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Developing ethical standards for risk managers.

In an era of rapid economic expansion, there are ample opportunities for corporate corruption and misguidance, thereby making the subject of business ethics widely popular. Today, business ethics courses are taught in a growing number of universities, and ethics research centers have been established at some of the most prestigious U.S. business schools.

But despite this keen interest in the subject, do the plethora of currently fashionable theories actually provide executives with a clear idea about how to perform their jobs more ethically? In an article in the Harvard Business Review, University of Toronto management professor Andrew Stark contends that many of the prevailing ethical doctrines are too abstract and theoretical, and therefore have little relevance to managers working in the real world. What executives need, he argues, are clear-cut, concrete recommendations that help them solve their day-to-day business problems. The same can be said for risk managers. For although no one would deny that maintaining ethical standards helps risk managers perform their jobs better, the conduct and actions that constitute this ethical behavior need to be clearly defined. Considering the nature and goals of the discipline, it can be said that for the risk manager, ethical behavior should involve the timely application of risk management principles to exposures, the implementation of effective workplace safety procedures, the fair administration of benefit programs and not accepting compensation other than from the employer.

But what behavior should the risk manager adopt to achieve these goals? Generally, it will be suggested that ethical standards for risk management involve maintaining a good work ethic, developing personal integrity, managing and communicating all pertinent risk management information throughout the company, preventing personal relationships from conflicting with job responsibilities and ensuring that one's training is sufficient to meet the challenges of the job. And although these principles can be embodied in a company ethics code, risk managers should take it upon themselves to ensure that their behavior is in alignment with these principles.


Risk managers should always remember that the function of risk management programs and standards is to protect the assets of a corporation. Although a portion of these assets is investors' capital- the so-called "business risk"- this is small when compared to the amount invested in the facilities, equipment and people that are necessary to conduct the company's day-to-day activities.

It is humbling to think of the responsibility the risk manager has for protecting these assets. To do it correctly and efficiently, risk managers must have excellent ethical standards. Ethics are vital because many people - both inside and outside the organization depend on the risk manager's integrity.

Maintaining a good work ethic through consistent effort and diligent work is one of the primary ways through which risk managers can be ethical. Diligence is important because risk management activities such as loss control require a great deal of sustained, focused thought. Keeping motivated is also important - especially when the risk manager is the harbinger of bad news. For example, when risk managers have to convey to upper management that a production procedure needs to be changed in order to eliminate an exposure, intense motivation helps them convince upper management that the change needs to be made. A solid work ethic also helps risk managers demonstrate to others in the company that they are serious about making the firm a safer and healthier place to work. This, in turn, will help the risk management function gain credibility throughout the organization.

The importance of personal credibility cannot be overemphasized, particularly when the risk manager must gain support for a new program. Performing the risk management function therefore depends in large part on how the risk manager comes across to members of upper management, peers and to employees who carry out the programs. As a result, risk managers must demonstrate that they are honest, credible and worthy of respect. Sometimes, developing this integrity and respect can take time. For example, it took the author a number of years to earn the trust of upper management and to develop a way to clearly and convincingly articulate the risk management message throughout the company. However, once that trust has been earned, risk managers will find that people within the organization are more willing to listen to theft recommendations.

Effectively managing and communicating information is also key to risk management ethics. For the risk manager, information pertaining to loss control procedures, the purchasing of insurance and other risk management functions is the primary tool for accomplishing their jobs. Also, the systems risk managers use to obtain, organize and dispense this information determine how well they function. As a result, this information must be managed in a consistent, accurate, timely, well-thought-out and bias-free manner, no matter who the information is presented to.

Clear communications are particularly vital for risk managers who have limited authority within their companies. In these cases, the risk manager is in a staff position, and operates primarily by making recommendations to upper management. Consequently, risk managers need to know what their authority level is in relation to each upper level executive to whom they provide information and service. In these situations, the risk manager should always provide full, complete information while leaving the authority for decision-making to the appropriate upper-level executive. Of course, there is the obvious danger for the risk manager to present the information in a biased manner in order to influence the mindset of the decision-maker. However, such a maneuver is ethically wrong, even if it results in a better solution to a problem.

Information must also be clearly and honestly communicated to other company personnel; indeed, clear communications are the best way to ensure that the company adheres to risk management principles. For example, many workplace accidents can be prevented if the personnel involved simply conform to the appropriate safety standards, principles and rules. Therefore, the risk manager must ensure that safety information is communicated to and understood by all personnel. Also, when an accident occurs, risk managers can regard it as an opportunity to make upper management aware of the need for new or improved safety programs. Since accidents usually cost more than the safety measures implemented to prevent them, risk managers can often sell upper management on these safety strategies. And the more risk managers sell themselves through their knowledge of risk management principles and personal integrity, the greater effect the discipline will have within organizations.

Risk managers should also continually upgrade their training to keep informed of risk management trends. The new ideas and concepts that come from training and education help risk managers meet the everchanging challenges that face their companies.

Most risk managers are purchasing agents and administrators for insurance contracts and are responsible for the management of property risks, liabilities and benefit programs. However, the personal relationships that risk managers develop with service providers have the potential to lead to ethical problems. For example, problems can arise when a risk manager is reluctant to look at alternative suppliers due to a friendly relationship with a provider. Risk managers must therefore be on guard against compromising their ability to make objective business decisions due to these relationships at least as much, and maybe more so, than through material gratuities; it is always important to keep in mind that these relationships are first and foremost business associations.

Although such relationships permeate companies, many firms' ethics policy manuals do not deal with the issues they raise. Therefore, the purchasing function should be governed by a code of ethics. For example, The Woodward Governor Co. has an ethics policy governing relationships with customers, suppliers and agents. The primary theme of this document is to inform employees about putting the company's interests first when making purchasing decisions.


It would be presumptuous for any person or organization to endorse an ethical standard for other companies. Nevertheless, examining the Risk and Benefits Management Ethics Policy used by the Woodward Governor Co. provides a glimpse into the essential components of such policies.

In 1870, The Woodward Governor Co. was rounded in Rockford, Illinois, by Amos W. Woodward. Mr. Woodward developed a device that controls the rotating speed of a waterwheel by changing the flow of the water driving the wheel. This was a simply constructed friction-type noncompensating governor that opened or closed the water gate as the speed of the shaft dictated. Today, The Woodward Governor Co. designs, develops and manufactures controlling devices for aircraft, ships, trains, water turbines, gas turbines, steam turbines and other prime movers throughout the world.

The company has endeavored to be an organization of high integrity. The management of Worker Member Benefit Programs and the protection of stockholder member assets are to be accomplished in a quality, timely and fair manner. To carry out this goal, these members must understand the responsibilities by being well trained. They must maintain a high level of personal integrity and courage to see the issues through to fair conclusions. All laws and regulations in the communities and countries in which the company operates must be obeyed. This requires a thorough understanding of these obligations and the various contracts the company enters into with insurance carriers, vendors, customers and members.

The Woodward Co. can expect to maintain its ethical tradition only by treating all individuals and organizations inside and outside the company honestly and decently. For the risk manager, correct behavior involves the following: the risk manager does not give to loss control engineers, auditors, underwriters, attorneys, brokers or others - or receive from same - gratuities or any items of more than token value; remembers that even items of token value are prohibited by most government agencies and certain vendors; avoids - or, if unavoidable, reports - possible conflicts of interest to the corporate member relations manager, treasurer or other officer; maintains all personal relationships with loss control engineers, auditors, underwriters, attorneys, brokers and others in a professional manner to maintain objectivity of both the manager and the vendor; and reports all transactions in a timely and accurate manner.

This latter point is particularly important to The Woodward Governor Co. As a result, no transfer or expenditures of company funds or assets may be authorized unless the stated purpose is, in fact, the actual purpose. All company funds and assets shall be recorded and described in the accounting records of the company. Obviously, the use of company funds or assets for any unlawful purpose is strictly prohibited by the company.

At Woodward Governor, the price paid for insurance (risk transfer) and related services is to be based upon full disclosure of underwriting information. The risk management department is not to withhold information to get lower premiums. Rather, the company should seek to lower its insurance expenses through excellent management of risk, self-assumption, and avoidance of risk and competitive bidding between underwriters and brokers.

Also, the risk manager shall not accept payments, gifts, gratuities, entertainment or other items of value from a current or potential company insurer, broker or service provider, or officials of the U.S. government. The only exceptions are items of token value, or entertainment and meals accepted during business visits. Any member who is offered items under circumstances that might appear to a reasonable individual to be intended to influence the member's judgment in performing company duties shall report such offer to an officer, the treasurer or the corporate member relations manager. No government official shall be employed or retained by the company without the prior written approval of the chief executive officer (CEO) or chief operating officer (COO). Also, it is a serious violation of the law to provide any such items to U.S. government officials or personnel.

The risk manager must also not use his or her company position for personal profit or other personal advantage, and should avoid any activity that is contrary to the company's best interests. The risk manager also may not become associated as an owner or employee of, or consultant to, any company vendor, subcontractor or service provider, without the prior written approval of the CEO or COO; this prohibition also includes any substantial financial interest by an immediate family member.

When dealing with auditors, the risk manager must follow all pertinent laws and regulations. All contracts entered into are to be honored as written. The risk manager shall not attempt to influence the negative outcome of the audit of such laws, regulations and contracts through the use of payments, gifts or gratuities. Items of token value, such as meals provided in the ordinary course of business, are acceptable, provided the auditor's employer does not prohibit such hospitality.

The risk manager may engage consultants to perform legitimate business services in a commercial manner. Such consultant-performed tasks must be agreed to in a contract that details the scope of supply and contains specific details on the cost. The contract or proposal for services must be approved by the treasurer or corporate member relations manager in advance. The consultant must understand that any deviations during the pendency of the contract must be approved by the risk manager.

The Woodward Governor Co. may engage only agents and brokers performing legitimate business services in a commercial manner. Compensation paid must be reasonable considering the services performed and the location in which provided. Agents and brokers may not be asked to perform any task that is prohibited for a company member.

In summary, the risk manager is to administrate benefit programs in a fair, equitable, timely and quality manners to protect the assets of stockholders to effect workplace safety and to apply risk management principles to company problems. The risk manager is to receive only the compensation agreed to with Woodward Governor Co.

These excerpts from the Woodward Governor Co.'s risk management ethics policy may provide some guidance on business issues pertinent to the risk manager. However, regardless of the content of a company ethics policy, risk managers must take it upon themselves to do all they can to perform their jobs ethically. To achieve ethical standards, the risk manager must remain objective and continually evaluate what motivates their decisions. Whenever a question of ethics arises, risk managers should consider listening to the advice of other people they work with, because others are often the first to notice if their motives are biased: The risk manager may have compromised his or her objectivity and not even been aware of it.

Many of these recommended actions are not popular. They can add to operational costs, cause changes in products or get in the way of producing functions. Therefore, the risk manager needs the respect of everyone in the organization to maintain excellent risk management discipline. If risk managers' objectivity or knowledge is questioned because they are not correctly motivated or trained, they will lose the respect of others, thereby potentially exposing their companies to hazards that would otherwise be avoided, managed or insured.
COPYRIGHT 1993 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Wood, Edward F.
Publication:Risk Management
Date:Aug 1, 1993
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