The Ethical Choice in Risk Management

It is important for risk managers to recognize that at some point in their careers, they will likely have to face a personal ethical conflict. This presents risk managers and other insurance professionals with the choice of two distinct kinds of “right” answer.

There is the “traditional definition” of right, where upholding valued societal principles like truth or confidentiality is considered the best ethical choice – regardless of the outcome. This is known as the “duty-based” approach to ethical decision making.

The other choice is a decision based on circumstances, referred to as the “utilitarian philosophy” of ethics. This is considered a more pragmatic approach in that it recognizes that actions have outcomes. This approach also supports the view that the outcomes of upholding truth or another valued principle are not necessarily the most desirable outcome.

Although you as a risk manager may not know exactly how you will personally respond to such issues, you can prepare both yourself and your organization by developing a framework for tough decision making – this will provide an “edge” for your organization in a world where strong ethics and corporate governance are increasingly tied to performance.

ETHICAL QUANDARY

So what happens when doing what is supposed to be right feels wrong? Because of the nature of the industry, risk managers may very well find themselves in such circumstances. Consider this example:

A man and his wife debate over whether to terminate his life insurance policy. He feels it is expensive, and the premium could be put to better use. His wife feels the family needs the coverage should anything unexpected happen. However, the insured contacts his insurance agent late Friday and requests the policy terminated. He indicates that his wife is not aware of his decision, nor is she in favor of doing so. The agent obviously counsels against such a move, but the client insists. Finally, the agent accepts the cancellation, and as he is on his way out the door for the weekend, puts the cancellation request in his drawer to be dealt with on Monday morning.

Later that night the client is involved in a serious collision and dies. His wife, unaware that he has cancelled his life policy, files a claim on Monday. The insurance agent has not yet processed the cancellation, and is now presented with a tough choice. His sympathy for the widow makes him hesitant to process the cancellation, but by not doing so, he is also ignoring the fiduciary responsibility to the insurance company (and is actually in breach of a legal and binding contract by doing so).

ETHICAL PREPARATION

If you really want to position yourself and your organization to make tough ethical choices, it is important to go through some ethical “workout sessions”. The above “insurance agent’s dilemma” is a good place to start. Put yourself in his shoes for a moment and consider the following questions:

What are my true feelings? It would be easier for the insurance agent if he could just forget the human element, work within the narrow confines of his job and move on. But the feeling he gets when he thinks about the wife and children of the claimant just will not go away. By staying true to the classical principle of always disclosing the truth, he will be upholding the law and the traditional values of the profession. He also knows that he will not be venturing down the slippery slope of making decisions based on circumstances rather than set rules. But will he feel good about the decision knowing that his client’s beneficiaries may suffer?

What does my organization believe in? After assessing your personal feelings, look outward and consider the values of your organization. Will your decision ultimately uphold your organization’s goals and values, even if it appears to go against traditional principles?

What do your colleagues believe in? Establishing an open work environment where individuals can take the time to talk about ethics is critical to an emergency plan. It is important to acknowledge that difficult choices will arise in the risk management practice and colleagues must work together to prepare for them.

The above are not decisions risk managers should face alone. Clearly, there must be some discussion with superiors and colleagues before a final decision is made. The final decision may put the risk manager in a position where he/she cannot continue to work for the organization – if the organization believes in a utilitarian approach and the risk manager believes in classical or duty-based approach, continuing to work for that organization may not be plausible.

By their very nature ethical decisions are polarizing, but they do not have to lead to conflict. An environment that encourages ethical discussions builds trust, and if we have the sense that our colleagues are trustworthy and sincere we are less likely to personalize and “demonize” those who take a different ethical stand. This in turn leads to greater honesty and openness, which in themselves can prevent ethical issues from arising.

CLEAR DEFINITION

A recent article in CFO Magazine states that 47% of finance executives they surveyed felt pressure from directors to “doctor the books” and improve the appearance of results. Even with the strict rules imposed by the U.S.’s Sarbanes-Oxley Act, and the damaging press surrounding Enron, WorldCom and Adelphia, organizations still find themselves meandering into the gray area of ethical behavior.

The gray area is where actions do not feel entirely wrong, but do not feel entirely right either. Very few individuals move from total honesty to total dishonesty in one fell swoop. However, once one creeps into the gray area, it is much easier to end up at the black end of the scale. It is also sometimes hard to isolate where the line was actually crossed. It is therefore up to organizations to clearly define the “white” and the “black” to ensure that everything is done to encourage staff to remain on the right side of the line.

Keeping out of the black areas should be a top priority in today’s corporate environment. Ignoring business ethics is clearly not a viable option, nor is it realistic to think that emotion can be separated from any serious ethical discussions. Beginning with personal exploration of ethics is an empowering and practical way to prepare for issues that might arise in the corporate world. Why? Because it helps develop instincts, which can become powerful tools in a complex and changing environment.

CORPORATE GOVERNANCE

Corporate governance is not simply a list of ideals posted on a company’s website. The ideals must live and breathe within the organization. Ethics and corporate governance structures as living organisms must grow with the organization and its world. Like any other source of risk they are subject to a volatile and complex environment.

And, like risk, we can never take the human element out of ethics. Following an ethical exercise regimen will allow you as a risk manager to develop an early warning detection and response system giving value to your work and your organization.