Risk Appetite versus Zero Harm & the Confusion at Board levels

In this podcast episode, due diligence engineers Richard Robinson and Gaye Francis discuss the concept of risk appetite versus zero harm and the confusion it creates at board levels because they're trying to put all of their risk issues into a single statement.

They discuss how a risk appetite is about balancing risk and reward, whereas zero harm is about nothing bad happening, and this gets uncomfortable when applying risk appetite to human safety. 

The outline the commonly applied risk paradigms and how a synthesis of risk appetite in commercial and safety practice does occur in project due diligence.

For more information about Richard & Gaye's due diligence work, head to https://www.r2a.com.au

Transcript

Megan (Producer) (00:00):

Welcome to Risk! Engineers Talk Governance. In this episode, due diligence engineers Richard Robinson and Gaye Francis discuss risk appetite versus zero harm. We hope you enjoy the episode. If you do, please give us a rating. Also, don't forget to subscribe on your favourite podcast platform. If you have any feedback or topic ideas, email via admin@r2a.com au.

Gaye Francis (00:31):

Hi Richard. Welcome back to another podcast session.

Richard Robinson (00:34):

Hello Gaye. Here we are again.

Gaye Francis (00:35):

We are. Today we're going to talk about probably something that I find one of the most interesting topics in our business, and that's risk appetite versus zero harm and the concepts of the two, and the confusion that it's creating at board levels because they're trying to put all of their risk issues into a single statement. And it sort of comes up as that risk appetite statement, doesn't it, at a board level. The easiest way probably to explain it is to maybe go through the three different risk paradigms that we see most commonly used, and then have a discussion around that and why the confusion exists.

Richard Robinson (01:16):

Yeah, because obviously just for the point of the confusion, if you say risk appetite, you've got to balance risk and reward on the one hand, whereas zero harm says nothing bad's going to happen. But when you start applying risk appetite to human safety, you sort of get an unpleasant feeling about the whole thing. And that's where the boards are getting this confusion.

(01:32):

Now, we've noticed this tension over the years in all sorts of places, and the way we normally explain it's to sort of go through these three paradigms or ways of thinking about risk. And we suspect there's more than these around in the risk business. We keep saying it's a multidimensional space, but these are the three. Now, when you talk about risk appetite, you're basically saying, look, we've got a certain course of action and it's got pluses and minuses, and if you've got multiple courses of action, you pick the one with the greatest pluses and the least minuses. That'd be a sensible thing to do. And in order to determine what that is, you start talking about risk appetite. And that's the way the commercial people talk about it because they're always talking about upside, downside risk, that that's the way they think.

(02:11):

When you start talking about zero harm, that's the safety people and the safety people are saying, we don't want bad things to happen! From a safety viewpoint, we just want to eliminate them. And we've had this conversation about if the police commissioner says our objectives to sort of stop all child molestation in this city, whilst most of us recognise that, that's probably aspirational, we certainly expect a police commissioner to have that general view on life and to do everything they can to try and achieve that zero harm outcome.

Gaye Francis (02:42):

Yes, he doesn't have a risk appetite for that.

Richard Robinson (02:45):

Does have a risk appetite for child abuse. And the idea that you're going to offset community resources, you're going to do everything you can, but your objective is zero harm. The two make an awful lot of good philosophical sense when you consider one in commercial practice and you present a one in safety practice.

(03:02):

The place where it's you get a synthesis, and we've sort of talked about this a number of times, is project due diligence, which is basically the essence of our text. Because if you have a hundred projects that your business is contemplating, you just systematically work through those looking at the upside and downside risk associated with each project. And if you can afford to do the top 10, you pick the ones with the greatest upside risk profile and the least downside risk profile just from a sensible commercial viewpoint. The trick is, of course, that when you actually start doing any particular project, you want the thing to go smoothly without any hitches or glitches. And that means you are basically saying you're promising the upside risk position. And you're saying from that upside risk position, you want a zero harm outcome. It'll be delivered on time, to budget, nobody gets hurt and all the other good things.

Gaye Francis (03:50):

It'll deliver what it's supposed to deliver.

Richard Robinson (03:53):

So from our point of view, that's when the two actually synthesize. But the rest of the time there's still this underlying confusion.

Gaye Francis (04:02):

And trying to put it into a single statement or a risk appetite statement at a board level for an organization trying to include all of those different elements. It doesn't quite make sense.

Richard Robinson (04:13):

And I've never quite understood it because I mean, historically, a lot of organisations used to split their commercial decisions and commercial risk management away from their safety decision and their safety risk management. And whilst I understand that the two overlap, to a point. I mean, one of the points of the WHS legislation, it basically doesn't say go and work out cost benefit for controls. It basically says, work out what can be done, and before you start thinking about costs, work out the possible practical control before you start thinking about costs and then consider the cost, secondly.

Gaye Francis (04:48):

Well, I mean the WHS legislation's really asking, why wouldn't you do something rather than creeping up on it and saying why you would do something.

Richard Robinson (04:57):

Correct. And you can see how the two ideas sort of dance around each other so far as we can tell. And when we make the remark that risk is this sort of complex space and you can cut it through in different ways. My actual guess is that probably what you need to do if it's a commercial matter, is cut it through the commercial risk assessment tools and if it's a safety risk matter, cut it through with a safety risk tools, which has a zero harm philosophy lurking in the background. And if it's project risk, well then you probably will be doing both.

Gaye Francis (05:27):

Yeah. I think the environmental factors, environmental organisations are getting more to the zero harm model. That's sort of the tendency. Victoria has changed their legislation to be so SFAIRP.

Richard Robinson (05:43):

But all the other legislative zones use the RIO principle, where there's serious environmental harm, you should do everything to postpone and prevent environmental degradation. I can't remember the exact words of the RIO convention off the cuff now, but it actually has the same general philosophy. You sort of say, if this is really bad, you've got to do everything you can to make sure it doesn't go wrong, and you figure out what can be done first and then you work out the costs second.

Gaye Francis (06:09):

So I guess there's two courses of actions that boards or organisations can do. They can do the one that you just said and separate out the commercial issues from the safety issues, or you could have just an overall risk position statement that included all of those things. But I think the key thing, and the thing that we sort of try to educate boards on is that there are those different ways of thinking about things, and you will get different insight depending on which risk paradigm you apply at the time.

Richard Robinson (06:35):

Well, you always favour the risk position statement that does give the board a unified proposition without committing themselves. I guess it's nuanced, but nuances are sometimes necessary.

Gaye Francis (06:49):

So that's quite interesting. Any final comments? I think it was just one of those topics that we've seen boards struggle with a little bit and this insight, and I think the project (due diligence) was sort of the one that brought those two concepts together.

Richard Robinson (07:05):

Well, I think it's more than that though, because you see, the way we run the project (due diligence) was remember, you basically have the promised upside risk position and you do everything you can to make sure that nothing goes wrong. That is actually the safety position. And I've got to say that our experiences, when we've done project due diligence reviews for about $10 million to about $3 billion Australian dollars worth, none of them ever gone over time of budget, have they?

Gaye Francis (07:27):

No. I think the other key thing to that, and they've probably done the commercial thing really well, or the upside downside risk position well, is they've been very good at articulating what the benefits are of the project.

Richard Robinson (07:39):

 Correct.

Gaye Francis (07:39):

So the upside position or that risk appetite position is well known, and then you're doing that downside or zero harm study from that position. Where it starts to get really difficult for projects is when they're unable to clearly articulate what the key benefits of the project are.

Richard Robinson (08:00):

Yeah, I'd have to agree with that.

Gaye Francis (08:01):

What you're trying to achieve.

Richard Robinson (08:03):

One of the things we always have difficulty with the project due diligence is getting, you might recall a couple of projects we were asked to look at, and if they couldn't articulate what they're set out to achieve, then it's virtually impossible to risk manage it because the goal posts keep changing.

Gaye Francis (08:21):

And that comes at a number of levels. I mean, that comes at your stakeholder engagement, and all of the stakeholders have to agree to what those critical success outcomes or what that end prize is for the project. If you've got different stakeholders wanting different outcomes for your project, that risk appetite certainly changes from different people's perspective.

Richard Robinson (08:43):

And that's where the difficulties arise.

Gaye Francis (08:45):

Okay. So I think this is probably an issue that'll continue with organisations.

Richard Robinson (08:52):

It's not going away. Not from what we're seeing.

Gaye Francis (08:54):

But I think if you can clearly see the difference between the ways that people look at things or the ways that you can cut through the risk issues, then that gives you that little bit of extra insight. So thanks for the chat today, Richard, and we'll see you next time.

Richard Robinson (09:09):

Thanks Gaye.