Public sector risk management is evolving at a rapid pace. Jean-Paul Louisot headed to the Public Risk Management Association’s congress in Boston to find out more
The Public Risk Management Association’s (PRIMA) 28th annual conference took place in Boston on 11–13 June and attracted a record number of participants, 1,300, from all over the USA, Canada, and as far as away as Australia, plus a delegation from the UK’s Association of Local Authorities Risk Management (ALARM). In a parallel achievement, PRIMA remains the largest public entity risk management association worldwide, and is claiming now over 1,900 members from cities, counties and states, school districts, pools and other public agencies like airport and water authorities.
The participation of an international delegation was particularly fitting as this year’s theme for the conference – the title of this article – stressed the global nature of risk management today. All of the educational sessions offered in the conference program were based on the association’s core competencies (see box) providing a framework for the knowledge and skills PRIMA deems necessary to be an efficient risk manager in the public sector.
The opening session orator set the tone for the whole conference when he stressed we all suffer from a “destination disease”, forgetting to enjoy the ride. He encouraged delegates to enjoy every moment of the working day, and added this piece of advice for leaders and managers: “focus on people, not on tasks”. This directive seems particularly important at a time when international standards for risk management are being developed that seem to concentrate too much on the risk management process. Let us hope that the ISO 31000 will be read appropriately as a road map to sound management of risks, rather than a strict set of rules to adhere to. More specifically, the insistence on communication and consultation with all stakeholders throughout the process should be a permanent reminder that risk management must be heard around the world.
Reputation risk for public entities
It is now commonly understood that reputation – some refer to ‘image’ or ‘brand’ – is the main asset of most private entities, and that risks to reputation are therefore a strategic threat to any company, be it publicly traded or privately held.
The vice-chairman of ALARM and corporate risk manager of Hampshire County Council, Peter Andrews, took the stage for a workshop on “managing reputation risk in the spotlight”. Central to his presentation were recommendations on how to conduct ‘business as usual’, even when your registrar is committed to conducting the wedding of the future king of England. Andrews was risk manager of the Royal Borough of Windsor and Maidenhead in May 2005 when Prince Charles announced to the world, and his mother, that he was marrying his long standing flame, Camilla Parker Bowles. The Guild Building had the honour of hosting the Royal wedding and allowed all the couples married the same day to enjoy the $30,000 of flowers bought for the Duchess of Cornwall.
If Andrews’ reflection upon reputation was prompted by an extraordinary event, its roots are universal when he recalled an ancient Greek philosopher’s remark. Epictetus wrote nearly 2,000 years ago “Perceptions are truths because people believe them”. That is the crux of Andrews’ message to his American colleagues: “Manage perception as reality.” He went on to support “sensible risk management” practices that make the public safe without killing initiative. The message to constituents as well as visitors: “You are entitled to protection but expected to exercise responsibility.” In other words, all – including civil servants and elected officials – are to take responsibility for their own actions.
From his time in media-exposed Windsor, Andrews offered his philosophy on the importance of reputation for the efficiency of local authorities, sharing the ‘3As’ of reputation management: anticipating risks, issues and outcomes; assessing key players and agendas, etc; and aligning expectations and messages
Andrews also listed five attributes to keep in mind when developing a message: clarity, constituency, care, control and commitment to correct. He also stressed that any public risk manager has two main constituencies, the constituents themselves and the elected officials whose agendas may at times differ substantially.
But the main lesson of Andrews’ presentation is that the time of a crisis may create an opportunity rather than a threat. Crises are moments when the population’s (and the civil services’) resistance to change may be lower, as they are pushed out of their comfort zone of ‘business as usual’. However, the worst risk to reputation for a public entity may prove to be the frustrations of constituents driven crazy with their unsatisfactory dealings with civil servants. The slowly brewing erosion of public image is more dangerous to the ‘public service brand’ than any crisis, offering a chance for redeeming efficiency.
Beyond the ALARM workshop, the entrees on the PRIMA 2007 menu were flavoured by the same two themes: risk communication and crisis management, which are clearly on the minds of public officials, elected or appointed, along with trust and reputation.
In “Where are the alligators? A primer on not getting bit”, Marcus Beverly, risk manger of the Association of Bay Area Governments offered a very simple equation to explain what risk is from the public’s perspective:
Risk = hazard + outrage
In which the variables are
• Hazard = fundamental or objective risk.
• Outrage = reaction to risk.
Of course we could build a new risk matrix and find that when hazard is high and outrage is low, the public tend to under react; when hazard is low and outrage is high people tend to over react. Overall, people tend to overestimate risks when they are:
• Controlled by others rather than by those at risk (the difference between driving one’s car and taking a commercial flight);
• In the hands of untrustworthy, rather than trustworthy hands (who believes what they are told by executives in the nuclear industry, waste companies or pesticide manufacturers?);
• Managed in ways that are unresponsive rather than responsive (think of the impact of secrecy versus openness, courtesy versus discourtesy, compassion versus contempt).
And these lead to the six golden rules of communication on risks:
1. Don’t keep secrets. Be honest, forthright, and prompt in providing risk information to affected publics;
2. Listen to people concerns. Don’t assume you know what they are, and don’t assume it does not matter what they are;
3. Share power. Set up community advisory boards and other vehicles for giving affected communities increased control over the risk;
4. Don’t expect to be trusted. Instead of trust, aim at accountability; prepare to be challenged, and able to prove yours claims;
5. Acknowledge errors, whether technical or non-technical. Apologise; promise to do better, and keep the promise;
6. Treat adversaries with respect (even when they are disrespectful). If they force an improvement, give them credit rather than claiming it yourself.
In a recent article in ICMA’s Public Management Magazine, Joseph Jarret addressed the question of maintaining credibility during a crisis as he defines a crisis as “any situation that threatens the integrity or reputation of your local government and that can be brought by adverse or negative media attention”.
One might debate the key role attributed to media as a root cause for a crisis, but there is no denying that the media’s attention tends to fuel its development. Nowadays, the impact of the internet and blogs should never be underestimated.
Stemming from such a definition, it is not surprising that Jarrett puts crisis communication at the centre of the manager’s concerns for which he defines five stages:
STAGE 1 – Containment: take immediate action to prevent the situation from growing worse.
STAGE 2 – Assessment: Find out what’s wrong and gather information needed to fix it.
STAGE 3 – Planning: Create a specific plan to resolve each specific crisis (even if forward planning is crucial, as a preparedness exercise, the ultimate plan will have to be tailored to the specifics of the crisis at hand).
STAGE 4 – Execution: Take action and carry out the plan.
STAGE 5 – Reorganise and review: Get back to normal and prepare for the next time.
Beverly stresses the importance of education, not only of staff and elected officials but also to some extent of opinion leaders in the public and in the media. To work well under stress or duress, the ‘team’ must have been trained in peaceful times. That is, good communication in a time of a crisis builds on the trust and communication established in quieter times. The ‘trust capital’ gathered then is extremely useful at the onset of a crisis.
And finally, returning to our traditional main course on insurance, Sarah Perry, PRIMA’s president-elect, had a new recipe to explain the cycle the industry goes through. It consists of four interesting phases:
1. Cheating:
• Reported losses better than accident year results (prior period reserves released).
• Aggressive assumptions for loss ratios.
• Senior executive compensation driven by stock options.
• Paid losses greater than incurred losses.
• Stretch for investment income.
• Intermediaries have the upper hand.
• Stocks peak and investors catch on.
2. Pain:
• Investors see through reserve manipulations.
• Investors lose interest and flee.
• Reserve restructuring charges accelerate.
• Missed earnings reports and reductions in estimates.
• Acquisitions pick-up.
• Reinsurance becomes less available.
3. Fear:
• Layoffs accelerate (executives lose their jobs).
• Investment income declines.
• Meaningful price increases begin to take hold.
• Terms and conditions tighten (underwriter suddenly remember how to say ‘no’).
• Alternative markets expands.
4. Restoration:
• Reported results worse than accidents year results.
• Significant increases in loss reserves.
• Conservative initial loss ratio picks.
• Sandbagging of results looking to future.
Then, as earnings peak, the whole crazy thing starts all over again! Sounds familiar?
As a final thought, I will borrow from a 15-year-old episode of TV’s Northern Exposure:
“I don’t think you can measure life in terms of years. I think longevity doesn’t necessarily have anything to do with happiness. I mean happiness comes from facing the challenges and going our on a limb and taking risks. If you are not willing to take a risk for something you really care about, you might as well be dead.”
Professor Jean-Paul Louisot is a Risk Management columnist and dean of curriculum at the CARM Institute
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