possible causes to link up into a chain reaction would grind any business to a screeching halt.
Making a Difference
Studies show that individual or groups of people are the difference between success and failure. James reason, who studied Human error, concluded that:
Although we cannot change the human condition (HN: human fallibility) we can change the conditions under which humans work.
All we need are Inspired CEOs who understand and appreciate the urgent need for changing the conditions under which humans work. They need to create conditions that promote people to have their mind on the job, to be engaged, alert, invested, and that cause them to experience pride in their workmanship and expertise.
Nobody knows more about a business process or –function than the person performing them as part of their daily routine. They can tell you where the bottle-necks are, and where potential risks are lurking. All you need is to create a climate in which it is safe for them to speak up. It sounds so simple but it has proven not to be that easy. Why?
IBM reported that two-third of all leaders from around the world participating in their study admitted to being overwhelmed by complexity. In other words, they lack understanding of cause and effect relationships, which is why they show such persistent unwillingness to change the conditions under which humans work. As a result, they perpetuate mediocrity, feed the so called war-for-talent, and even risk cutting short their own career since board members are showing less tolerance for under-performing executives.
How remarkable to read that these executives in the IBM report identified “creativity” as solution to their perplexity. After all, if you are befuddled and bewildered by complexity, wouldn’t learning about complexity, creating understanding of cause and effect, be a more logical and successful solution?
Clearly, institutions for business education and their centers for executive development are failing their students; the current and future executives of the world. They don’t recognize a solution when it’s staring them in the face.
Therefore, it all starts with understanding the basics; why you are in business, what the purpose of your business is, and how you design, structure or organize, operate or implement, maintain and manage the business so that it functions in alignment with its intended purpose. That’s why I wrote The Root Cause: Rethink Your Approach To Solving Stubborn Enterprise-Wide Problems.
[i] Tom Baker and Sean J. Griffith, “Predicting Corporate Governance Risk: Evidence from the Directors’ and Officers’ Liability Insurance Market,” Chicago Law Review 74 (2007): 487.
[ii] W.A. Wagenaar and J. Groeneweg, “Accidents at Sea,” 587-598.