Column: Risk Management

Broken Promises

By: | October 1, 2014

Joanna Makomaski is a specialist in innovative enterprise risk management methods and implementation techniques. She can be reached at [email protected]

In all of our relationships, either business or personal, we establish trust — at some level — in one another. In some cases, we have trust thrust upon us. In other cases, we have to earn it.

Promises, implied or explicit, are routinely made between us. They can be written, spoken or assumed. We often depend on these promises to make other decisions. If the promise-maker breaks their promise, distrust, catastrophe and chaos can ensue.

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A few months ago, Argentina defaulted on one of its debt payments. Last year, Detroit was forced into bankruptcy and has defaulted on and renegotiated its obligations.

General Motors recalled thousands of cars in the past 12 months. Another company, somewhere, failed to meet a supply agreement and shipped parts below specifications. Someone, somewhere, broke their marriage vows and filed for divorce. In a bar, someone sits waiting for a companion to arrive, having been stood up.

As a promise receiver, how solid is our due diligence and risk management when it comes to accepting promises at face value?

Why do we make promises and then break them? Do we over-promise? As a promise receiver, how solid is our due diligence and risk management when it comes to accepting promises at face value?

How much faith should we place in someone who makes a promise? Are we deserving of the adverse results that may come from these broken promises?
How much responsibility should we take when accepting, or relying on the other party’s promises? Can we influence our outcomes by making better partnership decisions?

In the case of Argentina, I find its actions particularly troubling. Its default almost seemed strategic. Its history corroborates this. Strategic defaults are damaging and have cascading adverse effects. The fallout rolls through the banking sector as the default rolls from one bank to another. The result of not collecting interest payments triggers a series of shortages that, like the credit crisis of 2008, jeopardizes our financial security.

Will time and our willingness to forgive allow Argentina to rebuild its credit rating? The answer is probably yes. We tend to minimize past acts and expect or assume that people, countries and companies will become good corporate citizens and do the right thing and fulfill their obligations.

GM has had a recent rash of recalls. It may have known about the issues or not, but either way, cars with defects were shipped.

I do, however, respect the fact that GM owned its failures and has done what’s right for the customer. I also expect GM consumers will rationalize and forgive GM its transgressions and hope they get it right next time.

In all the above relationships, what I find interesting is that trust and faith are the underpinning elements of a risk decision.

The suitor makes himself or herself look desirable and reliable. The borrower trumps up their financial position and presents a rosy, reliable, responsible outlook. The manufacturer boasts about integrity and quality initiatives.

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If a partner of high integrity and quality fails me, I am sympathetic. Sometimes the circumstance of the breach is beyond our control and we fall victim to a series of events that are like dominos falling.

The decisions we make and the partners we trust have a direct impact on risk and the outcomes we expect and realize.

As we strive to make the best partnership decisions, we should look more into the history, character and integrity of those sitting across the table.

We will make better choices and produce better outcomes by doing so.

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The R&I Editorial Team can be reached at [email protected]