The Guardian 11 May, 2005
Acceptable Risk & the Golden Skeleton
Every so often The Guardian receives a press release from an employer or other
organisation which unashamedly tells it how it is. Last week we received one on a new
acceptable risk calculator for businesses. It was from Dow Ethics*. The press release
reported the calculator's launch on April 28 by Dow VP for Acceptable Risk™, Erastus
Hamm, at an International Payments conference in London. The following is an abridged
version of Hamm's speech:
Hello. It's truly a pleasure to be here among so many of the movers and shakers of the world
economy. After all, it's you guys who say what companies like mine can and can't do. I know
Barclay's and Credit Suisse are here at the conference — you're two of our largest
shareholders.
Whenever there's risk, we assess odds of catastrophe versus potential benefit — but we do it in
an intuitive, "flying blind" sort of way. Incredibly, we treat business risk the same way. We
assiduously crunch numbers for labour costs, stock conditions, inputs and outputs, you name it;
we even have whole conferences devoted to the cost of the payments cycle itself. But we make
the biggest, riskiest choices the same way we choose what play to see in the evening.Today,
I'm here to tell you that a "flying blind" approach to risk is no longer possible — nor, as of May 1,
will it be necessary. We want you to grab risk by the horns and wrestle it down to the ground all
along the risk trail. On May 1, therefore, we are releasing the beta version of Acceptable Risk™
(AR™), the world's first market-smart risk standard.
It's a set of rules derived entirely from real-world risk cases and in line with best practices, that
you can follow to maximise benefit for just about any project. We're also providing a "Risk
Calculator" to help you find out instantly what risks are or are not acceptable from a bottom-line
business perspective.
Traditional AR™
Before I demonstrate AR™ and the Calculator, I'd like us to stop and ask: what is "acceptable
risk"?
For the government, it's quite simple. When governments evaluate risk vs. benefit, they
basically just tot up casualties. If a product results in one or two casualties, yet brings huge
benefit in terms of lives saved, that risk can be deemed acceptable for the public
good.
If the product kills dozens or hundreds, and brings little benefit, then that's deemed
unacceptable.
One flaw here, of course, is that profit never enters the picture. Yet profit is the reason we do
everything that we do. Assessing risk without factoring profit is like trying to tune up your car
without knowing where the engine is.
As a result of this blind spot, much of the government's maths is fuzzy. How many lives equal
how much benefit? Where's the tipping point? Making this explicit would of course mean putting
a precise value on human life. The government can't do that, and of course nobody else can
either. The good news is nobody has to, because our society has a democratic means for
determining value. It's called the market, and it plays no favourites.
Over the past few decades, our society has substituted the "invisible hand of the market" for
government monopoly over many aspects of life, from fighting the war on terror, to operating
schools and prisons, to taking care of our parents in their dotage. The same has been true for
risk management.
Up until 1974, whenever we wanted to market a product in the US, we had to prove to the
government that the product was safe. That all changed when after one particular fight over a
pesticide component we were producing, the government agreed it would assume the burden of
proving the product's danger.
The government basically said: go ahead, use your best judgement, and if we really have to,
we'll tell you to stop. Today, we're gratified to see this new paradigm formalised in the WTO,
which makes governments prove that products are harmful, rather than producers prove that
they're safe.
In this and other ways, we at Dow feel that we have been instrumental in "sane-itizing" the
global risk picture. After all, where consumers and corporations have their own eyes, ears, and
brains, is it really necessary for governments to provide extra ones?
New-Model AR™
Amazingly enough, though, there is still no tool to help us in business know what risk is
acceptable, and what isn't. We stumble along with our unspoken rules, hoping against hope our
decisions make sense.
Dow Acceptable Risk™ will change all this. For the first time ever, you will know beforehand
what you can and can't allow to occur. Will project X be just another skeleton in the closet —
something your company comes to regret? Or will it be a golden skeleton — will it have harsh,
but acceptable costs?
To help you determine this, the AR Calculator™ accesses an immense knowledge base of over
half a million risk events from every country on earth (reflecting the global risk breakdown).
These cases are normalised according to location, time, casualties, financial outcome, litigation
costs, and other parameters. Twenty-six ancillary databases on products, laws, climate, income
levels, etc. further clarify what any given case will mean in bottom-line terms.
At the highest level, event data have been divided into different types.
Unproven Harm / Diffused Risk (UHDR)
The most common type are those cases where harm shows up late, if at all, and investments
are amortized through wide distribution.
Beginning in 1972, for example, alarmists began linking casualties to one of our pesticides,
Dursban, whose main ingredient came from German nerve agent research in WW2. Studies on
student volunteers as late as 1998 showed no unexpected results, but Dursban lost out and
was banned in the US. Its usefulness continues, fortunately, in places with more rational
approaches to risk.
Had we had Acceptable Risk™ back in 1972, we would have known that Dursban's global
potential, combined with low chances of major risk "blossoming", would mean that if Dursban
was going to be a skeleton in the closet, it would be a golden one — which it is.
Mitigated Causality / Indirect Ownership (MCIO)
A type of risk especially familiar to bankers is when the company involved is the agent of
another entity who is primarily responsible. Close to home for Dow in this category are some
products that helped cause wide and sometimes illegal devastation in wartime Vietnam. We got
a lot of flak in the media for these products, but it never got worse for that, mostly because the
ultimate culprit was the US military. Today, napalm and Agent Orange are definitely "skeletons
in the closet" for us. But even in 1970, AR™ would have shown us that despite some mottling
around the tibia, these skeletons would likely be golden.
Marginal Target / Unclear Impact (MTUI)
Suppose Bill wants to set up a factory to produce a new pesticide. He logs on to the AR
Calculator™ and plugs in the various chemicals, how much he wants to produce, and so on.
The database finds roughly analogous cases, adjusts for geography and changes in law and
income, and tells Bill that the risk of setting up in the US might well involve over $2 billion in
liability from potential area lawsuits. After comparing that with profit projections, it's very clear
that taking this route will make Bill an unhappy camper.
But the database proposes alternatives. The harm risk in India, for example, translates into
potential losses of less than $400 million, based on previous liability settlements. Meanwhile,
profit margins actually increase thanks to cheaper manufacturing, less draconian inspection
requirements, etc. It is clear already that the skeletons here will be golden.
We would of course never wish to imply that an Indian life is worth any more or less than any
other. I myself believe in the sanctity of life. But the market has its own logic, and if we're going
to live with it, we must make the most of its choices.
Uncertain Provenance / Diverse Agency (UPDA)
That said, we can't be simplistic about hugeness, either. It's not the number of skeletons in the
closet, but what they represent.
An extreme case in point would be the Green Revolution, the introduction of modern technology
in Third World agriculture in the '60s and '70s. Just for the sake of illustration, let's give
momentary credence to the most pessimistic figures and suppose that between 1970 and 1990,
the number of hungry folks in the world excluding China did grow by 11 per cent, and that the
Green Revolution had something to do with it. Let's even throw Bhopal into the mix, since the
factory there made components for pesticides.
Would this be acceptable risk from our viewpoint? The answer is clear when you notice, on the
one hand, that the Green Revolution was essential to modern agribusiness, being its most
profitable experiment ever; and that, like climate change and other huge trends, the Green
Revolution belongs to a type of risk case in which scientists do not all agree on the source of
problems caused, or whether they even exist. Unless the precautionary principle comes to
dominate government once again, there is little actual risk in such cases — especially interesting
now at the dawn of the new "Green Revolution."
A Sobering Note
Today, as we make sure market-based values guide our decisions, we have to constantly watch
out for those who would establish risk guidelines that aren't so useful.
One group of challengers are those pressure groups within government who would have us
return to the 1970s and the precautionary principle. Then there are the so-called "socially
responsible" investment groups, a "fifth column" who put emotional pressure on other investors
to completely avoid all skeletons — bypassing many opportunities in the process.
Finally, the battle is far from won at the international scale, either. Yes, a global reach has made
flexible risk management easier; yes, the WTO and even the EU do prioritise profit in a way that
we all find sensible. But there are other global projects as well. The UN's Human Rights Norms
For Business would essentially let governments and NGOs make sure business actions accord
with old frameworks. As far as we're concerned, adopting these Norms would be attaching leg
irons to a prize horse.
Introducing Gilda, the Golden Skeleton
And now, finally, the part of the day that I've really been looking forward to. A lot of you have
probably been wondering what's under this shroud. Well, you're about to find out. Because if
there's one thing we want you to remember from this talk, it's that "the only good skeleton is a
gold skeleton." [Vikram Banarjee pulls off the red cloth covering some object, revealing a gold
skeleton.] Meet Gilda, the mascot for the Dow Acceptable Risk™ program. Do you have a
skeleton in the closet? A lot of us do. But maybe the problem isn't the skeleton, maybe the
problem is the way you're seeing that skeleton.
It may be just a skeleton in the closet, yes — but it could very well be a golden skeleton
too.
And as you move into a future of ever-increasing complexity and ever-increasing opportunities,
Dow Acceptable Risk™ can assure that your touch will a Midas touch, and that all that glitters
will henceforth be gold.
So thank you very much; we hope you come up and get a closer look at Gilda, get your picture
taken with her, whatever. I'll take questions now, but afterwards I want to remind you to get your
free keychain, and drop off your business card if you want to sign up for the free licence for a
year of AR™ use.
*For full text visit www.dowethics.com and follow prompts. This site is laid out on a similar basis
to the Dow Chemicals site, but the content is not quite the same. For readers who enjoy this
approach, there is a another site with a similar appearance to be the WTO's site, located at:
http://www.gatt.org For details of other activities visit http://www.theyesmen.org