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An Organization Behavior Approach to Risk ManagementAuthor(s): Darwin B. Close

Source:The Journal of Risk and Insurance,

Vol. 41, No. 3 (Sep., 1974), pp. 435-450Published by: American Risk and Insurance AssociationStable URL: http://www.jstor.org/stable/252046 .

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An

Organization Behavior

Approach To

Risk

Management

DARwiN

B.

CLOSE

ABSTRACT

This

researchseeks

to

discover further

theoretical base

for the area of

Risk Managementby incorporatingaspects of Organization Behavior

Theory into

the processes of risk

identificationand risk

measurement.

This is done

not only

to help the

individual

riskmanager,

but to a

larger

degree to

provide

a

base for the

teaching

of

Risk

Management

in the

college classroom.

A

systems

model

by

William

G.

Scott

of a

complex

organization

s

adapted to

the

study of

risk. The basic

system and

its

subparts

are

described

and the

goals of the

system

are

related to the

general goals of the

Risk Manager.

Each

subpart

is

then

examined for

its contribution

to the

processes of risk

identification

and

measurement.

The

interrelationsbetween

the subparts

and the

dynamic

nature of

these interrelationsare noted.

Historically,

the

subject

of

risk

management

has

been

viewed as

a

three-

step process

consisting

of

recognition

of

risk, measurement

of

risk

and

handling

of

risk.

One

description

of

the current

process

of risk

management

is

illustrated on the next

page.'

Once

these three

steps of

risk

management were

stated,

the majority

of

articles

and

texts on the

subject

then

set about the

task of

finding

the best

methods

of

carrying

them out.

In

many

works in

the

area of risk

manage-

ment, the first two steps are given only brief, cursory

treatment.2

Risks

Darwin B.

Close,

Ph.D.,

CPCU

is

Associate

Professor of

Insurance and

Finance in

The Ohio State

University.

He

was

Executive Director of

the Griffith

Foundation

for

Insurance

Education,

1965-69.

This

paper

was submitted

in

February,

1973.

1

Charles T.

Bidek,

unpublished

research,

The

Ohio

State

University,

January,

1972,

taken

from an

extensive

survey

of

current

literature

in

risk

management.

2

For example

in Risk

Management

and

Insurance

by

Williams

and

Heins, one

twenty

page

chapter

is

devoted

to risk

recognition

and

measurement.

Robert

Mehr and

Bob

Hedges devote three

chapters

in Risk

Management

and

the

Business

Enterprise

to

these

subjects but cover many potential losses, leasehold interest, improvement and better-

ments,

extra

expenses, etc.

almost

completely

from

an

insurance

point of view.

Donald

L.

MacDonald, Corporate

Risk

Control,

Ronald

Press

Company, 1966,

has

nothing

clearly

identifiable

as

risk

recognition

and

measurement.

One

minor section

titled The

Intelligence System

by

implication

is

addressed to

these areas.

The

Growing Job

of

Risk

Management,

American

Management

Association, Inc.,

Times

Square,

New

York,

1962,

provides

one

case

entitled

Alertness

to

Changing

Needs and

one

article

by

A.

J.

Ingley

on

the

Problemsof

Risk

Analysis.

William

M. Howard's

casebook,

Cases

on Risk

Management,

McGraw-Hill,

New

York, 1967,

does not contain

a

single

case on

either

subject.

(

435

)


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3/17

436

The

Journal

of Risk

and

Insurance

THE

PRESENT

STATUS

OF

RISK MANAGEMENT

START

The search for

manageable risk

identified?

*

Yes

No

Can

the

risk

be

measured?

Yes

Measuree Handle

via least

cost

criterion.

Can the risk ..)Yes aS top

]

t

|

ab

a

t~g'

i

|

*No

Can

the risk be

Yes

id

Stop

*

No

Can the risk

be

es

j

n

Sto

economically

0

~~~~~~~~~retained?-

nuac

Can the risk be

Yes

Transfer

___

transferred?

LT

No O

ther

0-4

Can combination Yes it feasible Yes

make

handling

desirable?

W

ble ombie

_

No

ei No

l~vauate

ririoN

No

as reevaluation

provided

a

metho

of handling

the

risk?

Yes

Source:

Charles

T.

Bidek

Unpublished

Research

The Ohio

State

University

January

1972

are

first

classified,

i.e.,

fundamental

vs.

particular, pure vs.

speculative,

etc.,

and

typically

some

schemes

of

risk

recognition

are described.

The

insurance

survey,

insurance

policy

check

list and

risk-enumeration

ap-

proaches

are those most

often described.

Risk

measurement

is often

described

in

terms

of probability

distributions

and

measures

of

variation, perhaps

with some reference

to

utility

functions

or indifference analysis accompanying the discussion.

H.

Wayne Synder, ed.,

Risk

Management,

in the

Huebner

Foundation

series, Richard

D.

Irwin, Inc.,

Homewood, Illinois,

1964,

has

one

page on

analysis and

one chapter

on evaluation.

Tom C. Allen

and Richard M.

Duval,

A Theoretical

and

Practical

Approach to Risk

Management,

American

Society

of

Risk

Management,

New

York, 1971, devotes less

than

one

page

to both

topics.

Author

Matthew

Lenz, Jr.,

Risk

Management Manual,

Insurors Press,

Santa

Monica,

California, 1972,

devotes

one

part

of

one small

section,

19

pages, to

identification and

another 14

pages

to risk

analysis

out

of almost 400

pages.



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An OrganizationBehavior Approach to Risk Management 437

In any event, the brief treatment accorded risk recognition and measure-

ment has been due to the rudimentary state of the art. There is, in fact,

little

in

the way of a theoretical base for risk management as a whole and

discussion, specifically of the topics of risk recognition and measurement,

has been entirely descriptive in the how to do it, reporting sense of the

word. Teachers in the area have really had little to work with aside from

a

simple this

is

how

it

is done

approach.

One

university recently dropped

its

course offerings

in

risk management

because of

what

was viewed as a lack of

anything

concrete

to

teach.3

This

is

why most

texts

pass quickly into the third step; that of handling

the

risk. Here the

authors are getting closer to firmer, more familiar ground

because

it is

only

a

short

step

to

insurance.

But

even

in

this area, other

methods of handling risk: hedging, buy vs. lease, other contractual transfers

of

risk, etc.,

are

given

short

shrift.

Once

again

there

appears to be

a

dis-

tinct

lack of much to

say

about

these

subjects,

little

in

the

way

of

theory

to

be used

either

in

the

teaching

of risk

management

or

in

its

practice.

One

text even defines the

term

risk

management

in

a

way that accom-

modates this

state of the

art.

Mehr and

Hedges

define

the

term as

the

management

of

those risks for

which the

organization, principles, and

tech-

niques appropriate

to

insurance

management

are

useful. 4

As a result,

the

risk

management

works

cited

are

about ten

percent risk

identification

and

measurement

and

about 90

percent

here

is how

the

insurance mechanism

works

as

the most

effective

way

of

handling risk.

Thus risk

management

becomes

insurance

oriented

and

emphasizes the

handling

of risk.

One

recent incident demonstrated

this

emphasis.

The

August,

1971

Annual Meeting

of

ARIA in

Montreal

presented

a

session

termed

What's

New

in

Risk

Management.

This session

was

interesting

and

lively,

but

it should

have

had

a

different

title,

more

appropriately,

What

Are

the

Current Problems in Insurance Coverages for Larger Business Concerns?

The

topics discussed, product

recall

coverage

for

example,

dealt

almost

exclusively

with

the

problem

of

securing appropriate

insurance

coverage

for

unusual

exposures.

No new

aspects

in

the areas

of

identification or

measurement

were discusssed.

The

major problem

of risk

management, then, appears

to be

related

to

the lack

of

any underlying theory

of risk

management

and so the

historical

emphasis

on

insurance

seems to be

a

nervous

grasping

for

something

con-

crete

and

explainable.

The result

has been

many

courses

in

principles

of

insurance masquerading as courses in risk management, and many articles

about

insurance

topics

which the authors

have cloaked with a

pseudo

risk

management

flair.

Perhaps

the

reason

for this situation is the fact that

the

emphasis

has

been

upon

risk rather

than

upon management.

Risks to

the

organization

3

University

of

Pennsylvania

discussion

with

Dr.

Dan M.

McGill, Spring, 1972.

4Robert

I.

Mehr and

Robert

A.

Hedges,

Risk

Management

in

the

Business Enter-

prise (Richard

D.

Irwin, Inc.,

Homewood, Illinois, 1963), p.

viii.



8/9/2019 252046.pdf

5/17

438

The Journal of Risk and

Insurance

claimed

the emphasis. The organization

itself

under such an emphasis

has

been

considered

as an entity,

a bathysphere in an ocean

of pressures

(risks) acting upon

it. The viewpoint

is external, seeing

the effects

of

something untoward acting upon the organization. Viewing the organiza-

tion as

an entity creates

distortion because

any complex-goal oriented

organization

is a

system with

subparts and

subsystems which are usually

in a sort

of dynamic juxtaposition,

constantly

being rearranged, in response

to external and

internal forces. This view sees

a forest

without realizing

that it is made up

of individual,

differing trees. A much

closer look

at

organizations

and

organization theory

seems

warranted.

Perhaps by looking

for theory

in

organization,

one can find help

for theory

in risk manage-

ment.

Organizations are dynamic systems and all have goals. Perhaps the major

goal of any organization

can

be considered

as

survival

and

growth,

the

ability

to exist

and

prosper.

Such a

goal

requires

that

risks to

it

be

handled.

Perhaps

then some

answers

to

risk management

problems can

be

approached by way

of

organization

theory.

Organizations

As

Systems

Scott

describes

the

distinctive

qualities

of

modern organization

theory

as being its conceptual-analytical base, its reliance upon empirical research

and

its

synthesizing, integrating

nature. He

accepts

the

premise

that

the

only

meaningful way

to

study

organization

is

as a

system.

Understanding

human

organization

requires

a

creative synthesis of massive

amounts

of

empirical data,

a

high

order

of

deductive reasoning, and

an

intuitive

appreciation

of

individual

and social

values.

Accomplishing

all

these

objectives

and

including

them

in

the

framework of the

concept of

the

system appears

to

be the

goal

of

modem

organizationtheory.5

Scott

presents

a

model

which

appears adaptable as

a framework

for

risk analysis.

This

model, depicted

below,

will be

explained and

the

subsequent

discussion will

indicate

how it

can be

used in

risk management.

This

model is

useful

to insurance scholars

because

it

does

provide

a

frame-

work

within which

to consider

risk identification and measurement. Per-

haps

the best

indication of such

value is

the

subsequent

discussion here of

just

how

a

practicing

risk

manager

may

be

able to

use

it.

This

discussion

then

presents

Scott's

model

adapted

to use

as a framework for

the

study

of risk

management

as

well

as

for the risk

management

practitioner.

Such

a use of this model is perhaps an illustration of the synthesizing-integrating

nature

of

organization

theory.

A Framework

of

System Analysis

The

large

box

represents

the

organization

and

the circles

represent

parts

of the

organization,

linked

together

by

solid

lines;

within each circle

5William

C. Scott, Organization

Theory,

A Behavioral

Analysis

for

Management

(Richard

D.

Irwin, Inc.,

Homewood,

Illinois,

1967), p.

123.



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An OrganizationBehavior Approach

to Risk

Management

439

THE SYSTEM

THE GOAL

OF

THE SYSTEM

0_

STABILITY

INPUT-

IND

8.1f f

GROWTH

INTERACTION

(part)

are

intrapart

links,

jobs

to

jobs, individuals

to

individuals,

for

example.

The

various parts

of the

system are:

A- Individuals-the

people

within

every

organization,

B-The

Formal

Organization-the

structure

tself,

C-The

Physical

Environmentof the Work

Systems-the

task environ-

ment

where people, processes

and

equipment

interface,

D

-The

Informal

Organizations-the peculiar qualificationsand alter-

ations of

the

formal

organization

so

as

to

make it livable and

bearable,

E

-

The

Structure

of Status and

Role-ExpectancySystems-literally the

effects of individuals on the formal organization and how values

are built into

the

system.

Scott

then described

the

goal

of an

organization

as

being any one,

or

combination

of:

(1)

Growth, (2) Stability,

and

(3)

Interaction.

These

goals may

be interrelated

or

they may

be

completely independent.

Or

they may

be

sequential,

for

example

a

short

term

goal may be

growth,

then

would

come

stability

as

a

desired

state. One

of

these

goals, interaction,

refers

to

the

end

of

providing

a mechanism

for

association

of

members

from which they gain satisfaction. Scott interpretsthis as meaning that

any system

which is

dependent upon

the

proper functioning

of

interrelated

parts

must seek

the interaction

goal.6

This

suggests

that all

organizations

have

to

be

responsive

to

the

needs

of their

members.

The

first two

goals

are

perhaps

of more direct

interest

to

a

risk

manager.

First,

he

has a

substantial

interest in

the

stability

of

his

organization

and

stability

of

his

organization

can

be

directly

affected

by

his

treatment

of

B Ibid.,

p.

128.



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440

The

Journal of Risk and Insurance

risk. Reduction of risk and

uncertainty means reduction in the frequency

and severity of deviations

from the stated goals of the enterprise. Any

increase in knowledge, any

increase in the level of certainty, leads to

increased stability.

The

goal of stability

implies a closing of the

system,

an attempt to

reduce the ability of a

firm's external environment to affect it adversely.

All systems, all people, try to become closed in order to reduce the ability

of

external factors to affect

them. It follows that systems which are static

are more successful in

closing themselves. Where all things are known and

nothing changes, a system

can adapt, and unchanging, remain adapted to

its environment. The search

then is for certainty and knowledge as a way

of reaching such a state.

The risk manager's function is precisely in this

direction, a search for certainty by way of a reduction in uncertainty.

The

second goal, that of

growth,

is

the property of open systems. Growth

means change, characterized

by

Scott

as movement along

two

vectors-

those

of

development and structural evolution.

The term

development

is used

here

to describe

the

stages that

an

organization goes through

as it

grows

to

maturity,

and

the

term structural

evolution

is used

to

describe

changes

in

an

organization stemming

from

its

adaptation

to new

environmental conditions.

But

whether

it is

development

or structural

evolution,

the risk

manager

knows that

growth

means

dynamism,

the

introduction of

change

and

uncertainty,

and

new

risks

to

the

organization.

Growth often means

destabilizing influences

so

to

a

cer-

tain extent

the

relationship

between

growth

and

stability

is

antithetical.

Certainly

there

appears

to

be a

trade-off

between

growth

and

stability

in

many

situations. The risk

manager, then,

must

recognize

that the

goal

of

growth complicates

his

function.

The

Risk

Manager

In

The System

But how can a risk managerutilize this systems approach?Where does

he

fit? How

can he

utilize

the

system

to

improve

his own

function?

He

simply puts

himself into the model which now

would

appear

as

follows:

la

Usk

Mauager's

Fir

Zput)

>| Status and

T o

Role

Expectancy

ThRio

Oraniztio

INGROWNR

,System

-

ZManager

_

g

\eWr

\Tme Ifo

ronment

STABEITV

This

is, after, the realistic position

of

a risk manager. He is in the

middle, encompassed by

his

organization,

acted

upon by individuals, units

and

sub-units and in turn

acting

and

reacting

himself in

response.

7bidb

,

p.

128.



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An OrganizationBehavior Approach

to Risk Management

441

Within

the

system

he

would view

his

job

in

relation to the various

sub-

parts. He would ask himself two questions:

1.

How

can my knowledge

of

this

system and the individual

sub-sets

help me perform my job more effectively?

2. How will the incidences of change

in any one sub-part

affect the

interrelations

between the sub-parts?

In this

paper

the object

will be to take the first steps toward utilizing

this

systems approach

for

risk

management.

The intention is not

to

explore

exhaustively

the

aspects

described

above

but rather

to

illustrate how

each

of

the

steps subsequently

described can

be used in risk

management.

But how

can

he use the system?

The risk manager should begin by

attempting to identify and classify risks in relation to the sub-parts most

directly

affected.

This

suggests

that

an internal classification of risks

might

be more

helpful

than some more familiar

dichotomy

such as fundamental

vs.

particular, pure

vs.

speculative, etc.

It would

seem logical

to state that

if

those

risks affecting

each

part

are

identified, then the

risk manager has

gone

a

long

way toward identifying

the risks

acting

upon

the

system.

Simply put,

the risk

manager

tries

to

identify

those risks which affect each

sub-part.

The sum of the risks

affecting each sub-part

will become

the

first total of risks

impinging upon

the

total

organization.

A-The

Individuals

Looking at

the first sub-part,

the

individuals in the

organization, the

risk

manager

might

first

try

to

identify

those

dangers

to

the

organization

which

are

likely

to

be felt

by way

of

their

effects on

individuals. Perhaps

the

organization

via the

risk

manager

should

ask

itself

to

what extent

and

in what manner

is each

individual

important

to

it.

This

approach suggests

some enumeration

of the

key

men in the orga-

nization. March and Simon discuss this concept of key men from the

viewpoint

of the

organization by

relating

inducements

offered

to employees

to the

contributions

they

make.8

They

believe

that

employee

motivation

and job

satisfaction

will

be

high

when the

employees perceive

the induce-

ments

they

receive

to be

equal

to or

greater

than

the

contribution

they

make

to

the

organization.

The

organization

would

define

a

key man,

how-

ever,

as one

who is

making

a

contribution

which

substantially

exceeds

the

inducements

which

are

required

in order to

retain

his

services. It

is the

employee

with

a

unique

worth

or

an

employee

who

consistently

makes

a contribution far in excess of the inducement level necessary to retain

his services

who is

the

key employee.

March

and

Simon

would

say

that when inducement

is

less than contri-

bution

(I

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442

The Journal

of Risk and

Insurance

viable alternative.

Thus, when

there is a difference between

the firm's

idea

and the

employee's own

conception of his worth or if the

employee

sees

no

alternative

employment available, there

can be a contribution

considered greater than the inducement necessary to keep him. The loss

of

such

employees

would

damage,

perhaps even destroy, the organization

and

is

therefore a

risk, and

is normally transferred to a professional

risk

bearer

via the

product

of life insurance.

Even the temporary loss of

key people, because

of illness or accident,

can

be

damaging.

This

suggests

additional approaches are necessary

since

such

remedies

as

key

man

life insurance would not adequately handle the

risk.

But the real reason

for concern about

the

key man lies perhaps in the

development of that management theory concerning people within orga-

nizations

and the functions which

they perform.

Henri Fayol9 described

the function

which

a

manager

performs

as

being: (1)

Planning, (2) Or-

ganizing, (3)

Commanding,

(4) Coordinating,

and

(5)

Controlling.

Davis10

took a similar

view

and now authors such as Koontz1 describe

the

important

functions

in

very nearly

the same

way. These writers

represent

the

Classical School of

management thought

and

although

modern management

theories

go

far

beyond

these

views,

the

concept

of

the individual

remains

of value

because

it

helps

to

focus

attention upon

the

individual

functions

in an

enterprise.

The

key personnel

of an

organization

should

be

viewed

in

relation

to

the

management

functions

performed.

To what

purpose

should

risk manage-

ment

be

directed toward

consideration

of

these basic

management

func-

tions?

The

response

to this

query

would

appear

to

lie

in

the

use of these

functions

as a

means

of

identification, measurement,

or

handling of risk.

Job

or

position

analysis,

the

aspect

of

manpower

and

personnel

study

dealing

with

job descriptions

and

duties,

is a fertile area for the

risk

manager. Here is the place to start, here is where he should ask the

questions: (1)

What

functions

do

you perform?

(2)

How

do

you perform

them?

(3)

What

aspects

of these functions do

you

believe could

be the

basis

of

risk to

the

organization?

(4)

How

can we

eliminate, reduce,

or

otherwise

handle these

risks?

An alert

risk

manager, especially

attuned

to risk

origin,

should

be

able

to gain

much valuable

information

from this source.

Certainly

the

enumera-

tion

of

duties

by any important

employee

should

help

identify potential

dangers

to the

organization

should

these duties not

be

performed.

The first sub-part of the system, then, should help in the area of risk

management by directing

attention

toward

those

key people

within

the

Henry

Fayol,

General

and Industrial Administration,

International

Management

Institute,

New York,

New

York,

1930.

O

Ralph

C.

Davis,

The

Fundamentals

of Top

Management,

Harper

and Brothers,

New

York,

New

York,

1951, p.

23.

11

Harold

Koontz

and

Cyril

O'Donnell, Principles

of

Management:

An Analysis

of

Managerial

Functions,

McCraw-Hill

Book

Company,

New

York,

New

York, 1972.



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An OrganizationBehavior Approach to

Risk Management

443

organizationand toward analysis of the functions which these key people

perform.

B-The

Formal

Organization

The formal organization itself has been subject of much discussion

in general managementtheory. Weber, in his Theoryof Bureaucracy,

2

established a framework within which formal

organizations could be

studied. In this pioneering work

on

organizational

heory he demonstrated

the need

for

a

clearly identified hierarchy

of authority, a deliberately

planned structure containing rules,

regulations,

and procedures necessary

for

it

to function.

He identified the

necessity

for an impersonalorientation

and a career dedication

on

the

part

of

the

management orce.

Such a structureexists in any entity and along with it the rules and

regulations,processes

and

procedures necessary

to

carry

out the

business

of

the enterprise.

This

formalorganization an

be of help to the risk manager.

The

key

is

to

use

it

as means of risk

identification.

Criddle

uses the

formal

organization

as the

key

to his

approach

to risk

management.

He

utilizes

the

financial statements

and

other

records

as

a

means of

ferreting

out risks to the firm.13

The

organization

chart of a

concern

could

be useful in

identifying key

men and

potential key

men.

The

ledger

is

obviously a source of information

concerningthe real property and other assets of the firm which are of

critical

importance

to the risk

manager.

Profit

and

loss

statements

reflect

risks

of

consequential

loss and so it

goes. Certainly

all the

records

of the

firm

can

be

useful to the risk

manager.

The

risk

manager'sproblem

is to

identify

and use those records which have most

applicability

to his

own

function.

The

major point

is that

the formal

organization

s

but

one

part

of

the

total

system.

It

can

yield important

nformation o

the

risk

manager.

It is

not, however,sufficient n and of itself as an approachto riskmanagement.

Once

again

the entire

system

must be

examined.

C-The

Physical

Work

Environment

The

physical

environment

of

the work

system relates quite closely

to

that school

of

management thought

termed

Scientific

Management

and

represented by

the

philosophy

of

Frederick W.

Taylor.14Taylor's

work,

viewed

today

as

too

simplistic,

nonethelesshas

been

of

major mpor-

tance

in

management heory

because of

its

scientific

approach.

Taylorfocused attentionon the man and machinerelations in manufac-

turing

concerns.

He believed

that there

was one

best

way

to

accomplish

a

task

and that

the

proper

role of

management

was to

find

it.

Study

of the

12

Max Weber,

Theory of

Social and Economic

Organizations (The Free

Press, New

York,

New

York, 1947).

13A.

Hawthorne

Criddle,

Evaluation

of Risk

incorporated

in

H.

Wayne Snider's

Risk Management,

(Richard

D.

Irwin, Homewood,

Illinois, 1964), p. 19-32.

14Frederick

W.

Taylor, Principles of

Scientific Management, Harper

&

Brothers, New

York, New York,

1911).



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444

The Journal of Risk and Insurance

job, the man, and

the equipment

would lead to job specialization, job

simplification, and logically, to greater

efficiency.

Taylor's emphasis upon

the

physical environment of the job

points out a

natural area of interest

to a risk manager.

Two aspects are

immediately evident; first, the

industrial safety engineer-

ing considerations

and

secondly,

the

concepts of the flow chart as advanced

by

Ingly.'5

Both of

these ideas arise

logically from

the

risk

manager's

interest in the

physical environment of the work.

In relation to

safety engineering, Brereton and Peterson

describe specific

methods

of

searching out and

identifying risks in the

physical work setting

and state them

in

the form of guiding

principles of

safety management.'8

The first principle:

An

unsafe act, an

unsafe

condition,

an accident-all

are symptoms of something wrong in the system.

17

An accident suggests

that a risk was not

identified and that the risk manager

has had a failing,

large or small as it

was. This is true

because the function of job safety must

be

performed by

someone

or

some

department and

part

of

a

risk

manager's

responsibility

must be to

observe these results.

The

function

of

safety engineering

is

to

define and

to locate these

operational errors,

whether

they

occur

because

of

poorly

defined

respon-

sibilities, organizational

deficiencies, inadequate

planning, or imperfect

tool

or

process design.

Brereton and

Peterson

believe

that each accident

opens

a

window

through

which the

system

can

be

viewed; that different

accidents

may

indicate

the same or similar factors

responsible.

Certainly

all

risk

managers

in

organizations

where

machinery is used

must

consider

employee safety

as one of their

major

concerns.

This is one

area

in which

reducing dangers

reduces risks. The

savings

in

human lives

and

productivity

make this

job

most

important.

Equally

rewarding

are

endeavors at

risk

identification which follow

Ingly's

ideas

of

the

flow

chart

method

of risk

management.'8

Ingly

believed

that the risk manager should diagram the entire operations from initial

acquisition

of raw

materials, through

the

processing

and

marketing

to the

final use of

the

product

by

the

consumer. Such

a

diagram

would indicate

bottlenecks

and other

possible

risks. He defined

the

measurement

of

risk

as

being

the costs associated with elimination of

these

bottlenecks.

Ingly

believed in

physical inspections

of the

process

flows as

an impor-

tant

adjunct

to flow

charting.

Visual

inspections

are

always advantageous.

Such

an

approach,

somewhat

akin

to current

management

concepts of

critical

path analysis,

is of

great

importance exactly

because it

focuses

attention on critical processes, critical points in processes, and critical

people performing

them.

The risk

manager

will find

this

area

a

fertile one

15

A. J. Ingly, Corporate

Risk

Management

Insurance

Series

112, New York American

Management Association,

1956, p.

3.

16

Philip

R.

Brereton

and Daniel

C.

Peterson, Safety

Management for the Risk

Manager,

Risk

Management,

February, 1971, p.

31.

7

Ibid.,

p.

31.

18A.

J.

Ingly, op. cit., p.

4.



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446

The

Journal

of Risk and Insurance

safety regulations

which act to slow piecework

output? Have

workers

unknowingly developed dangerous

ways of performing tasks?

The informal

groups would

be a factor improving the productivity

of

such inspection tours if for no other reason than that such groups ordinarily

are

task

oriented,

and perform

the function of helping each

other

with

difficult work

tasks.

Such group expertise and

cooperation mean

workers

do not

have to ask superiors for help and can

thus avoid looking dumb

or

inefficient

because

the members can help each other. Understanding

group behavior and utilizing

informal groups

positively give the risk

manager a better grasp of potential

personnel and

work environment risks.

But informal

groups

are

important beyond their

use in identifying per-

sonnel

and

work environment

risks. Those groups in and of themselves

are a source of specific potential losses to the firm. Whether or not such

losses

are

within

the

purview

of the

risk manager

is a separate consideration

but

there is

no

denying

the

potential

harm to a

firm

which can arise

when

such

groups

feel threatened or when they perceive that the

firm's

goals

are different

from

their

own.

Perhaps

the

most

obvious

illustration of

such

dangers

are

the common

production

losses

created when groups

decree

different

and

lower

production quotas.

Slow downs,

establishment of

low

level

quotas

and

piece

rate

norms are examples. The effects

of such

tactics

on

production,

and, therefore, profits, are

well understood.

Another

perhaps

more

potentially

serious

risk arises from the decision of

some such

groups

to

engage

in

outright

sabotage.

Not

only

can

production be damaged

but

also

building

and

expensive equipment.

The

point

is

that

the risk

manager

can

improve

the efficiency

of his

job by recognizing

the existence of

informal

organizations-their

effects

on

the

firm. Informal

groups

can

be

the source

of

risk

identification

and

are of themselves

sources

of risk and

potential

loss.

E-Status and

Role

The last subpart-status

and

role expectancy systems-is

important to

the

risk manager because

status is important to every employee.

The

need

for

esteem,

as described

by Maslow,20

is a need felt

by everyone.

These

needs can be

satisfied by employment and

many individuals look

to their

jobs

as their

principle

source of

ego satisfaction.

The

formal

organization,

with

its formal ordering of

people and

positions,

its

hierarchy

of

authority,

is

a

natural

place

to seek

status

satisfaction.

It is obviousthat in any formalorganization,statusesand roles are internally

linked

by

hierarchical

ordering.

At

the

same

time,

there

are

also

informal

orderings

of statuses

and

roles

in terms

of

prestige

groups

and

occupations.2'

Viewing

this

subject

first

from

the

aspect

of the formal

ordering,

it

is

suggested

that the

position

held

by

the

risk

manager himself

will have

20

A.

H. Maslow,

Motivation and

Personality

(Harper

Brothers,

New

York,

New

York,

1954).

21

bid.,

William G.

Scott,

op. cit.,

p. 125.



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An

Organization

Behavior

Approach

to Risk

Management

447

a

bearing

upon his ability to

perform

his job effectively. If he

is

attached

to

the

formal

organization at a

relatively high

level, his

office will

have

prestige.

His

comments and

suggestions will carry more

weight

because

they become equated to the power of that level of the formal organization

to which

his office is attached.

If the risk

manager

is

the firm's

insurance

buyer,

with a

fancy title,

his prestige

will reflect this fact

and so will his

effectiveness. Support for

this

function

must

come

from

above, a point

sufficiently

high

in

the firm's

chain

of

command

that the risk manager's function is

of obvious

importance.

The

organization runs a risk that

it

may

be

passively

retaining

risks

simply because

the

risk

manager

hasn't

sufficient

clout to make

his

function

appear important to others.

This

could

be

manifested

by department

heads,

for example, failing to cooperate in locating company problems and dangers.

Status is

important. Appropriate

status

for

the risk

manager

means

enough

to

enable

him to perform his

function

effectively.

From

the standpoint

of the informal

ordering

of statuses

the

risk

manager

may

find

significant problems

involving

his

function.

The

effect

of

status

upon safety

is

perhaps

an

obvious

example.

In

some circles a

white laboratory

jacket carries

the status of

a

scien-

tist.

This

jacket, while

protecting one's

clothing, can be

a

sign

of

status.

There should not

be

any problem

in

getting

any employee to wear such

garb,

and

the safety value of

such clothing

is

easily achieved because such

equipment

is

readily

accepted.

Safety

helmets, on the

other hand,

have

currently

taken on a

political,

reactionary connotation. The hard

hat

image

is

one

of political conserva-

tism. People

may, or may

not, wish

to wear one,

depending

upon their

own

political

philosophy. This means

that a worker's decision

concerning

this protection will

perhaps

be made on the

wrong

basis, since the only

correct

reason

for

wearing the hat is because one is

near

dangerous processes.

In addition to any political connotations, safety equipment in general

carries

a distinct

lack

of

status.

With the

exception

of

groups like engi-

neers,

safety equipment

is

the

sign

of the rank and file

worker.

An

individ-

ual

may be reluctant

to wear

safety

gear, or

use

it, because

he

is

marked as

a

common

employee.

Further,

safety gear may

become

the mark of the

sissy, the

timid man

who

is

afraid of his

machine. This

is

especially true if

the

informal leader

is

a

he-man type

who

disdains use of such

equipment.

Obviously, safety

equipment not

in

use

is of no

value,

and

risk

of industrial

accident can

increase dramatically.

Status and

role then

become

important to

the risk

manager as they

cause

human behavior

which may

tend to

accentuate dangerous

working

conditions.

Perhaps this

is

of

no

great moment

in the

risk manager's pro-

cedures for

identifying

risk. It

is, however,

of

vital

importance in

measuring

risk.

Any

risk

manager

who

believes

he

has

substantially reduced

industrial

safety

hazards when he has

had some new

equipment installed

without

consideration

of status

systems is

over-simplifying

his

position.



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448 The Journal of Risk and Insurance

Intra-

and

Inter-Part Interaction

Referring back to the original model, Scott indicates

that intrapart

relations exist; individual to individual, job to job.

These relationships

are dynamic in nature, subject to constant change. Intrapart shifts are

both the starting point for major organizational changes as

well as the

end

point focus of deliberate organizationally induced changes.

Looking within each of the subparts the risk manager must focus

upon:

(1) Changes in the internal structure, (2) Changes in

personnel,

and

(3)

Changes in interpersonal relationships.

Looking within the subparts, individuals must first be considered

because

the people within organizations are constantly entering it, shifting

their

positions within it, and leaving the organization. This observation

should

serve to remind

the risk manager that his analysis

of

these

individuals,

their functions and value to the firm must be reviewed

periodically.

Observation of the formal organization through its

various records is

a

must

for

the

risk manager since it is this very dynamism

which

creates

risks

for the

enterprise.22 Shifts,

demonstrated

by changes

in

the formal

organization chart, the process flow charts, profit and

loss statements,

balance

sheets,

and other

formal

records,

often

present

the risk

manager

with his

greatest challenges.

Changes in the work environment bring about new exposures to danger

and the

ebb

and

flow within the informal

organizations create new leaders,

new

influences, and

new

group opinions

on

jobs, processes

and

people.

Movement

causing

new

intrapart

relations within the status

systems

of

the

organization introduce further dynamism. Each

of

these intrapart

variations requires recognition by the risk manager

and

his

response.

It

is

the

interpart relationships, however, which demonstrate the real

value

of

a systems approach to the subject of risk

management. These inter-

part

relations

describe the total interdependency of the

system.

A

change

in personnel can lead to new informal groupings with new leaders emerg-

ing and new group cohesiveness developed. A change in

the physical work

environment,

occasioned

perhaps by

a

new

machinery installation, can

produce profound changes

in

accident rates, machinery breakdown, and

product output.

Scott

states that system

and the

interdependency

of

parts

are

interchangeable

ideas.

23

Turning

back to Scott's

model, imagine

the

limits of the

system as

being

a

relatively rigid

framework from which is

suspended

the

various

subparts by

a

series of rubber

bands.

(See

illustrations on

next

page.)

Each

part

is

connected

to

the frame and to

each other

part by an elastic

band.

Now, imagine movement, perhaps

caused

exogenously,

of

one

of

the

parts.

For

example,

the

effects

of a

new

government

safety regulation

on

the

man-machine

subpart.

This movement

will

cause

further

movement

22A risk

manager for

a

large group

of

companies recently

discovered a new

poten-

tially

highly dangerous

risk

accepted by

the

company by reading the minutes of

the

Board

of

Directors meeting.

2 William

C. Scott, op. cit., p. 120.



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An

OrganizationBehavior Approach to Risk Management

449

by the subparts

as

each

reacts to the new

strain caused by its connection

to

the affected part.

For

example, new safety regulations may

cause

changes in part C, which alters the job's prestige which alters that

worker's

place in the informal organization.

RIGID FRAMEEXTERIOR

WITHELASTIC.LEXIBLE

CONNECTIONS

ETWEEN

THE SUBPARTS.

STRAIN

INTRODUCED

ON

SUBPART

C.

li,

INCREASED

ENSION

One

can

expect

that a

new

equilibrium

will

develop

within

the

confines

of the

system.

Even the

periphery

itself

may well

bend a

little; however,

if it

is

assumed that

the

organization

survives

the change as a viable

force,

one must assume that the perimeter remains intact. The risk manager now

must

look at

a

new

set

of

relationships, new connections

between the

parts.

It

is

precisely

at this

point

that the

systems approach

to

risk

management

becomes

of

such

great importance. Previously

used

methods

of

risk identi-

fication have

been

relatively

static

in

their

operation. Searching for

risk

was

like

viewing

one frame of a motion

picture,

a

snapshot

of

the

organ-

ization at

one

particular point

in

time

and

space. Emphasis was upon

the

risk

and

not

necessarily upon

its

effects on

all

parts

of the

organization.



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450

The Journal of Risk and

Insurance

Emphasis on one part

created by some change could be handled but

there

was no way to analyze

the changing relations between the various

parts

of the organization. Each change was handled

as though it affected

the

organization only through its effect on one part, thus the perception of

interdependency was missing.

This systems approach,

with its emphasis upon inter-relations,

gives

the risk

manager

a

framework

within which he can

begin

to assess

the

effects of change

upon

an

organization.

It is, after all, dynamism

which

creates

risk

and

the

systems approach

lets

the

risk

manager

handle change.

What are the effects of

a change

in

A

on

parts

B,

C, D,

and E?

The

systems

approach provides a

theoretical

framework

within

which such

questions

can be approached.

Conclusion

The systems approach

to

risk

management

is

of value because of several

attributes. It focuses

attention

upon

risk identification, a function long

neglected

in the literature. It

provides

an

emphasis upon the organization

rather

than

upon

some

artificial,

external classification of risk. This approach

tries

to

classify

risks

by

means of

identifying

those risks

impinging

upon

each

of the

subparts

of the

system.

Such a classification

makes sense

because

the

very

nature of the

process

customizes the classification to the

specific organization

served

by

the

risk

manager.

It

is believed

that

by identifying the risks acting upon each subpart

that

the

risk

manager

has

gone

a

long way

toward identifying the risks

acting

upon

the

whole.

This

seems

logical since the whole, barring substantial

synergistic properties,

would

appear

to

be the

sum

of the parts.

Finally, the systems

approach emphasizes the inter-relations

present

within

the

organization,

providing

the

risk

manager

with a

framework

with

which

to measure the incidence

of risks effect

on

the total organiza-

tion. Dynamic conditions can be handled.

It

has not been the

aim here to

describe

exhaustively the risks affecting

each

part

but

only

to illustrate

some

obvious

ones. The goal rather

was to

describe

the

system

and indicate how

it

can be used by a risk manager.

By concentrating upon

the

system,

a

risk

manager has a new tool, a frame-

work

wherein

his

identification and measurement

process can be

attacked

more

systematically,

more

logically,

and

more

completely.

252046.pdf

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