Workplace Issues

The Ethics of Risk Management: No Easy Answers

Calculations are rarely enough for deciding how to manage risks.
Rick JonesMarch 7, 2012

Let’s start with a scenario: suppose you are the risk manager for a small town of 10,000 people that lies just downstream from a reservoir created by a large dam. After several days of torrential spring rains, the town engineer rushes into your office to tell you that the dam is about to fail. You initiate your evacuation plan by calling the police chief to start getting the word out to the town population. Everyone is aware of the obvious hazard, so the evacuation notice does not need any explanation.

But then more bad news: the police chief informs you that mudslides have closed all but one road out of the area. The town engineer investigates and tells you that the police report is correct but one mudslide, on the shortest evacuation route from town, might be able to be cleared in time with the help of residents. Unfortunately, that particular road happens to be right next to the dam. As a prudent risk manager, you evaluate your alternatives and conclude there are only two options. The first, Plan A, guarantees that 5,000 people can be safely evacuated but the other 5,000 will likely drown in the subsequent flood. Plan B has a 50/50 chance of either saving the entire town or drowning the entire population.

Using the risk equation I introduced in September (risk = frequency x severity), we can see from a quantitative perspective that both plans have the same risk:

Plan A:
Risk: 5,000 deaths = (Prob=1) x (Severity=5,000)

Plan B:
Risk: 5,000 deaths = (Prob=½) x (Severity=10,000)

But this is one situation where the precision and logic of mathematics provide no clear guidance on what you should do.

Risk management is about making choices in the environment of uncertainty. These words are easy to say, but the actions taken because of this reality can have significant societal, corporate, and personal ramifications. Everyone makes risk-related decisions that affect others, but how often are risk-management decisions examined or discussed from an ethical or moral perspective?

It’s an issue CFOs should consider as they are increasingly expected to take on primary responsibility for risk management. Risk management is taught and discussed mainly on its technical attributes associated with risk analyses, insurance, technical issues, and, of course, costs. Too often, engineers and managers think risk management can be optimized to come up with the best solution subject to system constraints. Yet in practice, such as the imminent flooding dam example above, mathematics doesn’t help. And even when analytical solutions can be achieved, if decisions concern people, the mathematical solution may not be the “best” answer.

The basic issue is how we judge right versus wrong. Each of us possesses personal standards that we use in decision-making. But the actions of a group of individuals — whether as a team, a company, a governmental agency, or a society — require acceptance of behavioral standards that transcend personal tenets. How we interpret one group of individuals’ behavior requires us to contrast their actions against our own group’s standards.

Understanding our ethics helps us make that evaluation. Ethics, or the study of how we make decisions, allows us identify the principles that we apply to choices. Its study helps us understand how we distinguish between right and wrong. The five major ethical approaches below provide a framework for executives when they are trying to understand risk-management decisions in the context of ethics. The list can give decision-makers insight into their choices and help companies determine acceptable policies and practices.

Utilitarian: The basic premise is that the action selected should provide the greatest good for the greatest number of people, or the least harm for the greatest number of people. While this tenet may sound like a noble philosophy, it can be viewed unfavorably by many people who believe that either the actions involved; the manner in which the people are harmed; or even the people harmed, such as children, represent unacceptable behaviors.

People’s rights: People’s inherent ability and right to choose is an essential part of life. It is a violation of human dignity to manipulate people as objects and in other ways where they are not allowed freedom of choice. There are other rights included in people’s rights, including the right to be treated fairly and the right to the truth. We have a right to be told the truth and to be informed about matters that significantly affect our choices. In this principle, actions are unethical to the extent they violate the rights of others: the greater the violation of rights, the more serious the unethical action.

Fairness or justice: The approach goes back to Aristotle’s view that “equals should be treated equally and unequals unequally.” In other words, people should be treated fairly, but people can receive different treatment based on different qualifications. For example, two workers of equal skill and experience should receive the same salary, and workers with less skill and experience should receive lower wages. Fair treatment in employment hiring means that “equals” should be interpreted relative to the duties and skills required to perform the work. People are treated as “unequals” for good reasons in some situations. For example, I should never be hired as a ballerina.

Common good: This principle has its origins with the early Greek philosophers, and presents a social-centric ethical view. What is good for the community trumps the good of individuals. The principle challenges us to think of ourselves as individuals who choose to work together for the purpose of achieving common goals, for the well-being of a community, that we could not achieve as individuals.

Virtue: This approach recognizes that even though humans are imperfect, we should strive to achieve certain ideals. It represents a moral compass to help improve behavior in a way that will achieve the fullest development of humanity. Virtues are attitudes and behaviors like honesty, courage, compassion, and integrity. In dealing with an ethical problem using the virtue principle, a relevant question is: What will promote my personal and community character development?

Now back to impending disaster in your (hypothetical) town. While you were reading this article, the water has been rising and the dam is about to break. The innocent lives of all of the town’s people — men, women, and children — are in your hands. You need to make the decision now. Which alternative do you choose: Plan A or Plan B? What is your ethical basis for your decision?1

1 My experience in posing this question to groups is that most people choose Plan B.

Rick Jones has spent the past 30 years applying risk analysis and management techniques to industrial and business problems. He has presented at several conferences and is the author of numerous articles and technical research papers. His third book, 20% Chance of Rain: Exploring the Concept of Risk, was recently published.