Archive for May, 2016

Anorexia Periculi: The Risk of Avoiding Risks

Wednesday, May 4th, 2016

An Introduction to E16: http://e16.fws-audit.com/e16/

 

In a well-known study of the OECD  http://buildingmarkets.org/sites/default/files/managing_risks_in_fragile_and_transitional_contexts_september_2011.pdf  the authors describe how the inability “to provide the requested guarantees on reporting and accountability” for aid projects in Somalia and elsewhere resulted in a stop of funding from major donor agencies – the results of this risk avoidance of the donors were disastrous: whole regions were destabilized; civil war flamed up. The death toll went into the thousands.
Similar experiences were reported from the Global Fund, where audit findings of misused syringes in an HIV program resulted in a massive cut of funding: in the wake of the scandal, nearly half of the employees in HQs had to be dismissed and country programs had to be cut – it is not exaggerated to say that this reaction of the donors resulted in a direct loss of human lives.
Needless to say that crying “scandal!” in a secure office surrounding somewhere in Western Europe was nearly risk free, while implementing the programs was not.
These and similar experiences brought the theme of risk communication to the boards of supranational and international organizations. How to communicate risks to back donors? This seemed to be a core issue for the organizations. How to mitigate these risks? How to measure them? And – after all: which risks?
Risk assessment has a long and strong tradition in business. The commercial world is used to taking risks: taking opportunities is, after all, the core attitude of all entrepreneurship. Entrepreneurs risk capital, because there are chances out there. No risk, no fun or – to put it a bit more seriously – in responding to needs, the entrepreneurs receive a premium for the risked capital. The rational was and is: when the risk was a private one, the profit should be private either. This algorithm has broad acceptance. In short, success is our justification.
“Aha!”, we say, “These naïve people in the non-profit sector have no business attitude. They are risk-shy. These cowards should learn from business that you cannot use chances without risks!” So, because business is so highly developed in risk assessment and risk management, why not use the knowledge from the business world in the international aid industry? Risk is risk – so why not approach the risk of climate change like the risk of a credit default? This is the point, where terrible misunderstandings came into the game.
Business consultants were hired. Power point presentations made for bankers were updated for aid workers. Yes, risk awareness somehow increased. All international and supranational players now produce heavy files with risk assessments. Country directors are proud to present their risk mitigation policy. This sounds good: a success story! At least for the consultants involved.
And this is what happens when the risk management tools from business are implemented in the non-profit scene: the tools are used to avoid, to mitigate, to camouflage partial risks. Managers diminish their personal risks for their career. Organizations diminish their risks as organizations. Governments diminish their risks as governments. States diminish their risks as states. The only problem is: we do not deal with privatized risks in the non-profit sector. If you safe your own backside (as a manager, as an NGO, as a government, as a state), it does not necessarily mean that the mission was accomplished or that the public problem was solved. So, in the case of the Global Fund, budget cuts reduced the risks of the donors, while the world is probably less protected against epidemics. If the budget of Germany is balanced, it does not mean that the EURO is stable. If Munich Re invests in hedge funds, it does not mean that financial markets are insured against collapse.
Is this just an accident? Or is there an incremental risk in risk management, that partial interests misuse risk management for its own purpose?

 
Excursus: difficulties in communicating the risks of climate change
A few weeks ago, I visited a Climate Change Office in a small country. Climate Change Offices are an initiative of the UN and their task is to raise the awareness of governments to the risks of climate change. We took a taxi to the location, and the taxi driver was very talkative. He claimed that a profession which is not able to predict the weather for 3 or 4 days in advance should shut up when it comes to the prognosis for the next 30 or 40 years. This is a kind of popular assessment of professional risk assessment.
A few minutes later, in the Climate Change Office, the managers complained that they had difficulties in communicating the risks of climate change to politicians and the general public.
One problem is that all prognosis deals with uncertainty. And if politicians requested taxes now in order to finance vague prevention measures, taxi drivers would probably disagree.
The second problem is that talking about climate change does not only implicate the question of what to do, how to react, how to adapt. It also includes the question of “Who is responsible for this mess?” This is a language that a taxi driver would understand.
You see between the lines how the word “risk” is mutating, when we talk about the “risks of climate change”? While once it covered the possibility of privatizing a portion of the future, it now tries to blur the links to the past. We say “risks of climate change” where we should say “impact”. But then the next question would be: “Who is guilty?” So, let us rather talk about “risks”.
In his book “Risk Society” (1986) Ulrich Beck describes what happens if the stock of privatizable chances is exhausted and the unintended side effects of this process, which show themselves as public risks, become predominant. The whole order of values is mixed up. Examples:
Recently, the SEC, the Wall Street supervisory body, started legal proceedings against EXXON, because shareholders and the general public were not correctly informed on the risk of burning fossil fuels. Shareholders could claim damages from EXXON, for the damage that was caused by their investment. — Most readers would probably have difficulties to follow this argument. I mean, drilling for oil in the Arctic is an even more evident risk than buying hot coffee at McDonalds, isn´t it?
At the same time, the Rockefeller Foundation announced that it would sell its shares in EXXON “because of ethical reasons”. — Most readers would probably have difficulties to find the ethical aspect in this move. Was this sale not simply a strategy of private risk reduction?
As a last consequence, the initiative of the SEC would mean that investors should receive a warning that they should know that endless growth is not possible and that their growth expectations would lead to disastrous side-effects. I even imagined a kind of mandatory label on shareholder certificates that says: “Ministry of Economics warning: economic growth is dangerous for the ecological stability of the planet”…

 
Theses
Our question was: How to awake the risk appetite in the non-profit sector?
The mantra of business consultants, that there are “chances out there”, does not work in the area of public risks: there are no privatizable chances. This standard script is rather part of the problem than a solution.
Missing risk appetite is, clearly, not only a phenomenon in the non-profit sector. All big organizations suffer from anorexia periculi. But in the profit world, principals can find ways to let their agents participate in the expected success. This possibility is very limited in our sector.
An entrepreneur can formulate his personal risks and chances quickly and precisely, while the general public has usually difficulties to formulate its response. But, so what? Yes, it is an eternal tragedy that humans are clever when they think about themselves and careless when they think about the public. There is no action coming from this insight. Especially no increased risk appetite in the non-profit sector.
Even the words are against us: in the current risk narrative, the term “risk” is distorted and used to blur responsibilities. The clever employee, who re-insures himself against all possible career risks, is the one who triumphs in these language games.
Our problem seems to be hopeless. Non-profit risk appetite appears to be a kind of impossible necessity. Necessary, because the need to respond to the unintended side-effects of our high risk economy is rising. Impossible, because there is no rational argument, why we should be heroic. To promise a gratification for heroic action would be, seen from the comfort position of market saturation, in itself as a high risk attitude, which destabilizes our habits.
On the other hand, there is “the risk”, if not the inevitable consequence, that our societies commit suicide because of the fear of death.
So what to do? What I suggest here is a balanced radical approach.

 

  • Public risks are the place where missions are found and fulfilled
    There is no use in trying to privatize public risks. A public sector actor should admit the possibility to fail. The possibility to fail is a proof that there is mission.
  • Risk assessment must include the risk of non-performance
    There is no risk-free activity. Even if we do nothing, we run into risks.
  • To manage risks means also to create risks for others
    Risk management is not only a passive process of risk exposure. At the same time, an advocate of ecology, a representative of social needs etc. should and must also generate scenarios of risks to the causer of the public risk.
  • Communicate blind spots – avoid alarmism
    The highest risk is always the risk which we cannot see because we stand in our own way. We are depending on others who are able to tell us about our blind spots. This also means that Grand-Viziers live a dangerous life. If they try to avoid this risk by introducing a kind of permanent alarmism, they surely miss their calling.

Let us keep in mind that there are many concepts of how to work with the uncertainties of the future. Every culture has its own approach, and over time the concepts are changing. Risk management is not courage, and courage is not destiny or fate.
“The citizen is neither a person of virtue nor of bravery. The highest ethical movement to which he is able is – charity”, as Georg Friedrich Wilhelm Hegel wrote in his “Systems of Ethical Life” 1806. It was already then visible that civil society has a problem with risk avoidance.

 
Frank Fabel, Chairman EMPACTA e.V. www.empacta.org

 
How do you think? Do you agree or disagree? Write a comment into the comment bracket below. We would like to explore these and other questions at E16, the EMPACTA event in Berlin, Germany: Risk Management and the Risk of Avoiding Risks: Explorations in Cross Cultural Accounting http://e16.fws-audit.com/ Please be invited!