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.
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?
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