Richard Smith-Bingham
Marsh & McLennan Companies
Overview: Watershed events (such as the Tenerife airport collision in 1977, the Piper Alpha oil rig fire in 1988, and the global financial crisis in 2008) and subsequent reports have done much in affected industries to prompt senior management discussion about risk culture, establish new regulatory requirements, and spur wide-ranging programs of action. But it is equally clear that many companies have struggled to implement consistent, meaningful,
and sustainable solutions across their operations.
Our experience suggests that a strong risk culture preserves value and enhances performance in three ways.
First, and perhaps most significantly, it helps avert incidents that can impair corporate reputations. In today’s world, it is ever easier for customers to share views on the quality of service they have received and for the victims of industrial accidents or product recalls to collaborate to seek redress. In many sectors, the level of regulatory scrutiny has increased, and a lower tolerance for misbehavior can be seen in stiffer penalties and tougher provisions. Fair dealing with customers is high on the oversight agenda, and many industries face a strong push to remove obstacles to customers switching providers, where possible. As a consequence, shareholders are increasingly pricing the strength of company risk management into investment decisions.
Second, a strong risk culture helps mitigate exposures that come from increasingly complex operational practices (often enabled by technological advances) and the challenges of properly supervising them. Companies in many sectors deploy multifaceted, interdependent systems that rely greatly on employee judgment at all levels for active risk management. By the same logic, individual employees or small groups are able to inadvertently generate massive liabilities through recklessness, negligence, or simple adherence to inadequate procedures.
Third, a strong risk culture generates efficiencies that result in margin improvements. By anticipating potential incidents, good operational discipline in industrial companies can reduce downtime and increase productivity, as well as providing a safer environment for the workforce. A decline in the number of incidents can additionally mean lower workforce payouts, fewer regulatory fines, and less need for customer compensation. Firms with strong risk cultures, as evidenced in their safety record, can see a very significant discount on insurance premiums for operational exposures.
Tightening or transforming the risk culture of a company is neither easy nor fast. But it is certainly valuable and possible. The remainder of this paper looks at symptoms and conditions for corporate vulnerability, proposes how best to think about risk culture in a company context, and sets out practical steps for initiating a successful program of action.
