by Chris F. Best
Chris F. Best is editor of Foresight, a London-based insurance and risk management journal published by Risk and Insurance Group Ltd.
Risk management has traditionally been defined as the identification, measurement and economic control of risk. A closer look at this definition, however, reveals a host of questions which profoundly affect the work and status of risk managers. Most of these questions relate to what "economic control of risk" really means.
Several years ago, a British risk manager was trying to sell loss control to the chairman of his company, a large food retailer. The risk manager thought he was making a clear, persuasive case by presenting a detailed set of numbers which showed that for x investment there could be an x plus y savings in stolen merchandise, currently running at 3 percent of stock.
The risk manager was shocked when the chairman gave his version of the classic response to the argument for increased risk management measures: "If we don't lose at least 3 percent of merchandise through customer pilfering, we're not marketing the goods properly!"
This "classic" response that the chairman encapsulated in so few words attacks risk management for the narrowness of its vision and for persistently seeing itself as an end in and of itself.
The chairman was politely pointing out to the risk manager that companies do not exist to practice risk management, but to provide goods and services and make profits for their stockholders. When the chairman dismissed the loss control proposal in favor of the 3 percent rate of pilfering, he was making the point that an investment must justify itself solely in terms of its effect on the company's bottom line.
Workplace Health and Safety
Given the fact that return on investment in production, marketing and sales usually promise better results than improved loss control, arguments for greater risk management measures are not easily won. It should come as no surprise, therefore, that in the United States and the United Kingdom, improvements in workplace health and safety have moved in sync with tighter regulation. Dennis Farthing, former chairman of the U.K.'s Institute of Risk Management, has stated that the "only real incentives to improve risk are regulatory or fiscal sanctions."
Yet it is the risk manager's natural instinct to view health and safety as well as the whole process of risk management as being worthwhile to any company. …