Risk Management Reports

November, 2000
Volume 27, No. 11
 
Random Readings

With the coming of autumn, I have whittled down my ambitious pile of summer reading, with three plusses and a minus.

My first plus is a short booklet published by the Canadian Institute of Chartered Accountants entitled “Guidance for Directors—Dealing with Risk in the Boardroom.” (April 2000: contact CICA at www.cica.ca C$15 per copy) It’s a concise (21 pages) paper that provides guidance for board members charged with risk oversight. Its major assets are a series of sample questions that board members should ask their CEOs and senior managers on strategy, specific proposals, operational risks, and emergency preparedness. It notes that “preparing for foreseeable risks also helps an organization respond to the unforeseen.” It concludes that the “biggest risk for directors . . . is denial—trusting management despite evidence of serious problems.”

The short appendices to this booklet give an overview of the CICA Criteria of Control framework, some ways of thinking about risk, sample board questions and a summary of the eight principles of Criteria of Control. Roy Bennett, chair of the Advisory Group for CICA, sees the broader picture: “There is often a tendency to think of risk as a negative factor which should be handled within the terms of reference of the audit committee. Such an approach runs the risk of having too narrow a focus and not addressing opportunities as well as risks. Risks and opportunities can exist throughout the organization and may apply to all aspects of strategies, plans and procedures. It is therefore important that this element of board responsibility be dealt with by the whole board and not be delegated to one specific committee.” Bennett’s point raises the level of risk management importance another notch.

My second plus is a new journal published by Perpetuity Press, in Leicester, UK. (Annual subscription US $240. Email: info@perpetuitypress.co.uk) Risk Management: An International Journal is an academic exercise, edited by Dr. Martina McGuinness at the University of Leicester, yet its contents are quite readable for us lowly practitioners and well worth the expense.

Members of its advisory board include the noted John Adams, author of one of the most important books in a risk manager’s library, Risk, Maureen Gibbins of the Institute of Risk Management, and Walter Stahel, of the Geneva Association. Members come from UK, Canada, Australia, Switzerland and the US.

I now have the first three issues of Volume 2 (2000) and am impressed by the breadth and practicality of many of its papers. An example in the first issue is an article by John Sparrow and Patrick Bentley, of the University of Central England Business School, outlining some of the “Decision Tendencies of Entrepreneurs and Small Business Risk Management Practices.”

While it reads too academically, it does contain some good ideas on small business tendencies, drawn from a study of 24 small entrepreneurs in West England. This is a much misunderstood group in both Europe and North America, one that should receive more attention. What appears to be most needed is a simple, brief, and practical approach to measuring and responding to major risks, along with a guide to business recovery (see the following review of a booklet from IBHS, just what the doctor ordered!).

The second issue features a remarkably challenging self-interview by Jack Dowie, of The Open University, that tries to puncture every existing risk balloon:

  • “A lot of risk assessment therefore goes on at great public expense, to no useful effect and invariably increased confusion among experts, administrators, politicians and public alike.”
  • “We don’t need ‘risk’ if we want to choose the best course of action, and indeed are best rid of it."

Dowie’s article is thoughtful and mind-moving. Read it!

The latest issue (No. 3, 2000) is a compendium of articles on operational risk, gathered by Clive Smallman, of the Judge Institute of Management Studies at Cambridge University. It is an important addition to my article on operational risk (RMR April 2000 - “A Fairly Poisonous Cocktail”) and to the Risk Professional monograph on the subject published last winter (see RMR August 2000 for my review). For example: “Factoring the human element (in risk scenarios) is generally considered too difficult, particularly where economic modeling is involved. Irrationality is incredibly difficult to model, and not surprisingly is discounted in most decision-making models. Yet, it is surely the linch pin on which the success or failure of processes and systems turn . . . .” And, “the subject (of operational risk) remains polarized between what might be termed the quantitative and the political schools.”

My third plus is the brief and highly practical loose-leaf binder from the Institute for Business and Home Safety, a Florida-based nonprofit sponsored by the insurance industry to reduce loss from natural disasters. Entitled Open for Business, it guides small business owners in understanding their investments, critical resources and risks, using a series of worksheets to develop a business impact analysis and contingency recovery plan. The nine worksheets, ranging from emergency contacts to critical customers, creditors, suppliers, and computer hardware and software information, are practical and easy to complete. I’ve used it for my own Seawrack Press, and I now have a complete and workable contingency plan. For copies contact IBHS at www.ibhs.org or 813-286-3400 in Tampa, Florida. Copies are US$10 each.

My last reading, and my only minus, is The Complete Guide to Business Risk Management, by Kit Sadgrove, published by Gower Publishing, in England, in 1996. I’m afraid this is another of the one-sided views of risk management so prevalent today. The author’s starting position seems to be safety and insurance, and he never moves off dead-center. He begins his misplaced focus on the first page, defining risk as “the worst things that could happen to us.” Even though he acknowledges that “there is no point is trying to avoid risk completely,” the rest of his book tries to refute this assertion. The focus is on minutiae, seen in the eight of the fourteen chapters devoted to operational risk. Nowhere is there a mention of credit, market or regulatory risks. Nowhere is there mention of some of the more sophisticated quantitative models and methods. While he does advance some practical ideas, in a staccato writing style, for the operational arena, the author lacks a coherent and logical overall argument. His approach, laden with anecdotes, is more a pitch to retain a risk management consultant, Mr. Sadgrove’s profession. The last page describes exactly how to use a consultant. His lists read like an old-style Chinese Communist primer: the seven categories of risk; the eight ways to pollute; the four stages of risk management; the six strategic elements; the three production modes; the five security zones; etc., ad infinitum.

If you are still unconvinced, contact Ashgate Publishing in Brookfield, Vermont, USA.at www.ashgate.com or telephone 802-276-3162. The cost is $84.95.

Copyright H. Felix Kloman and Seawrack Press, Inc.

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