252046.pdf
-
Upload
chicouiobi -
Category
Documents
-
view
217 -
download
0
Transcript of 252046.pdf
-
8/9/2019 252046.pdf
1/17
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 .
Accessed: 11/06/2014 17:25
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp
.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact [email protected].
.
American Risk and Insurance Association is collaborating with JSTOR to digitize, preserve and extend access
to The Journal of Risk and Insurance.
http://www.jstor.org
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/action/showPublisher?publisherCode=arihttp://www.jstor.org/stable/252046?origin=JSTOR-pdfhttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/stable/252046?origin=JSTOR-pdfhttp://www.jstor.org/action/showPublisher?publisherCode=ari
-
8/9/2019 252046.pdf
2/17
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
)
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp
-
8/9/2019 252046.pdf
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.
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp
-
8/9/2019 252046.pdf
4/17
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.
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp
-
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.
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp
-
8/9/2019 252046.pdf
6/17
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.
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp
-
8/9/2019 252046.pdf
7/17
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.
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp
-
8/9/2019 252046.pdf
8/17
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
-
8/9/2019 252046.pdf
9/17
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.
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp
-
8/9/2019 252046.pdf
10/17
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).
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp
-
8/9/2019 252046.pdf
11/17
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.
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp
-
8/9/2019 252046.pdf
12/17
-
8/9/2019 252046.pdf
13/17
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.
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp
-
8/9/2019 252046.pdf
14/17
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.
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp
-
8/9/2019 252046.pdf
15/17
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.
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp
-
8/9/2019 252046.pdf
16/17
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.
This content downloaded from 200.16.5.202 on Wed, 11 Jun 2014 17:25:00 PMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp
-
8/9/2019 252046.pdf
17/17
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.