Human Assets and Risk Management

Risk is inherent in any business or trading operation and as such business leaders are expected to identify and manage it. Their primary accountability to safeguard the organisation’s assets and act as an agent in looking after the shareholders’ interests, doing all they can to safeguard them, makes risk management a key responsibility for them. This becomes more and more onerous as the range of risks and the scale of the consequences both grow.

You will perhaps understand this more easily if I point out that business continuity planning (BCP) is only one element of risk management for any business. Yet, when I was doing my audit training this was actually known as ‘Disaster Recovery Planning’ and formed a significant proportion of risk management. Technology’s ever-growing integration into business operations makes disaster recovery even more important than ever, yet its proportion has decreased. This is because:

1. Technology itself has made disaster recovery and the creation of back up sites so much easier;
2. There is wider acceptance that businesses also have a responsibility to their people and the communities in which they operate, and thus can be liable if they do not honour those obligations. As a result there is more that can go wrong or more that needs to be guarded against;
3. The consequences of something going wrong are far more significant;
4. The potential sources of trouble are so much greater: the actions of any person at any level in the organisation could precipitate the end of the business.

I don’t know whether there is any historical connection but, in light of this, it seems entirely logical that scenario planning should become a means of developing alternative business plans. This allows to business to forecast a particular course of action under certain conditions and then to adjust accordingly if the assumptions change.

Yet, despite these advances, it would appear there are still major flaws in management thinking.

Firstly, the scope of scenario planning appears to be too narrow. In fact the speed with which the economy collapsed in 2008 and the overall consequences of that downturn, would suggest that the scenario planning completely excluded any possibility of such events. In other words they were all so optimistic that there appears to have been no concept whatsoever of risk.

Secondly, again despite the broadening scope of risk, there appears to be no recognition of the potential risks of key client failure and the consequences for business.

These two factors combined have, I am convinced, exacerbated the situation and made the whole recession more severe and long-lasting that it might otherwise have been.

The obvious solution then is to ensure that scenario planning includes optimistic best case scenarios and pessimistic worst case scenarios and that risk management incorporates planning for the loss of a significant chunk of business. For example, if your business is in the automotive industry, plan for the eventuality of one or even two of the major manufacturers failing.

However, I don’t believe that is enough on its own. As I wrote in my new book “A Feeling of Worth” a business inevitably goes through cycles with good years and bad years and over time these average out. Somehow, managers and business owners forget this and act as though bad times are a complete disaster. There has to be some mechanism to try to equalise things and that makes it second nature for managers to undertake more thorough assessments so that they don’t fall into this trap again. You won’t be surprised to learn that I think the solution here is the valuation of people as assets.

Valuing people as assets immediately puts a different complexion on the way they are treated. They have a value to the business that generally increases over time and all too often little or no account is taken of the past investment that has been made in them, and similarly no thought is given to the investment that will have to be made in new people when things improve. This is poor asset management and valuing and treating them as assets will at the very least engender better risk management. This with more effective scenario planning and better anticipation will allow management to apply people more strategically for the better long term interests of the business, and thereby better fulfil their own fiduciary relationship with the owners and shareholders.

It would make them more accountable for the way they manage their greatest asset, and that cannot be a bad thing.