Risk Management Reports

July 2001
Volume 28, Number 7

More on Defining Risk

Last month I suggested a "Parable of the River" to illustrate that "risk" cannot exist separate from time, circumstances and perception and that any risk response considers both potential rewards and harms. Peter Law, the retired risk manager of Schlumberger who lives in Rowayton, Connecticut, jumped to buttress the argument of Margaret Davis, of Glasgow Caledonian University, whose original thoughts provoked my parable. He writes:

"I assume Margaret Davis is a Scot and on that assumption I must rush to her support. Not having been privy to the thrusts and parries of Davis vs. Wilkinson and Kloman in discussing the meaning of risk, I am probably foolish to comment, but it wouldn't be the first time. From the account in the June RMR, however, it appears to me that the battle is not being waged over common ground.

The W/K definition of risk as having both an upside and a downside in its consequences, the possibility of gain or loss, surely is a given. Virtually every enterprise or action - the stock market, creating or expanding a business, buying real estate, going to the doctor, even getting up in the morning - contains the possibility of winning or losing. Albeit the dictionary tends to emphasize the downside of events or situations, but win or lose is inherent in decisions or actions taken daily in the corporate world as well as real life.

In recent issues of RMR, the old style risk manager has been urged to embrace the obvious fact that risk is not just fortuitous but may also be speculative. His new job description must resemble that of the CEO. Nice work if you can get it. However, most corporations don't need a risk officer to help them decide what is to be gained by taking a particular action; there are plenty of disciplines within the corporation already working on it. If the RM/O is allowed to add his two cents, fine.

It reminds me of a meeting in Paris that I attended in 1981, shortly after joining Schlumberger. This conference included all the lawyers around the world that were involved with the company's premiere business, wireline operations. Euan Baird, the current chairman, was president of Wireline at the time and was invited to speak to the gathering.

After his talk, at the break, I went to him to introduce myself. Before I could get out my name, he said, 'Oh, I know who you are. Terrible job. Always dealing with things that go wrong.' At that moment it would have pleased me to be able to say, 'Oh, but I am a member of the company's business planning group.'Corporations still need a RM/O (a specialist, as is the financial officer, economist, tax manager, lawyer, engineer, etc.) to focus on the downside of the enterprise, existing or proposed, And to take steps to minimize the loss potential, human, physical, financial, legal, and even public image if the CEO or other disciplines have overlooked it. And this is where the battleground of Davis vs. W/K may have separated. Surely Ms. Davis is arguing about "risk management" in the professionally realistic sense. Whereas W/K are arguing about what "risk" is in the holistic sense, what everyman and corporate executives as well face every day. The parables illustrate nicely that the decision to take a risk or not is affected by the surrounding circumstances. In a corporate setting numerous functionaries may be weighing the pluses and minuses. But once a risk is taken the risk manager has a distinct role in handling, eliminating or modifying conditions that can make the risk go awry."

My response to Peter: we agree on the overall definition of risk incorporating both upside and downside. And we also agree that, after decisions are made, various skilled risk tacticians take over implementation. Some, as you argue, tend to focus on the avoidance of pitfalls (the lawyer, derivative specialist, insurance risk manager; internal auditor; safety director; security director). While I agree that their past mandate has been to manage the potential of downside in events, I suggest that to perform their duties most effectively they must now also recognize the upside potential in their activities. That is, they too must adopt a more holistic approach and understanding to their work, even as they focus on specific tactics.

The problem today, as I see it, is the continued tunnel vision of narrow risk specialists, such as derivative, legal, insurance, audit, safety, and security managers, leading them to decisions that could subvert overall strategy.

Copyright H. Felix Kloman and Seawrack Press, Inc.

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