Magazine article Risk Management

Ethics and the Risk Manager

Magazine article Risk Management

Ethics and the Risk Manager

Article excerpt

The ethical exposure--any risk a company takes by behaving unethically--is not mentioned in risk management textbooks. Yet, unethical behavior can expose a company to potential property loss, liability torts and other risks. The risk manager need not be reminded of the criminal and civil lawsuits facing Enron, Tyco, WorldCom and Rite Aid, to say nothing of the many insurance companies that are in liquidation today.

Since this threat exists within every organization as well as in the vendors that serve them, the risk manager must subscribe to a high code of internal organizational ethics and integrity. The risk manager must demand that his or her company, as well its vendors, live by that code.

There are two types of ethical hazards--internal and external. The risk manager can mitigate both types by using traditional risk management processes of identifying, evaluating, treating and monitoring the risk of, or exposure to, poor ethical behavior.

Internal Ethical Hazards

Most organizations behave ethically because to do otherwise is business suicide. Unethical behavior inevitably spurs customers to flee, other firms to refuse partnerships and employees to leave for companies that live on higher ethical ground. Ethical organizations, on the other hand, attract and retain employees with integrity and are generally more successful. In a recent Harvard Business School study, professors John Kotter and James Heskett found that over an eleven-year period, companies that care about their customers, shareholders and employees (all ways to measure ethics), increased revenues by an average of 682 percent, compared with 166 percent for all others.

Organizations that do not have a code of ethics may realize short-term gains, but more likely than not, they are sacrificing long-term profits. This is illustrated in recent accounting and corporate scandals, where the culprits of unethical behavior ultimately brought long-term financial ruin upon themselves. Failure to identify and treat internal ethical hazards may not always lead to corporate demise, but if the examples of Enron and WorldCom are any indicator, the threat internal ethical hazards pose to any organization's long-term prosperity are too great for risk managers to ignore.

The best way to address internal ethical hazards is to ensure that the ethical standards senior management talks about are actually put into practice every day.

To evaluate this, risk managers must be familiar with every aspect of their organization's operations, from internal audit, corporate finance, accounting and human resources to safety, purchasing, production and marketing. Relationships with some of these groups already exist. Interacting with internal auditors, for example, was a traditional risk management responsibility long before the 2002 Sarbanes-Oxley Act.

If the,organization has a model for ethical decision, making and its core vision, values and code of conduct are part of the daily organizational culture, then it will be obvious that it is serious about mitigating internal ethical hazards.

But for organizations where the lines are not so clearly drawn, the risk manager must ask questions to determine the internal ethical state of affairs:

* Does the organization have a history of overcharging customers?

* Does management take any action to correct errors that result in short-term profits?

* Does the company follow the letter, and not the spirit, of the law?

* Is there a history of public corporate complaints?

* Does management conceal information in purchases?

* Has the organization historically failed to practice corporate governance?

* Does the company have an ethics program and require buy-in from all employees including upper management?

Are You an Ethical Risk Manager?

Buying commercial insurance is an excellent test of an organization's ethical culture and its risk manager's integrity. …

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