Historically, the corporate risk management department has been based on the partnership engagement model in that the department was viewed as a partner that supplied ancillary services to the core business. Using the COVID 19 pandemic as a backdrop, we will explain why this model has become outdated and how corporate risk management departments can evolve in ways that contribute to the success of the organization.
Scholars have long debated whether there is a pattern to history. Some thinkers maintain that history is cyclical or a random process in which events are mostly shaped by structural forces such as technology, social classes, geography and climate. Others argue that actions by individuals matter more, regardless of whether such actions flow down from the top or up from the grass roots. This “structure” versus “agency” debate matters to the future of the corporate risk management function. As previously discussed, the current model of the corporate risk management function is a structural one in which the profession provides ancillary services (insurance procurement, claim management etc.) that are often not seen by the c-suite as vital to the success of the business.
How can the risk management profession change this mindset? Change should start by looking at history generally and appreciating the role that the risk management profession can and should play in helping to build sustainable organizations that flourish. To better understand history, we have studied the work of Francis Fukuyama, one of America’s leading academics and thinkers, who explains that humanity has progressed through four stages (See F. Fukuyama, The Long Arc of Human Progress, Wall Street Journal (April 29, 2022)).
The first stage was known as the era of the “hunter-gather” and it was characterized by a few dozen individuals living in small communities. When some of the hunter-gather communities began settling in fertile river estuaries, they developed agricultural technologies that increased their size from a few dozen to thousands of people. This second stage became known as “segmentary lineages” or tribes, all claiming to originate from a common ancestor.
Approximately 8,000 years ago, humanity progressed from tribally organized communities to state-level societies. Appearing first in China and eventually Europe, state-level societies grew enormously in scale, often encompassing millions of inhabitants. A central organizing tenet to state-level of societies was the use of institutions that allowed a privileged few to rule by law in order to extract and accumulate wealth - natural resources, human labor etc. This rule by law approach provided some level of short-term protection against negative risks but ultimately would fail through depletion and corruption. In rule by law societies, most people never realized their human potential because they spent their entire life enriching someone else, somewhere else.
A fourth shift began in the 17th century in Western Europe and would spread to North America. Known broadly as liberalism, this doctrine is founded on the ideas of human equality and the pursuit of knowledge through the scientific method. This led to the creation of new social classes (those that own capital, a middle class that provides services, and a working class) and a shift in institutions away from rule by law to rule of law. An impetus for the shift was the gradual realization that an increasingly complex society could not function well for the long term unless its institutions used the rule of law to protect overreach by any one social class, especially the elite.
The rise of liberalism coincides with a shift from away from extraction-type thinking to a generative mindset which is more human-focused. Generative organizations focus on unleashing the full range of capacities of each individual. The logic is that just as your body needs all of its organs to be healthy, so too does an organization or society need all of its human capacities and institutions to perform at their highest level of functionality. Accordingly, generative organizations and societies adopt a rule of law approach that promotes common-cause values such as a reverence for life, freedom, and fairness. These shared values in turn make it easier for synergetic cooperation to occur which is the fuel needed for enduring systems to regenerate themselves over the long-term.
Herein lies the opportunity for the risk management profession. The profession will rise in stature to the extent that it is viewed as increasing the potential and magnitude of good things happening - just as in the way the above-cited physician saw his work as building a healthy community and not simply as a provider of medical services.
To understand what we mean, let’s go back to the example of the COVID-19 pandemic. In November 2019, a report co-produced by the Johns Hopkins Center for Health Security was released as the first detailed assessment and benchmarking of 195 countries on their readiness to manage the risks of a pandemic. The United States ranked first and scored the highest in four out of six areas: prevention, detection, health system capacity, and compliance with international norms (Abbey EJ, Khalifa BAA, Oduwole MO, et al. The Global Health Security Index is not predictive of coronavirus pandemic responses among Organization for Economic Cooperation and Development countries. PLoS One. 2020;15(10):e0239398. Published 2020 Oct 7. doi:10.1371/journal.pone.0239398). Despite this level of preparation, the United States has now surpassed more than one million deaths and it was unable to build societal consensus about the best way to minimize harm while developing a vaccine that would allow a return to normalcy.
Our inability to achieve societal consensus is perhaps best illustrated by the fierce debate over governmental mandates for mask wearing. For some, mask wearing became a symbol of solidarity and respect for others. Others turned masks into a hated symbol of oppression. In the end, the “mask wars” became a reminder of our limited capacity to change our behaviors and the limitations of managing risk by rule of law or what we call legal mandates.
Perhaps the most controversial legal mandate was the federal requirement of mask wearing on transportation, including airplanes. More than anything, this requirement exposed the limitations of the rule of law and the use of formal authority to impose mandates. Mandates work best as carefully tailored requirements that are used sparingly especially when then are limited options to protect people. The challenge is that every time you exercise formal authority - e.g., issuing a transportation mask mandate - you deplete it. The opposite happens when you use moral authority - e.g., acting with humility, treating people with respect etc. - you strengthen it.
Going forward in a world where power is increasingly shifting to individuals who can easily connect and combine their power exponentially for good or ills, the risk management profession has a rightful place in helping the c-suite act in a way that earns trust and enlists people in the pursuit of noble causes worthy of their dedication. How do we make this happen? Imagine that you are the family physician moving to a small town at the start of the pandemic. How would you create a successful public health campaign?
Until a vaccine became available, the goal would be to protect those at high risk of severe infection while those with low risk would return to work to prevent undue harm to society caused by disruption and degradation of basic economic function (goods, services, supply chains etc.). In the case of masks, this might mean urging the entire community to wear high quality masks (KN95 or N95) when indoors, especially around vulnerable populations, but not outdoors or in flight when people will need to eat or drink and when a plane’s air-filtration system is on. Once vaccines became readily available, the physician’s message would change to help people get back to their life.
Life is about progress and progress means taking risk which is the gap between the state of certainty and an uncertain reality. Managing that gap requires truth and trust; otherwise, we would remain in a state of perpetual fear about going to work, sending our children to school, or flying on an airplane. The truth is that humanity has created a technological standard of living for many parts of the world that protects us in ways that we don’t realize. Trust helps us decide what level of individual and collective risk we should be willing to assume in making decisions. For those who have been fully vaccinated and boosted and are in good health, being around unmasked people is a sensible tradeoff unless there are compelling circumstances. After all, we don’t require properly trained people to wear helmets when driving cars or to wear life vests when swimming.
In closing, the future of the risk management profession is about helping organizations function like strong and healthy communities. Accordingly, there are new roles and responsibilities for this profession in helping business leaders learn how to lead with moral authority and how to generate respect and influence by trusting people with the truth. Think of how the beloved family physician does it every day in a small town. We will continue with this topic in the next section.