Risky business

The View from Taft


April 14, 2016

During the last few months, unexpected events hit business and government organizations alike, causing serious worries and, in some cases, damages in their wake. Mitsubishi was deluged by safety complaints implicating its popular Montero SUV. RCBC was used by international hackers as a conduit for laundering funds stolen from the Bangladeshi government. The NAIA Terminal 3 suffered a five-hour blackout, which caused the cancellation of dozens of flights and the stranding of thousands of passengers.

Investigations into these events are still ongoing, but they do raise an important aspect of management in today’s world -- the need to anticipate and manage unexpected adverse events or “risks.” In all the above cases, managers had the responsibility to prevent or minimize the damage from these risks.

Mitsubishi insisted that the accidents being linked to the Montero were due to driver errors, but did express early fears that the company’s sales of the new Montero would be affected. RCBC’s president, Lorenzo Tan, has taken an indefinite leave to give way to ongoing investigations by the bank and government agencies, including the Senate. (Disclosure: I am a training consultant for RCBC.)

In the case of the NAIA-3 blackout, Manila International Airport Authority (MIAA) General Manager Jose Angel Honrado reportedly cited “bad luck” as the culprit, explaining that the generators did not function as expected. The Aquino administration has received a lot of flak over the incident, with many calling for the resignation of not only Honrado but also of Transportation and Communications Secretary Joseph Emilio Abaya.

When adverse events happen, managers cannot cite bad luck or other factors outside of themselves unless they have instituted risk management systems with appropriate controls. This is not easy because people tend to underestimate risks and, therefore, do not prepare enough for them. For businesses, this means projects that are behind schedule, over budget, and short of forecasted revenue.

I ask sellers of condominiums around universities why they continue to push such properties as “investments” given that the implementation of K to 12 is projected to cut enrollments by as much as half, taking away the main source of renters for these properties. The look on their faces tells me that it is a risk that they had not even considered.

The tendency to underestimate risks extends to our personal lives, too. Consider this scenario: a husband and wife have a date to watch a play that starts at 7:00 p.m. They will be coming from separate locations and must meet at home in order to go together to the theater, which happens to be on the opposite side of Metro Manila. If they are not seated by 6:30 p.m., they risk missing the start of the play because of strict theater rules. Thus, the couple agrees to leave their home by 4:30 p.m., given the usually terrible traffic.

From experience, the couple knows that each of them has a 50% chance of arriving at home on or before 4:30 p.m. Question: What is the chance that they will not be able to leave as planned?

If you estimated that the couple has a 50% or less chance of leaving late for the play, you have severely underestimated the risk. The chance is at least 75%. In fact, if the traffic situation from where each one will be coming from is similar -- a common situation in the metropolis -- the risk is even higher, and the couple is almost sure to leave later than planned.

Worse, the husband or the wife becomes too optimistic, hoping that the 50% chance would be in his or her favor. This is where the flaw in thinking creeps in. They forget that even if chance favors one of them, they both have to be home before they can leave for the play! And the chance of both of them being on time is only half the chance of any one of them being on time. Risks are aggravated when they combine together.

The lesson for the couple is that they have to agree to come home at a much earlier time such that the chance of their both being able to leave as planned is very high.

Similarly, managers should identify the risks their organizations face and estimate the chances of these risks occurring. They must then institute countermeasures for the key risks and ensure that such countermeasures are monitored and properly implemented. Just like the couple on a date, managers should be careful not to underestimate risks or fail to consider how they combine with each other.

Managers need to remember that managing risks isn’t about luck -- it’s about good planning and execution.

Benito L. Teehankee is a professor at De La Salle University. He is also Vice-Chairman of the CSR Committee of the Management Association of the Philippines.