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What's wrong with a long-term view?

What's Wrong With a Long-Term View?

Has risk management grown too big for risk managers? This question is on the minds of most UK risk managers following a series of disasters - the Bradford Football Club fire, the capsizing of the Herald of Free Enterprise ferry, the King's Cross Underground fire, the Hillsborough Stadium disaster - not to mention the public's growing concern over "green" issues.

Why the crisis of confidence? Risk managers are beginning to wonder, like the public at large, why disasters still happen as frequently, and with equal effect, despite the wide acceptance of risk management. Indeed, risk management has grown substantially over the past few decades, but is the burgeoning profession working?

At a recent conference Norman Bennet, risk manager for the Cookson Group, described a problem industry faces in its struggle with environmental impairment - fund managers. He said, "If you [fund managers] continue to judge us on short-term results, if you insist that we maximize our profits today, if you do not allow us to invest a reasonable proportion of our profits in improving our environmental performance, then we, and the rest of the world, will suffer.

"In essence, recognize that industry faces extra costs in improving its performance," he continued. "Recognize that these costs will be passed on to you. Without that recognition, we face grave difficulties."

At another conference Jim Phillips, risk manager for Coats Viyella, attributed risk management's failure to achieve its goals to "short termism," which he described as the sickness of British industry.

In his view, industry's short-term approach is caused by "greed and incompetence." Businesses are interested in profitability now and in the short-term, Mr. Phillips said, rather than in using current income to control costs which might impair future profits. Using Eastern Europe's pollution problem as an example, he said sometimes industry is simply incompetent.

Is there any difference between the views of Mr. Bennet and Mr. Phillips? Not really, since business might take Mr. Phillips' short-term attitude to profits only because of the fund managers' short-term attitude to company profits.

The larger question is, What can be done to make industry take the long-term view? That's because, as Mr. Phillips said, a long-term view is fundamental to risk management. Can risk managers bring about the change themselves or are they doomed to remain ineffective?

A company is run for the benefit of its shareholders. Nothing gets done on the risk-control front, with the exception of legal requirements, that does not contribute to shareholder profitability. Needless to say, this is not always in the best interests of risk management. Shareholders are mostly concerned with the prospects of their company during the next few years. Few, it would seem, are really interested in the prospects of the next 10 or 20 years, which is the time period of long-tail liability claims.

The reason for hope lies in the phrase "legal requirement." Alan Fisher, a partner in Davies Arnold Cooper, offered an answer to shorttermism: "Unless safety standards are mandatory and affect every competing enterprise in this country and the world, there will always be negative pressure to keep safety expenditures to a minimum and increase the profit margin.

"In this environment, a safety culture has to be imposed from above. This means tough legislation coupled with tough policing and enforcement. It is these factors which show that safety standards must now be imposed on the European Community, if not a global level, so that all manufacturers face the same costs curve when it comes to the implementation of safety standards."

This is the way to move risk management up on the list of corporate priorities. No matter how much risk managers strive for greater attention to risk control, and how much their boards might sympathize with their views, nothing will happen that does not happen to industry in concert.

The only way all industry will come out ahead is through tough laws and regulations on national and international scales. Risk managers cannot do this alone. Yet if a popular movement follows their cue, as it undoubtedly will, the road could lead to a bright future for those leading the way.

Chris F. Best is editor of Foresight, a London-based insurance and risk management journal published by Risk and Insurance Group Ltd.
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Title Annotation:risk management
Author:Best, Chris F.
Publication:Risk Management
Article Type:column
Date:Oct 1, 1990
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