The management of risk is possibly the most important function that business leaders have to perform if they are to be successful in achieving their objectives. Every economic activity is inherently risky and the results of inadequate risk management are frequently beamed on our TV screens as the media is very good at capturing the drama resulting from human failure.
The concept of operational risk is easy to understand; actually managing operational risk is far more complex- John Cassar White
The Deepwater Horizon oil spill in the Gulf of Mexico in 2010 and the more recent Costa Crociera shipwreck show the devastating effect of inadequate management processes or incompetent people. But there are other less dramatic business failures resulting from inadequate risk management that cause substantial economic damage. The Financial Services Authority in the UK, for instance, is conducting a vigorous campaign against what the Financial Times called the “mis-selling scandal” in which British banks were involved when they sold payment protection insurance to clients who did not need it or want it. So far these banks have been fined £6 million in penalties and the investigation is still ongoing.
The concept of operational risk management is not new; good managers have always taken measures to mitigate the risk of human failure. The best definition of operational risk I know of is that of the Bank of International Settlement that in the document on the Basel II regulations states that “operational risk is the risk of loss resulting from inadequate or failed processes, people and systems or from external events”. The concept of operational risk is easy to understand; actually managing operational risk is far more complex.
Successful business leaders know why in some companies led by apparently experienced mangers the checks and balance aimed at preventing business failure are often not effective. Perhaps the most important reason is that while many boards of directors acknowledge the importance of managing risk, in reality they do very little to support and encourage the risk management function. The financial services debacle that we experienced in the last four years when we saw mighty operators like Lehman Brothers, Northern Rock, Royal Bank of Scotland and HBOS crash, can all be attributed to bad risk management tactics that a first year undergraduate in finance could easily identify.
Those responsible for managing risk in an organisation are often unfairly considered by their own bosses on the board as unnecessary brakes on the enthusiasm of the go-getters that work in sales. In many organisations salespersons are traditionally considered as the winners and role models for the bright and ambitious young sparks. This lethal attitude is often masked for a long time as many organisations invariably follow the rituals of good risk management by having a formal structure in place, even if a serious scrutiny clearly shows that such structures are ineffective.
Another reason why checks and balances built in business processes often fail to prevent disasters from happening is the prevalent human weakness that is made up of a lethal mixture of complacency, superficial knowledge, and outright ignorance as to where business risks really lie. Unless one has a broad experience of the various aspects of running a specific business activity, it is easy to be misled when taking important decisions that should be based on a thorough assessment of every element that could pose a risk to the health of the business.
For instance, an experienced accountant leading an important and complex organisation can undoubtedly understand the financial metrics of his business. He or she would also appreciate the importance of business growth, and have a good understanding of how markets behave. But if this same business leader ignores the debilitating effect of inadequate managers, or delegates the oversight function of the human resources management to a mediocre executive, he will be lucky to avoid a major business disaster resulting from staff failures. Lifelong learning is a wise strategy not only for workers in a factory, an office, or indeed any other workplace, but is also valid for business leaders who ultimately carry the can if things go wrong.
One thing that should keep business leaders awake on some nights is our inability to identify risks that we do not really know much about as these may be rare and their effects on an organisation not well documented. Put in another way, the worst risk is the risk we do not know about. The eternal challenge for business leaders will always be that of constantly balancing good risk management with the promotion of business growth.
johncassarwhite@yahoo.com