Why it’s time to talk to senior management about risk appetite
Why it's time to talk to senior management about risk appetite
Driving a car is dangerous. That's not simply opinion – there's plenty of road safety data out there to back this up. But many of us still get behind the wheel of our cars every single day, because we all perceive risk in different ways. If we're racing a car on the track, we're making decisions on risk all the time. If I'm driving, I'm making a conscious choice to put myself in danger, but that's a decision I've reached thanks to my perception of the risks that surround me.
Ask anyone to consider the risks associated with certain tasks and they'll identify some tasks as being riskier than others, but not everyone will rank those tasks in the same order of risk. Plus, if we're stressed or tired, we see risk in a different way. Although it isn't only the job in front of us, or what we're doing in any particular moment, that inform our approach to, and our perception of risk. Intelligent people make decisions on risk based on their knowledge, their previous experience, their upbringing and their perceived cultural norms.
Human beings are inherently prone to failure. When we're considering risk, our brains use mental shortcuts that help – or hinder! – our decision-making process. For example, we might rely too heavily on the first piece of information we're given. This is known as "anchoring". "Availability" allows us to estimate how likely something is to happen based on information we can easily recall. Finally, "representativeness" describes our focus that the familiar is correct (which means we are often ignoring other factors).
Our brains process risk factors all the time, but we don't always make time to consciously reflect on the fact that we're doing this. Our day-to-day decision-making is rooted in the levels of risk we're willing to accept. Insurance policies are the perfect example of this. Does your home insurance feature voluntary excess, or zero excess? Is your car insurance fully comprehensive? The decisions we make about insurance are based on our personal appetite for risk.
As safety professionals, we regularly find ourselves talking to senior management teams. Even though our communications are normally about health and safety, the central concept of all our discussions is the balance between risk, cost, time and effort, as we aim to adhere to the concept of "so far as is reasonably practicable" as is imbedded in the principles that surround the management of of health, safety and welfare within the 1974 HSW etc Act.
But the idea of risk is wider than the scope of health and safety, so when we talk about risk, we're talking about the appetite for risk in general. Managing risk comes down to organisational appetite. The organisation's commercial strategy is decided by the leadrership team and this means that they get to decide: How much risk is the senior management team run willing to take in pursuit of the organisation's commercial goals?
Of course, all senior managers take risks in order to be able to push the company to the next level. Be honest – you've probably been on the receiving end of a speech or three about the way particular managers grew their company by taking financial risks. Entrepreneurs wouldn't exist if people weren't prepared to take business risks.
However, they might not have the same thought process in terms of the safety of their employees. You may well be reading this thinking: "Senior managers want things to be black and white. Clear cut. They'll ask: 'How much risk are we supposed to take?'" So,a fundamental part of our communication with senior management teams is to ensure they understand what risk really involves.
If managers tell you that they don't want a personal fine, or to go to prison, at this point the risk appetite of the organisation becomes clearer. Protecting staff – and anyone else affected by what the organisation is doing – boils down to the senior management's appetite for taking risk. (Although there are anomalies: some organisations make and do things that ultimately cause harm, yet their internal company cultures are astonishingly risk-averse.)
So how does risk appetite work in real life? Here's a great example that also brings us back to the idea of driving.
In 1970, Ford in the USA introduced the Pinto, a "subcompact" vehicle designed to appeal to customers who were buying German and Japanese cars that were typically smaller than the standard American automobile. However, the Pinto didn't sell very well: defects were identified that led to large-scale recalls, and the design of the fuel tank became controversial when Pintos involved in rear-end collisions caught fire.
Ford paid out millions of dollars in liability, notably in two cases resulting from fatal accidents in California and Indiana. The company's environmental and safety engineering division developed a cost-benefit analysis of fatalities and serious burn injuries comparing the financial impact of redesigning fuel tanks to the wider costs to society of injuries and deaths.
This analysis was cited in an article published in 1977, where it was revealed that the cost of modifying fuel systems was estimated as being larger than the benefits to society such modifications would provide. The story implied that Ford was trading lives for profits – an idea seized upon by the public. However, it became evident in later years that the cost-benefit analysis had been misunderstood by the writers of the article.
Ford's decision not to modify the fuel systems was based on the company's appetite for risk.
When we're talking to senior management teams about risks, we must guide them towards making well-informed decisions, based on understanding the level and the nature of the risk faced. Integrating and embedding a health and safety culture into a company's ethos and its daily practice is a massive part of ensuring senior management understand the levels of risk their employees face. At the end of the day, it's people's safety we're talking about: is their physical and mental health safe (enough) in the workplace, and can they they go home alive, with all their appendages, and their mental health intact?
Thinking back to that concept of "so far as is reasonably practicable", the balance between risk and cost is crucial. You can't wrap people up in bubble wrap when you're running a commercial organisation, but it's vital that senior managers understand that we all perceive risk in different ways. As safety professionals who should be the people who truly understand risk, it's up to us to vocalise our knowledge to senior management so they can make more effective decisions by being better informed. Knowledge is power!
We can help guide their decision-making processes by identifying risks that are "reasonably foreseeable", and to do this we draw upon common knowledge, industry knowledge and specialist knowledge. Combining our expertise as safety professionals with the industry-specific nous of senior management creates a powerful knowledge base that will inform senior management teams and guide them towards establishing their own kind of risk appetite both in specific cases and, as an organisation as a whole.
Senior management teams ultimately make decisions that govern the health and safety of their employees. If you've successfully shown them how to embed safety culture into the company's ethos, making these decisions should be more straightforward. Sharing your knowledge and getting senior management teams to open their minds to considering all risk can help them to define their own specific risk appetite. At the end of the day, it's those senior leaders who get to choose how hungry they really are!
by Carla Crocombe, MD and founder, Safety Rocks