Risk Management

The Upside of Risk

Organizations win when they integrate risk management into strategic decision-making.
By: | May 24, 2016 • 13 min read

In 2012, the LEGO Group considered increasing its investment in the fast-growing Chinese market.

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A year later, it began weighing whether to build a sales and distribution presence in China. The company had existing sales hubs in Connecticut, London and Singapore. That required the Danish toy company to consider the potential opportunities of such a move as well as the potential risks.

“There is a tendency for people to look on the negative side of risk, but the objective from my point of view is mainly the positive,” said Rico Ferrarese, who was with LEGO Group’s strategic risk management department until recently moving into an operational role.

Hans Læssøe, senior director of strategic risk management at LEGO, created the department in 2007. It focuses on company strategy. It doesn’t handle insurance, safety, claims or other traditional risk management responsibilities.

“Insurance has value but it doesn’t help you develop your business,” he said.

Hans Læssøe, senior director of strategic risk management, LEGO

Hans Læssøe, senior director of strategic risk management, LEGO

“How do we help management make better decisions — decisions that are better informed about the uncertainties? … To me, that’s much more proactive,” he said.

“I think a lot of risk managers right now are hampered by the fact that they are coming from an auditing or insurance business,” Læssøe said. “They want to make sure everything is covered. They have not been trained or asked to look at opportunities. They have not been asked to support decision quality.”

Focusing on the positive side of risk is unnatural for many risk managers. There’s a reason many executive and operational leaders dub such departments, the “department of no.”

By the same token, it also is uncommon for the C-suite or operational leaders to rely on their risk managers when they are contemplating strategic moves. They often fail to recognize the tools that risk managers can bring to the table to help assess potential opportunities and challenges.

Generally, it is only when a strategy moves forward that the organization informs the risk manager as a prelude to securing insurance protection.

“All too often, risk managers get called in after the decision has been made,” said Elizabeth Carmichael, director of compliance and risk management for Five Colleges Inc., which includes Amherst, Hampshire, Mount Holyoke, Smith College and University of Massachusetts-Amherst.

Risk managers who successfully integrate themselves in C-level discussions often must take the initiative themselves. They ask questions and develop relationships throughout the organization. They make sure they understand the entire business and its operations.

They ask key leaders what would help them do their jobs better, and then follow through with ways to help.

Strategic Uncertainties

When LEGO considered going into China, it used a scenario process known as “Prepare for Uncertainty.”

“There are a lot of things we don’t know about China and especially China five years from now when we would be up and running,” Læssøe said.

“We have a set of uncertainties.”

Among them: What is the retail distribution structure like? Is it like the United States, with a few very large toy distributors, or like Germany, with “a gazillion and one small stores?” Or is it a combination of the two?

What are the consumers like? Will they want the same products as the American market, or will LEGO need to create different colors, heroes and concepts geared to the Chinese culture?

“How do we help management make better decisions — decisions that are better informed about the uncertainties?” — Hans Læssøe, senior director of strategic risk management, LEGO

Læssøe facilitated a structured discussion with the leadership team responsible for deciding whether to enter the Chinese market. Using Post-it notes, each team member team individually listed their “two most important uncertainties” about the potential move.

It was done that way to prevent group-think.

“We don’t even consider whether things are a risk at this time,” Læssøe said.

For three hours, the team talked through the ideas as they placed the notes two-by-two across on the table.

The leadership team then used the “Park Adapt Prepare Act” (PAPA) model.

“We prioritized them, not based on impact. The impact is inherently high. We look at the likelihood, low or high. Do we believe it will happen or not, the speed it might happen and our agility to respond,” Læssøe said.

If an issue was not likely to happen or offered sufficient time for the company to respond if it did, the uncertainty was “parked” on the side. Eventually, the only issues left on the table were those with a high likelihood and a short amount of time to respond.

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All of the items had the potential to be both risks and opportunities, he said. “Now, we look at the issues we need to address.

“We want to make sure our strategy is resilient in a world that probably will change in a different way than we expect,” he said.

“What will give you a competitive advantage in the future world is maneuverability or agility.

“Competitiveness to me is like a penicillin for the flu. It can get you nauseous and uncomfortable but it makes sure you are on your toes and don’t get really, really sick,” he said.

LEGO started building its factory in China a couple of years ago.

“It’s just about finished,” Læssøe said.

On the Cutting Edge

LEGO’s strategic risk management process is “probably the leading edge of best practice,” said Andrew Bent, manager, enterprise risk management, Alberta Energy Regulator, in Calgary, Canada.

Bent, who is chair of the RIMS strategic risk management development council, said that more risk managers are recognizing that they must create as well as protect value for their organizations.

“Risk managers shouldn’t be the ones saying, ‘No, no, no. It’s too risky.’ They should be working — and many now are working — to provide the organization with the information needed to make good decisions,” Bent said.

“Risk managers are now asking, ‘How do we actually create value for the organization? How do we support the business strategy?’ ”

It’s about ensuring decision-makers have solid information about both the upside and downside of a potential strategy, he said. When that happens, the leadership takes accountability for the decision and is able to explain to their shareholders or board the reasons behind decisions and what controls were put in place.

“Over the last few years, we have seen much more emphasis on the C-suite and boards to be actively engaged with risk management, to really understand what is going on,” Bent said.

“Risk managers shouldn’t be the ones saying, ‘No, no, no. It’s too risky.’ ” — Andrew Bent, manager, enterprise risk management, Alberta Energy Regulator

“The implication for the risk manager is that we must be prepared to answer their questions. Most risk managers I talk to see this as the opportunity they have been looking for and waiting for.

“The organizational culture has to be ready to receive and ask for information about risk, and risk managers must be better prepared to not only give the information they are asked for, but also the information the organization needs to hear,” Bent said.

Adding value to the organization takes many forms. It is as individual and specific as each organization’s operations.

When Bent was working in risk management at a law enforcement agency, the city he worked for had the highest murder rate in Canada.

“In addressing this serious community problem, we needed to think beyond the very obvious downside. We had to ask, ‘What is the value that risk managers can add to our organization?’ ”

The downside, or traditional approach, he said, would have been a push to ban knives and increase police patrols.

Andrew Bent, manager, enterprise risk management, Alberta Energy Regulator

Andrew Bent, manager, enterprise risk management, Alberta Energy Regulator

Instead, the agency focused on the potential opportunities. It began to coordinate activities with social service organizations, such as homeless shelters; employment, training and housing agencies; mental health and addiction centers; and others; to bring more organized support to residents, he said.

“They were doing great things without a lot of coordination,” Bent said.

“Is this our job as a police agency to coordinate? Perhaps not in a traditional model. But we manage the downside of the risk, so we thought it was more useful to manage to upside first so we don’t get to that point.

“It was about bringing together all of those pieces and putting the right people at the table to have those conversations and make sure they are risk informed and understand the good, the bad and the ugly,” Bent said.

In another situation Bent is aware of, a construction company facing a range of safety issues decided to focus on the upside economic advantages of creating a strong safety culture to prevent further injuries.<

Leaders who had higher rates of injuries on their sites were also the ones who tended to have more re-work on their jobs, and the sites used more materials. By addressing the safety culture, those sites became more profitable.

Supervisors and foremen were trained, performance indicators were created, unions were consulted, and if workers refused to transition to the new safety climate, “they were no longer welcome on the company’s worksites,” he said. “It was costing money and hurting people.”

“By addressing the safety culture, the company was able to control downside risk and also improve profitability.”

A New Way of Thinking

It’s challenging for many risk managers to think about the positive side of risk, said Joanna Makomaski, president of Baldwin Global Risk Solutions Inc., and a columnist for Risk & Insurance®.

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The Institute of Risk Management in London recently honored Makomaski as Risk Management Professional of the Year for her work on the Toronto 2015 Organizing Committee of the Pan/Parapan American Games.

Too many risk managers equate risk management with the company’s insurance portfolio, Makomaski said.

“When you rely only on insurance, in essence, you are waiting for something negative to happen and you can only mitigate the consequences.

“I am an advocate of identifying what your opportunity risks are, but you also have to look at the possible collateral damage of that risk,” she said.

For example, utility companies have a great opportunity for increased revenue during long, cold winters. At the same time, however, those companies may find that more people can’t pay their bigger bills. That can result in default risk on bill payment and a social responsibility risk.

“When you rely only on insurance, in essence, you are waiting for something negative to happen and you can only mitigate the consequences.” — Joanna Makomaski, president of Baldwin Global Risk Solutions Inc.

“That’s the challenge: Should the utility cut off their heat in the middle of a frigid winter? All of a sudden, even though this really good thing is happening, there are other risks to consider.”

In exploring opportunities, risk managers must consider their organization’s risk appetite, its tolerance for periodic excess risk, and the possibility that the failure to take a risk can have a negative impact. An example would be the way the manufacturers of the BlackBerry phone overlooked the risk posed to it by the iPhone.

“Given that risk is integral to the pursuit of value, strategic-minded enterprises do not strive to eliminate risk or even to minimize it,” according to “Risk Management in Practice” by Deloitte.

“Rather, these enterprises seek to manage risk exposures across all parts of their organizations so that, at any given time, they incur just enough of the right kinds of risk — no more, no less — to effectively pursue strategic goals. This is the ‘sweet spot,’ or optimal risk-taking zone.”

When risk managers understand a company’s potential exposures and the company’s risk tolerance, they can be in a position to tell the organization it can take on even more risk than they think, said Læssøe of LEGO.

Makomaski said she sometimes uses a “global heat map” to illustrate possible risks and returns of potential business strategies.

A heat map plots the likelihood and impact (ranging from very low to very high) of a strategy, including such potential risks, for example, as supply chain disruption, economic downturn, customer preference, new or increased competition, etc.

It’s important to note that such risk assessments are only as good as the data.

“Assessments are vulnerable to the garbage in, garbage out rule,” Makomaski said.

Marti Dickman, vice president, risk management, Advanced Disposal

Marti Dickman, vice president, risk management, Advanced Disposal

Marti Dickman, vice president, risk management, Advanced Disposal, said her risk management department is designed to “be the instrument that enables senior management to contemplate all of the risk factors and make good sound decisions about how to manage risk on the front end, recognizing we will still have a downside of risk.”

One way her department looks to add value is when the sales and marketing department negotiates with customers.

“They engage us right away and we offer suggestions for [contract] language, coverages that perhaps the customer has missed that we can provide,” she said.

“We can offer recommendations on how a component of the contract could be changed to create a value add and allow us to win the business. It gives us a competitive edge,” Dickman said.

“I work with my team so that my folks are not seen as the ‘no people.’ We want to be the ‘go-to people.’ The direction my team is charged with is to explain the challenges we see and the opportunities to make something even better.

“Instead of looking to avoid risk, we help them understand the risk on the front end so decision-makers can use that to make informed decisions. Ultimately, it will depend on the risk appetite of your company,” she said.

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Carmichael, of Five Colleges, said most of her risk management colleagues “are pretty skilled at understanding the upside of risk.”

“We get requests for all kinds of interesting projects within higher education,” she said.

“Our students and faculty are very creative and the administration is often looking to do things that are innovative.

“When asked to do a risk assessment, it may be wise to ask the administrator, ‘Are you looking to say yes or no,’ because that way you have a better sense of what direction they are working toward.

“If they are looking to say no, the task is fairly easy because you can probably come up with many things that can help the school say no,” Carmichael said.

“But don’t leave off the upside of the activity, as other administrators are likely to want to weigh in at some point.”

In one instance, an honors student with a circus project wanted to bring a trapeze event to campus. Participants would have the chance to learn how to swing on and transfer from one trapeze to another.

“The upside of the risk was great. It would be an on-campus activity that would engage a large number of people in the community, both staff and faculty. It would bring the campus together and give people an experience they might not otherwise have in a relatively low-risk environment.

“The obvious downside [to the event] was that someone could have been hurt or there could have been some other snafu, for lack of a better term, with the project,” she said.

“As the risk manager, in collaboration with other administrators, we were able to ensure that our facilities staff and public safety officers were on board.

“We also worked through a very well-reasoned and balanced contract with the trapeze company and used waivers to help spread the risk to the participants. We had an extremely successful event.”

Supporting the Business Plan

“When you invest in something,” said Ferrarese of LEGO, “it must have a positive outcome. You may not be able to put a financial outcome on it, but there is a positive reason we are doing it.”

“The key challenge,” said Dickman of Advanced Disposal, “is to overcome the traditional view that many people have of risk management.”

While that may be slowly changing among senior leadership, the onus is on risk managers to “reach out and take that initiative if the culture sees risk management in that more traditional role. Push forward,” Dickman said.

“Don’t be discouraged. Make inroads so people see you as a resource and benefit so they will want to bring you in at the beginning.”

At the same time, some risk managers need to change their own mindset.

“Instead of being risk averse, we need to understand there is a benefit to taking on more risk — when we do so in a controlled way,” she said.

Carmichael suggested risk managers “look for ways to engage in conversations about getting to ‘yes’ rather than starting at ‘no’ … and getting carried grudgingly along.”

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They also need to educate senior leadership. “The more aware your senior officers are about risk and risk management, the more likely risk management will be called in before a decision is made,” she said.

Makomaski said one way to gain traction and engagement is to “dance to the rhythm of the business.”

“I like to attach myself to an agenda or internal system that is working and risk adjust that,” she said.

“Make yourself an enabler to the strategy. My job is to enable the risk to happen within the bounding risk position of the organization.” &

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

A Recall Nightmare: Food Product Contamination Kills Three Unborn Children

A failure to purchase product contamination insurance results in a crushing blow, not just in dollars but in lives.
By: | October 15, 2018 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

PART ONE: THE HEAT IS ON

Reilly Sheehan, the Bethlehem, Pa., plant manager for Shamrock Foods, looks up in annoyance when he hears a tap on his office window.

Reilly has nothing against him, but seeing the face of his assistant plant operator Peter Soto right then is just a case of bad timing.

Sheehan, whose company manufactures ice cream treats for convenience stores and ice cream trucks, just got through digesting an email from his CFO, pushing for more cost cutting, when Soto knocked.

Sheehan gestures impatiently, and Soto steps in with a degree of caution.

“What?” Sheehan says.

“I’m not sure how much of an issue this will be, but I just got some safety reports back and we got a positive swipe for Listeria in one of the Market Streetside refrigeration units.”

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Sheehan gestures again, and Soto shuts the office door.

“How much of a positive?” Sheehan says more quietly.

Soto shrugs.

“I mean it’s not a big hit and that’s the only place we saw it, so, hard to know what to make of it.”

Sheehan looks out to the production floor, more as a way to focus his thoughts than for any other reason.

Sheehan is jammed. It’s April, the time of year when Shamrock begins to ramp up production for the summer season. Shamrock, which operates three plants in the Middle Atlantic, is holding its own at around $240 million in annual sales.

But the pressure is building on Sheehan. In previous cost-cutting measures, Shamrock cut risk management and safety staff.

Now there is this email from the CFO and a possible safety issue. Not much time to think; too much going on.

Sheehan takes just another moment to deliberate: It’s not a heavy hit, and Shamrock hasn’t had a product recall in more than 15 years.

“Okay, thanks for letting me know,” Sheehan says to Soto.

“Do another swipe next week and tell me what you pick up. I bet you twenty bucks there’s nothing in the product. That swipe was nowhere near the production line.”

Soto departs, closing the office door gingerly.

Then Sheehan lingers over his keyboard. He waits. So much pressure; what to do?

“Very well then,” he says to himself, and gets to work crafting an email.

His subject line to the chief risk officer and the company vice president: “Possible safety issue: Positive test for Listeria in one of the refrigeration units.”

That night, Sheehan can’t sleep. Part of Shamrock’s cost-cutting meant that Sheehan has responsibility for environmental, health and safety in addition to his operations responsibilities.

Every possible thing that could bring harmful bacteria into the plant runs through his mind.

Trucks carrying raw eggs, milk and sugar into the plant. The hoses used to shoot the main ingredients into Shamrock’s metal storage vats. On and on it goes…

In his mind’s eye, Sheehan can picture the inside of a refrigeration unit. Ice cream is chilled, never really frozen. He can almost feel the dank chill. Salmonella and Listeria love that kind of environment.

Sheehan tosses and turns. Then another thought occurs to him. He recalls a conversation, just one question at a meeting really, when one of the departed risk management staff brought up the issue of contaminated product insurance.

Sheehan’s memory is hazy, stress shortened, but he can’t remember it being mentioned again. He pushes his memory again, but nothing.

“I don’t need this,” he says to himself through clenched teeth. He punches up his pillow in an effort to find a path to sleep.

PART TWO: STRICKEN FAMILIES

“Toot toot, tuuuuurrrrreeeeeeeeettt!”

The whistles of the three lifeguards at the Bradford Community Pool in Allentown, Pa., go off in unison, two staccato notes, then a dip in pitch, then ratcheting back up together.

For Cheryl Brick, 34, the mother of two and six-months pregnant with a third, that signal for the kids to clear the pool for the adult swim is just part of a typical summer day. Right on cue, her son Henry, 8, and his sister Siobhan, 5, come running back to where she’s set up the family pool camp.

Henry, wet and shivering and reaching for a towel, eyes that big bag.

“Mom, can I?”

And Cheryl knows exactly where he’s going.

“Yes. But this time, can you please bring your mother a mint-chip ice cream bar along with whatever you get for you and Siobhan?”

Henry grabs the money, drops his towel and tears off; Siobhan drops hers just as quickly, not wanting to be left behind.

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“Wait for me!” Siobhan yells as Henry sprints for the ice cream truck parked just outside of the pool entrance.

It’s the dead of night, 3 am, two weeks later when Cheryl, slumbering deeply beside her husband Danny, is pulled from her rest by the sound of Siobhan crying in their bedroom doorway.

“Mom, dad!” says Henry, who is standing, pale and stricken, in the hallway behind Siobhan.

“What?” says Danny, sitting up in bed, but Cheryl’s pregnancy sharpened sense of smell knows the answer.

Siobhan, wailing and shivering, has soiled her pajamas, the victim of a severe case of diarrhea.

“I just barfed is what,” says Henry, who has to turn and run right back to the bathroom.

Cheryl steps out of bed to help Siobhan, but the room spins as she does so.

“Oh God,” she says, feeling the impact of her own attack of nausea.

A quick, grim cleanup and the entire family is off to a walk-up urgent care center.

A bolt of fear runs through Cheryl as the nurse gives her the horrible news.

“Listeriosis,” says the nurse. Sickening for children and adults but potentially fatal for the weak, especially the unborn.

And very sadly, Cheryl loses her third child. Two other mothers in the Middle Atlantic suffer the same fate and dozens more are sickened.

Product recall notices from state regulators and the FDA go out immediately.

Ice cream bars and sandwiches disappear from store coolers and vending machines on corporate campuses. The tinkly sound of “Pop Goes the Weasel” emanating from mobile ice cream vendor trucks falls silent.

Notices of intent to sue hit every link in the supply chain, from dairy cooperatives in New York State to the corporate offices of grocery store chains in Atlanta, Philadelphia and Baltimore.

The three major contract manufacturers that make ice cream bars distributed in the eight states where residents were sickened are shut down, pending a further investigation.

FDA inspectors eventually tie the outbreak to Shamrock.

Evidence exists that a good faith effort was underway internally to determine if any of Shamrock’s products were contaminated. Shamrock had still not produced a positive hit on any of its products when the summer tragedy struck. They just weren’t looking in the right place.

PART THREE: AN INSURANCE TANGLE

Banking on rock-solid relationships with its carrier and brokers, Shamrock, through its attorneys, is able to salvage indemnification on its general liability policy that affords it $20 million to defray the business losses of its retail customers.

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But that one comment from a risk manager that went unheeded many months ago comes back to haunt the company.

All three of Shamrock’s plants were shuttered from August 2017 until March 2018, until the source of the contamination could be run down and the federal and state inspectors were assured the company put into place the necessary protocols to avoid a repeat of the disaster that killed 3 unborn children and sickened dozens more.

Shamrock carried no contaminated product coverage, which is known as product recall coverage outside of the food business. The production shutdown of all three of its plants cost Shamrock $120 million. As a result of the shutdown, Shamrock also lost customers.

The $20 million payout from Shamrock’s general liability policy is welcome and was well-earned by a good history with its carrier and brokers. Without the backstop of contaminated products insurance, though, Shamrock blew a hole in its bottom line that forces the company to change, perhaps forever, the way it does business.

Management has a gun to its head. Two of Shamrock’s plants, including Bethlehem, are permanently shuttered, as the company shrinks in an effort to stave off bankruptcy.

Reilly Sheehan is among those terminated. In the end, he was the wrong person in the wrong place at the wrong time.

Burdened by the guilt, rational or not, over the fatalities and the horrendous damage to Shamrock’s business. Reilly Sheehan is a broken man. Leaning on the compassion of a cousin, he takes a job as a maintenance worker at the Bethlehem sewage treatment plant.

“Maybe I can keep this place clean,” he mutters to himself one night, as he swabs a sewage overflow with a mop in the early morning hours of a dark, cold February.

Bar-Lessons-Learned---Partner's-Content-V1b

Risk & Insurance® partnered with Swiss Re Corporate Solutions to produce this scenario. Below are their recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

Shamrock Food’s story is not an isolated incident. Contaminations happen, and when they do they can cause a domino effect of loss and disruption for vendors and suppliers. Without Product Recall Insurance, Shamrock sustained large monetary losses, lost customers and ultimately two of their facilities. While the company’s liability coverage helped with the business losses of their retail customers, the lack of Product Recall and Contamination Insurance left them exposed to a litany of risks.

Risk Managers in the Food & Beverage industry should consider Product Recall Insurance because it can protect your company from:

  • Accidental contamination
  • Malicious product tampering
  • Government recall
  • Product extortion
  • Adverse publicity
  • Intentionally impaired ingredients
  • Product refusal
  • First and third party recall costs

Ultimately, choosing the right partner is key. Finding an insurer who offers comprehensive coverage and claims support will be of the utmost importance should disaster strike. Not only is cover needed to provide balance sheet protection for lost revenues, extra expense, cleaning, disposal, storage and replacing the contaminated products, but coverage should go even further in providing the following additional services:

  • Pre-incident risk mitigation advocacy
  • Incident investigation
  • Brand rehabilitation
  • Third party advisory services

A strong contamination insurance program can fill gaps between other P&C lines, but more importantly it can provide needed risk management resources when companies need them most: during a crisis.



Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at dreynolds@lrp.com.