Prediction and Preparation

31st annual RIMS Canada Conference, Calgary – Part 2: Plenary sessions

THE FUTURE OF RISK MANAGEMENT

If risk management is to expand beyond a fragmented sub-discipline, risk managers must recognize not only the dangers associated with risk, but also the rewards and opportunities, panelists told the September 2006 RIMS Canada Conference in Calgary.

“Risk managers must learn to be opportunistic,” panelist Felix Kloman, the editor and publisher of Risk Management Reports, told his audience of about 700 at the conference. “Even in the throes of disaster, we should be seeking possible strategic advantages for our stakeholders. This means of course that we must adopt the idea that risk holds both favorable as well as unfavorable outcomes. Risk management is one technique that can improve risk-taking.”

Following on Kloman’s point that “risk is both good and bad,” Beaumont Vance, the senior enterprise risk manager of Sun Microsystems Inc., said “as a risk manager, the greatest barrier I have to being effective is the assumption by others that we are entirely negative-focused.”

Vance noted board executives generally do not view risk management departments as exploring opportunities on which the company can capitalize. As a result, board executives may choose to do an end run around their risk managers in search of advice that might justify taking risky actions or decisions.

Vance recalled asking an executive to show him the assessments he was doing.

“We can handle that,” Vance recalled telling him. “Why didn’t you call us?”

“Well, because you’re the guys who say, ‘Don’t do it,'” the man replied. “I’m not going to call you if I want to do something and all you’re going to say is, ‘Don’t do it.'”

BUCKING NEGATIVISM

Risk managers might be able to counter this perception, Vance suggested, if they are able to identify the positive outcomes for taking certain risks. In fact, the whole profession might benefit from a name change to “strategic uncertainty management,” he said.

John Adams, a professor of geography at University College London, agreed the semantics of risk don’t help.

Adams noted the word ‘risk’ is ubiquitous. He said when he used the Google Internet search engine to look up the word ‘risk,’ the search engine generated 1.2-million hits – “more than sex or God,” he observed.

And “the word ‘risk,’ if you look it up in the dictionary, is negative,” Adams added. For example, the Oxford Dictionary of Current English defines risk as “the chance or possibility of danger, loss, injury, etc.”

Citing this definition, most risk managers see themselves as responsible for avoiding risks, the panelists observed. But Klocan warned risk managers could be consigning themselves to oblivion at corporate boardrooms across the country because executive officers see them as mere “nattering nabobs of negativity.”

Adams agreed, noting that “risk management has fallen into the hands of people who are unaware of the opportunity costs [related to] risk aversion.”

Consequently, Vance said, “the guys on Wall Street always seem to be 10 years ahead of us” in terms of assessing risks and outcomes.

Like Vance, Klocan suggested scrapping the term “risk” entirely when referring to the profession. “If [risk management] continues to focus on negative outcomes, it isn’t going to last much longer.”

Adams suggested tackling the semantic problem by exploring positive outcomes of risk. “Why do we take risks?” Adams asked rhetorically. “There are rewards…

“Certainly we take risks for a purpose. If you are obsessed with reducing accidents, then you are going to forgo loss of rewards…Risk [according to the dictionary] has a negative connotation, but we must not let this drive us into ignoring the reason why we take them.”

Vance said risk managers must be aware that human beings will bet on numerically improbable risks if it means obtaining a desired outcome. “There is a perceptual bias towards risk,” he said. Risk managers can take advantage of this propensity by helping board executives to make “enlightened” decisions about risk, Vance said. “We can take our rightful place as assistants for decision-making about all things that have to do with risk.”

PREPARING FOR THE WORST

Preparation, good communications and co-operation helped save the lives of 184 people who survived the emergency crash landing of United Airlines Flight 232 in Sioux City, Iowa, the pilot of the flight told the RIMS Canada Conference in Calgary.

In a very personal presentation, Captain Al Haynes told his audience that standard operating procedures and constant drilling of procedures contributed to saving lives in a crash that killed 112 passengers and crew aboard the flight.

“I seriously believe that one of the reasons we had so many survivors was that the Sioux [City] airport, the surrounding community, and the people in those communities, were prepared to respond with a well-organized, up-to-date, comprehensive disaster plan,” Haynes told his audience, who gave him a standing ovation.

He recalled in vivid detail how a faulty part caused the plane’s engine to separate. The resulting shrapnel hit the plane’s back tail, shearing through the plane’s hydraulics system. In an extremely rare occurrence, all of the plane’s hydraulics systems shut down at once, meaning the plane could not brake, could only make right turns in the air, and couldn’t steer while landing.

Haynes said United Airline’s policies, even though they didn’t address the specific circumstances, aided the pilots in coming up with a plan of action. “On United Airlines, you will follow a standard operating procedure,” Haynes emphasized. “Who doesn’t have one? I don’t know where you work or what you do, or what your business is, you should have a standard operating plan…. If you follow standard operating procedures, you can take care of anything that goes wrong.”

PRACTICE MAKES PREPARED

Good communication helps, Haynes noted. He played portions of the audio flight recorder that captured the 48-minute period between the time of the first distress signal and the point when the plane crash-landed on the emergency runway in Sioux City.

Within five minutes of the original distress call, an air traffic controller had cleared all of the non-emergency-related radio traffic onto a separate channel, Haynes reecalled, so that only the captain and ground control could be heard on the flight recorder. The air traffic controller was calm and poised throughout the event, he added.

By the time the plane descended to the cleared runway, hundreds of emergency personnel had descended upon the scene. Thirty-one fire departments answered the call, as well as 35 ground ambulances, 26 law enforcement agencies, 250 National Guard members, nine helicopters, 150 EMS medical personnel, five physicians, six pathologists, 12 dentists, 14 military units and six emergency management agencies.

As it turned out, Haynes noted, Sioux City had already practised for an airline crash on the exact same runway a little more than a year before Flight 232 crash-landed. Such drills are an important part of the preparation process, he said.

Haynes noted community officials in Sioux City ran a live drill, in which emergency personnel participated once every three years. “They said, ‘Let’s go out to Sioux City and simulate a worst-case scenario,'” Haynes recalled.

“I asked, ‘How did you get people to take the drill seriously?’

“He [the organizer] said he convinced his people to take this drill seriously and really learn from it because should there ever be a crash here, it’s bound to be a lot less severe than we’ve trained for. I think Sioux City was prepared, because they took that drill seriously. I think the 183 survivors were extremely fortunate that [Sioux City] is where they ended up.”

Finally, good communications between the pilots and between flight attendants and the staff was imperative, Haynes said. “You go wherever you can find an answer,” h e said. “You have to have teamwork and believe that we will solve our problem as a team…

“When something goes wrong, everybody has a right to be heard. You swallow your pride, you swallow your ego and say, ‘Let’s find a way of getting this plane on the ground.'”