RM Solutions - Business Risk Management Solutions

This “Commentary” on the Westray Mine disaster appeared in the Globe and Mail, Report on Business, April 30, 1998

The dialogue over the last two weeks in the Business Ethics column (Westray: where was the Board? - Jan 29; Westray: Directors did their job - Feb 5) will raise awareness about the responsibilities of Board Directors and Senior Managers for managing the risks of their business.

Unfortunately, a vague or even keen awareness of emerging corporate governance responsibilities will not prevent the next industrial tragedy unless corporations begin to integrate an effective risk management process into basic management practices.

The risk management process applies logical and proven techniques which allows an organization to identify and assess risk so that informed decisions can be made regarding the elimination or control and treatment of all prominent risks. In the process of identifying the probability of an accident and assessing the possible consequences for all stakeholders, a unique risk profile of the business is developed. To properly prioritize risk, relevant external factors must also be considered, such as political and regulatory issues or the impact of public perception.

In Canada, many large corporations have risk management programs. It is common that only traditional risks such as fire, flood and public liability are considered in these programs and the treatment of such risk is usually dealt with by a contract of financial transfer - insurance. In many cases, risk advice is sought exclusively from the insurance industry which may not have the expertise or mandate to assess, control and take action on a broad range of business risks.

For example, Adrian White, a former Director of Curragh who wrote in this space last week, noted that experts from the largest coal property insurers and brokers inspected the Westray mine before the disaster. A passing grade in this type of inspection may have given Curragh a misleading expectation of compliance with health and safety standards at the mine. Property policies insure physical assets and revenue, not workers. Consequently, property loss prevention experts do not adequately assess occupational health & safety issues or management practices which may have been contributing factors in the Westray explosion.

How can Senior Management and Board Directors integrate ethical decision making into their organization in order to protect all stakeholders? An effective risk management program will ensure that essential information is available to make informed decisions. The basic elements of an effective risk management program are:

Senior management and board level commitment to a broad-based, strategic risk management process. This commitment must be sufficient to ensure that risk management becomes a core skill of the company and is practised throughout the organization, particularly at the operating level;
Risk management policies and procedures established in writing for the most prominent risks, with specific objectives and targets. Due diligence requires documentation to prove that procedures are not only established but adhered to;
Clearly defined responsibilities for managing and controlling risk. Performance evaluations which include specific risk management objectives assures accountability;
Adequate resources and tools focused on the most prominent risks so that compliance and effective performance is assured. Ongoing employee training is essential;
Testing and monitoring of all programs and procedures, particularly emergency and business recovery plans with continual improvement as the goal.
Regular reports including independent audits prepared for review by senior management and board directors. These reports must provide concise information regarding the status (including deficiencies) of all corporate risk management programs.

The 1994 Dey Report to the Toronto Stock Exchange on Corporate Governance in Canada regards managing risk as one of the five principal responsibilities of the board of directors of a listed company.

Society is demanding greater corporate accountability at a time when risk has become more complex due to advancing technologies and unforeseen interdependencies. A well designed and comprehensive risk management program will fully address the unpredictable consequences and sometimes tragic outcomes of competitive business decisions.