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The 1990s: The Decade
of Risk Management
(Part 1 of 3)

 

In early 1989, RIMS formed the Risk Management Roundtable. Chaired by Michael McDonald, director of risk management for Ryder System Inc., its mission is to advance both the theory and practice of risk management. Some 15 experienced risk managers are serving; the group is expected to grow to about 30 risk managers. Through discussion at Roundtable meetings, the aim is to identify trends and issues, and develop mechanisms to address them in order to broadly disseminate views and concerns.

In April 1989, several areas came forward for study, and teams were formed to undertake an investigation. One area was how the risk management function is performed and how it is perceived, particularly by senior management in the business environment.

The "new risk team" proceeded to look at the genesis of risk management, its present reality and where its future lies. Research undertaken by team members was synthesized into what follows: a blueprint for the future which aims to broaden the individual risk manager's role in order to contribute far greater than now to Corporate America's need to manage a myriad of risks cohesively.

This paper was written by Anthony J. Burlando, vice president of risk management for The Hillman Company, with contributions from George Balcer, director of risk management for Stone Container Corp., Thomas A. Duffleld, vice president of risk management and insurance for Archer Daniels Midland Company, Fred B. Molineux, director of corporate insurance for Johnson & Johnson, and Spencer J. Rankin, vice president of risk management for Schering-Plough Corp. Mr. Burlando also wishes to thank Sue Anne Mitro, manager of property/casualty insurance of The Hillman Company for her assistance

The paper is the opinion of the "new risk team" members; it is their hope that others will offer views and reviews and thereby create a dialogue for change in the status quo.

Risk managers are in the business of managing the future. In the next decade, risk managers will create their own individual career opportunities by fundamentally changing the traditional risk management function. Risk management will emerge as an essential business discipline and the risk management position will be elevated to the corporate officer level. The 1990s will be "The Decade of Risk Management."

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Risk Management in the 1980s

Risk management mission statements generally focus on the preservation of assets and continuity of earning power. The mission statement is usually coupled with the five-step risk management decision making process. The former defines What is managed, and the latter outlines shows it is managed.

In reality, neither the risk management mission nor the risk management process accurately represent modern risk management. More importantly, these useful but outmoded definitions may be retarding individual career development and impeding the acceptance of risk management as an essential business discipline.

A giant leap is necessary to correct the creeping mismatch between these generally accepted risk management definitions and risk management in practice. However, before a leap is possible, a number of questions must be answered.

Should the preservation of assets and the continuity of earning power be claimed as the risk management mission statement? Clearly it should not! This mission can be claimed by the CEO, the treasurer, and the legal department and the lobby security guard. It is absurd to suggest that a risk manager would propose that assets not be preserved or that earnings should cease. Corporate assets will be protected and earnings will continue. This basic mission was satisfied long before there were risk managers.

Does the traditional risk management decision making process accurately describe how risk managers make decisions? It does not! The traditional risk management process is the sequential application of five discrete action steps: identify, measure, select, implement and monitor.

While the logic is pristine and appealing, the traditional process fails to adequately describe the practice of risk management within the business organization. It is severely flawed in at least three areas:

  • The process is circular. The third step (select) is the decision making process. How can it be used to further define a step in a Decision making process?
  • By definition, the time order must be sequential. One cannot "measure" unless one first identifies;" one cannot Monitor unless one first "implements;" etc. The concept is supremely logical but totally impractical. It implies a rigid, linear management process As such, it is at cross-purposes with the desirable image of a risk manager as an intuitive and creative problem solver.
  • The same decision making process can be applied to almost any problem-solving challenge. Whether tying down a business deal or tying one's shoe, it is purposeless to reiterate the obvious. A benign process is not an essential risk management tool.

The traditional five steps imply an isolated technician, working outside the mainstream of management, who spontaneously identifies risks previously overlooked by well-meaning, but basically Risk-illiterate, superiors. In fact, more credit needs to be given to the intuitive risk recognition abilities of top management, and risk managers need to acknowledge that risk identification is often done for them by others.

The traditional mission and process have led risk managers into an over-reliance on insurance. While effective insurance management calls for mega-dollar decisions relative to risk retentions, limits, coverages and deductibles, the close association with the insurance buying function has been detrimental to risk managers for the following reasons:

  • Insurance deals with painful or unpleasant alternatives. It is a Bad news business. Many risk managers, like Greek messengers, have lost their heads mismanaging the inevitable bad news inherent to the functioning of insurance mechanisms.
  • Corporate America has a clear bias against insurance (or insurance-related mechanisms) arising out of unrealistic business expectations, a basic lack of understanding of insurance cycles and prior, unsuccessful attempts to establish long-term business relationships with insurance companies. Additionally, the influence of bad experiences with Personal insurance's cannot be underestimated.
  • Insurance mechanisms deliver an inordinate number of financial surprises, giving a false impression that the managers of risk are less competent than, say, legal or tax department managers. As long as planning and predictability are top management's ~ measurements of choice, risk managers will finish last in the image race.

NEXT: 1990's: The Decade of Risk Management
(Part 2 of 3)

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