Risk Management These Days

It seems like companies and governments can’t effectively manage risk. From a nuclear disaster apparently made out of a radioactive Pinocchio’s nose (it keeps growing every time the management lies), to badly bungled warzones, to banks that can’t pay for their mistakes, to the spill in the Gulf of Mexico‚Ķit’s like a thousand points of light, each representing some mismanaged risk that’s turned into a fire leaving people worse than they came.

Often it is the government that first requires an industry to manage its risk, then decides to help by assuming the risk (and in some cases even paying for the privilege). But you and I help, too.

In every contract of adhesion with major businesses, the language is replete with the customer holding the risk. And if that risk materializes, you can challenge in binding arbitration.

Systemic risk mismanagement is what we see, from the congress failing to do their jobs, to businesses going scot-free (or maybe they pay a modest tribute to the gods the judge favors) no matter how egregious their crimes.

But combating the problem seems difficult. For one, the governments that are supposed to enforce risk management seem ill-equipped and reluctant. For another, while much of the internet passes around image memes of one sort, the corporations pass around their own image memes detailing how to deflect, understate, or otherwise mismanage their risk. [Use your imagination, “destroy all the things,” or “why don’t we take our risk, and move it to the children of the earth,” etc.]

Lots of solutions come to mind, but most of them rely on functional government. And unless we solve the problem of functional government soon, that’s just not a viable option to force the proper management of risk.

Why do companies insist on being risk-addled so-and-sos? The naive belief that not paying for risk will make them more money? Their corporate brothers bragging up how they just built a new virulence research facility on the roof of a preschool? Do regulations contribute to a false sense that risk is overmanaged? Is it overmanaged in some places which gives the illusion of safety?

These questions, this post, tends to overstate the problem. There are problematic industries, yes. But in all likelihood many industries are doing a great job of managing their risks. Statistically we’re pretty safe these days. It’s easy to overstate some risks, due to their visibility, magnitude, impact.

Yes, government is currently mismanaging some risks due to their inaction. The banking industry has it as an endemic problem (and it even seems somewhat proud of the fact). And a few other bad industries can be lumped in with these.

But most business doesn’t seem to like the risk. We should expect them to tire of helping prop up or cover the risk loving industries. That leverage they hold should be key, if they ever wake up to what the bad bets and deflected risks are costing them. Indeed, in many cases they may be required to take action, as they are otherwise not maximizing their shareholders’ value.