Human Activities and Assets

Strategic, legal/compliance, and operational aspects of human capital management must be thoroughly considered in an ERM program in order to develop a complete picture of risk to the company, and put into place necessary controls or systems to ensure that human error is either eliminated, minimized or supported by back-up plans.

Just a few examples of contributing causes to the Titanic disaster show how both individual human error and staff or workflow management, if not properly evaluated as part of personnel risk, can significantly affect results of any major operation:

Several poor key strategic decisions were made. According to an inquiry by the U.S. Senate's Commerce Committee, the ship's speed was excessive, considering its size and steering capabilities. Neither Captain Smith, nor the White Star owner Mr. Isling, heeded three distinct warnings of ice flows in the vicinity sent by nearby [sources]. The Captain reasonably should have discussed the warnings with other officers or placed additional lookouts on duty.

Another major factor in the Titanic's sinking was its core design. Ship architects boasted that its multi-compartment design was “watertight” because the bottom was double-walled, and exterior sliding doors were sealed. However, water seeping from iceberg punctures could fill multiple compartments side-by-side, making the base much heavier than anticipated. Also, the materials chosen for the construction of the hull and rivets were of a metallurgy becoming brittle in icy water, making it easier for soldering rivets to pop out. Designers of the Titanic either were not aware of, or consciously chose not to implement, sounder building practices that other vessel designers of that time had discovered. Risk managers must consider the fact that even the most up-to-date technology and operational practices are not foolproof, and that simple errors in judgment can still cause significant loss.

Captain and crew may have had insufficient experience and training. Another issue was that the Titanic crew had not been trained adequately in carrying out a full-scale evacuation. Many did not know the fast escape routes to higher floors, and there was a delay in getting lower-level passengers to the deck. We also know that numerous officers were not told how many people they could safely put aboard in the newly designed lifeboats. As a result, the crew launched many of the lifeboats barely half-full.

Also of note, while Captain Smith was an experienced seaman, he had not headed a ship of the size and complexity of the Titanic, and may have been missing crucial background knowledge about how quickly it might stop or turn, considering its speed and its unusually small rudder size. Today, many companies still provide insufficient attention and funding to education and training initiatives, often favoring investment in capital assets and technology. It's important, though, to consider the full range of costs and benefits of a state-of-the-art system or machine, if staff cannot use it properly.

There were few standards governing work shifts, and so short-staffing caused problems. Only two Marconi radio operators were on board to relay messages from passengers via wireless radio, and the men were expected to simply work around the clock, taking breaks and relieving each other only as one felt tired. There was evidence that one or both had received iceberg warnings from local ships, but were either unwilling or unable to relay those messages to the bridge, or did not follow proper procedures to recognize and transport messages to the bridge. Evidence later indicated the men were, in fact, inundated with Easter telegraphs to and from passengers and did not focus on the warnings partly because of their general stressful workflow. Risk managers and HR professionals benefit from close cooperation in evaluating the wide range of potential problems that can arise from staffing shortages.

The Letter and the Spirit

Key men complied with the letter, but not the spirit, of the law.The ship's lifeboats had capacity to hold only half of those on the voyage, and merely a third of passengers and crew if the ship had been fully-loaded. Because of outdated maritime safety regulations, this minimal coverage was sufficient for the ship to be deemed “legally compliant.” Clearly there was a mismatch in what was required as “safe” from a legal perspective, and what was truly necessary. Often, it is only a small amount of marginal trouble, extra time, training, or expense preventing companies from fulfilling their ethical and moral obligations to the staff and to the public. Mere legal compliance alone is not enough.

The complicating factor of human “optimistic bias” must be considered. In a prior Property-Casualty360.com blog, “Rose-Colored Risk: Reducing Bias in ERM Risk Assessments,” it was noted that humans have a natural tendency or bias towards self-deception about significant risk, called “optimistic bias.” It proposes that people expect things to turn out better for them than their peers, or that they expect that the future will be brighter and better than the past.

Optimistic bias of the owners, staff and crew was a key complicating factor in the poor evaluation of many of the Titanic's potential risk areas. The Titanic experience demonstrates in extreme detail how an overly–but naturally—human optimistic view of the world can lead to one overlooking the small details that might affect measurements of the true likelihood and magnitude of risk. ERM practitioners must appreciate that all evaluation of risk itself is subject to human interpretation and bias, and adopt appropriate mitigation techniques to ensure a clear, sharp view of the future.

Practical Solutions For Better Risk Management

To begin tightening risk management around human capital, HR and ERM professionals must step up their efforts to catalog and fully assess the range of risks involving people. This includes both the risk of losses to personnel and staff, as well as losses potentially caused by employees and mismanagement—a number of scenarios that can be difficult, but not impossible, to quantify.

During this process, it may help to first categorize the losses into subcategories of risk, such as a.) strategic, b.) operational and c.) legal/compliance risk, then assess the myriad risk scenarios found within the appropriate categories:

1. Strategic human capital risks would include high-level business planning issues, such as:

• Overall workflow and management design for delivery of the company's products and services.
• Identification of key personnel whose loss would affect strategy of the company. This may refer to the CEO, CFO, or head of a financially sensitive unit such as underwriting or claims.
• Constitution and charter of the board of directors and major committees.
• Strategy decisions with major staffing impact, such as opening or closing a branch office, or creating a new product or entering a business line.

2. As for operational risks typically faced on a day-to-day basis, considerations may include:

• Death, resignation, retirement or disability of key performers whose contributions are key to business plan achievement. An example would be a top sales person.
• Overall staffing levels for departments, including turnover and retention.
• Large-scale layoffs or major departmental re-organizations.
• Compensation issues, which could in turn affect turnover and retention for particular jobs.
• Training and education of staff to ensure core competencies in job skills.

3. Legal/compliance risks associated with employees, violation of which can incur fines, fees, penalties or spawn litigation against the company. Related issues might encompass the following:

• Compliance with wage and hour laws, or hiring practices, such as background checks.
• Training and education, as well as policies and procedures, to prevent sexual harassment, workplace violence, and discrimination of any kind.
• Ensuring employees follow regulatory compliance and safety prevention policies and procedures.
• Implementing practices and controls to prevent theft, fraud, embezzlement, bribery, or other criminal acts.

Assessment Assistance

To this end, companies should take full advantage of the range of risk assessment tools available, including creating questionnaires and surveys; reviewing personnel loss histories and workers' compensation claims records; interviewing managers and staff, reviewing flowcharts and organizational matrices; and conducting on-site inspections. In addition, HR professionals should have a clearly defined role in the ERM process, to assist the company in having a full and properly aggregated view of risks, root causes, interactions, and impacts of business strategy as it affects, and is affected by, the workforce.

Human capital risk comprises a significant part of the risk profile of any major organization. The identification and management of human capital risks in relation to business strategy should not only be a core skill of every HR executive, but also such skills and experience should be shared–and maximized–through HR participation in the organization's ERM program. Don't let unidentified and unmanaged human capital risk sink your ship.