Risk Management through Regulation - Essay Example

Risk Management Through Regulation Name of the Student Name of the University Risk Management Through Regulation We live in a very dangerous world surrounded by risks. Risk is the possibility or a threat that an action or an event will adversely or beneficially affect a person or an organization or institution. It is the possibility of suffering harm, loss or danger. A more holistic definition of risk that includes hazards and consequences has been given by Ropeik & Gray (2002). They define risk as, “The probability that exposure to a hazard will lead to negative consequences” (p. 4). Risks are present in almost every action we undertake or event that takes place in our lives. It is only the probability of it occurring that differs from action to action and event to event. Risk management is an important factor to prevent and allay the effects of risks that encumber us. Regulation is often used in the process of risk management. This paper will analyze risk management through regulation in three fields, namely to counter terrorism, to oversee liquor licensing and ensure workplace safety in Australia and the challenges involved in using regulation to manage risks. Risk management has been defined as, “The identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events” (Hubbard, 2009, p 46). Risk Management provides a common framework and language which now has general acceptance in industry, engineering, business and other relevant fields. This is important in facilitating coordination and collaboration in a multi-sectoral environment. The adoption of this approach facilitates the effective use of very scarce resources. Risk management has been a core element of good management practice and it is important for risk management to have a holistic approach. Risk management helps to break down silos and divisions in organizations that have better understanding of its objectives. Risk management integrates a systematic way to make informed decisions. According to Alan Hawke the Secretary of the Department of Defense, “Risk management must balance the tension between present –day demands and preparations for the future and the enduring success of any enterprise. A risk management framework requires continued attention and support from senior leadership” (Alaszewski & Manthorpe, 2001). Dr. Neil Johnston, Secretary of the Department of Veteran Affairs says that, “It is important to note, therefore, that effective risk management is all about managing the entirety of risks” (Anleu, 2002). In an ideal risk management process prioritization is one of the most important aspects wherein, the risks which cause the greatest amounts of loss or harm and the greatest probability of occurring are dealt with first and the risks with a lesser probability of occurring and causing lesser impact are dealt with next. The risks are dealt with in descending order depending upon the level of harm they cause and the probability of their occurrence. The ISO (2007), sets out certain guidelines on the principles and implementation on risk management. The document sets out a process for risk management that involves 7 basic stages. The first stage is establishing the context. The risk management process should be aligned with the organization’s culture and structure. Establishing the context defines basic parameters to manage risks and sets the criteria and scope for the process. The next step is risk identification. Risk identification aims to identify the risks that are relevant to the situation. Risk Analysis, the third step seek to develop an understanding of the risks that are involved. It involves an understanding of the causes and sources of the risk and their consequences. Risk evaluation helps prioritize the risks based on their probability of occurring and the levels of their impact. Risk Treatment is concerned with the selection of one or more options to handle the risk and the consequences brought on by the risk. The last step, Monitoring and Review is concerned with analyzing the events and learning effective lessons from it to prevent future risks. Regulation is an important factor in controlling risks. Risk controls could be operated within organizations or imposed by external regulators. Controls could be applied at various stages in the development of risks and the realization of harms. They could operate formally or informally, by means of rules or through other regulation mechanisms like accountability and review. A variety of general regulatory methods could be normally used to control risks. These include command and control, self-regulation, incentives, Franchising, contracting and licensing, disclosure, regulation through law i.e. state action, Rights and Liabilities Law, Insurance Mechanisms etc. Most often multiple strategies are used to regulate risks (Baldwin, Hutter & Rothstein, 2000). A bomb exploded in the year 2002 in Indonesia. A total of 202 people were killed and 209 were wounded in the attack. The bombing has been considered the deadliest and ugliest act of terrorism in Indonesian history. The largest group among the killed was from Australia, leading to the day often being called 'Australia's September 11'. Since then the Australian Government has used various regulations to manage the risk caused due to terrorism both in their airports as well as coastal areas. The Aviation Transport Security Act 2004 (ATSA) establishes a regulatory framework to safeguard the people against acts of terrorism and unlawful interference in aviation. Security at the Australian airports is the responsibility of the airport operator. Those airports in Australia which the Secretary of DOTARS has declared to be security controlled airports under ATSA the operator must prepare a Transport Security Program (TSP) which must comply with their approved TSP and with the Aviation Transport Security Act and Regulations (National Counter-Terrorism Committee, 2005). The Department of Immigration and Multicultural and Indigenous Affairs (DIMIA) aids in countering terrorism by ensuring that all non-Australian citizens wanting visas, passage and entry into Austral are checked against the Movement Alert List. The threat of maritime terrorism has led to fundamental changes in the international maritime security environment. Australia announced in the year 2004 the establishment of a 1000 nautical mile surveillance which is designed to protect the ships and facilities from terrorist attacks. This has been followed by other countries and is said to be a prime example of countries trying to increase the regulation to step up the defense against terrorism. The Australian Government has implemented the International Ship and Port Facility Security code in Australia through the Maritime Transport Security Act 2003 (MTSA), and has introduced a range of maritime security measures, including additional facilities for screening containers and tighter immigration controls at seaports. Australia requires all foreign seafarers visiting Australia to have a visa for Australia. The Government has undertaken to consult Shipping Australia on the details of the new visa scheme (Phillips, 2006). The next area in which risk management is handled through regulation is liquor licensing in the state of Victoria. The availability of alcohol has traditionally been regulated by governments through licensing regimes, that places limits on who can sell alcohol, including provision of where they are allowed to sell and to whom they can sell it.(Livingston, Chikritzhs, & Room, 2007). In Australia, the regulation of the sale of alcohol has been the responsibility of state governments.(Livingston, 2008). An evidence based study came to the conclusion that extending the trading hours of alcohol outlets has resulted in an increase in alcohol-related problems (Gruenewald, Ponicki, & Holder, 1993). The Liquor Control Reform Act of 1998, is the main legislation that regulates the supply and consumption of liquor in Victoria. The primary objectives of the regulation is to support responsible liquor-primary licensees who display a commitment to minimizing the negative impacts of their operations on the community and to take action against liquor-primary licensees who display irresponsible action and whose businesses cause a negative impact on the community (The City of Victoria). The Act provides penalties including fines or license suspensions or cancellations on people or organizations failing to comply with the regulations put forth by the Act. The Act as such prohibits behaviour including, unlicensed selling of liquor, underage drinking, consuming or having liquor on unlicensed premises, public drunkenness and anti-social behaviour in and around licensed premises, and disturbance of the neighbourhood amenity (Consumer Affairs Victoria). In Western Australia, it was found out that such regulation of alcohol selling and consumption has been the reason decreased alcohol consumption rates (Wagenaar & Langley, 1995). The state of Victoria also provides regulations for workplace safety and to prevent the risks involved in the workplace. This is because there have been disasters in the industries in Australia that has prompted these regulations in Australia (Lin & Fawkes, 2007). The State of Victoria witnessed a gas plant disaster in which the supplies to the state were disrupted and a coal mine exploded in the region of Queensland. These disasters have given rise to the formulation of The Occupational Health and Safety Regulations 2007, which provides regulations to prevent the risks occurring at the workplace. The general rules of this act include proper installation, use and maintenance of risk control measures, provision of information, instruction and training to workers, regular medical examinations and health surveillance and it requires the reports of health surveillance to be confidential and must know how to involve health and safety representatives in consultation. The Act also makes provision for resolution procedures. Apart from these general regulations, the Act establishes regulations in each aspect of workplace safety in separate sections. Employers are obligated to follow these regulations to ensure workplace safety and to manage risks especially in high-risk work areas. Additionally the Act sets minimum standards for the construction industry. The act makes it easier for employers and employees to understand safety regulations and obligations and at the same time enables the cutting down of red tape and compliance costs (Work Safe Victoria). While regulation is used to manage risks there are several challenges that have been identified when using regulation to manage risks. One of the foremost challenges to using regulation is to ensure that it merely manages risks as opposed to hampering and impeding any activity or industry in an attempt to prevent and manage risks (Fischer & Brown, 1995). Apart from the individual challenges of each of the regulatory methods, the general challenges of regulations as such include, the regulatee’s inclination to comply with the rules willingly, the strength of the of the regulation and enforcement powers, the sanctions available, the seriousness of the risks involved, the visibility of breaches of rules, the frequency of contacts between regulators and the people who are regulated and a variety of other political influences (Baldwin, Hutter & Rothstein, 2000). The unwillingness of an individual or organization to comply with the regulation is a major challenge to using regulations to manage risks. The compliance of an individual to these regulations are dependent upon various factors, namely, commitment to regulatory objectives, attitudes to compliance, record, quality of management, organizational ability to comply and the treatment provided to the staff. Another challenge of using regulation with respect to compliance is that, achieving compliance alone may not serve the purpose of the regulation. Those regulated may find a loop hole in the regulation and may side step it through what is termed as creative compliance strategies. This is especially true in cases where the regulations are inherently vague and uncertain. The more loosely worded a regulation is, the more easily individuals and organizations can interpret it the way they want and use it to their advantage. This defeats the purpose of the regulation and the objectives of the regulators. The inclination to comply with regulations also depends upon costs, self interest; the profitability that can be gained by breaking rules, supposed probability of detection, level of knowledge of the risks involved, intra-organizational pressures, and the fact that compliance may go against organizational objectives. “Businesses may resort to opportunistic conduct and react negatively to control where the regulations are perceived as illogical or wrong” (Kagan, 1994).Compliance are also dependent on the contractual obligations and agreements present in the supply chain. Additionally reputational issues and consumer preferences can also have an effect on compliance thereby making it difficult to use regulation for risk management (Hutter & Amodu, 2008). The traditional form of command and control regulation is distinguished by the use of rules reinforced by legal sanctions. The main challenge to using this regulation to manage risk is the costs involved in administering and enforcing it. For instance, the new anti-terrorism measures have imposed large additional costs on the transport system and have involved significant effort from both government and industry. The regulation also includes high standard and rule-setting costs. Moreover it only demands compliance with a predetermined standard as opposed to providing the best level of risk avoidance which can be considered reasonable within a particular context. Secondly, this regulation involves high levels of intervention in management and is characterized by complex rules and a significant level of red-tape. High costs are the second major challenge to using regulations to control and manage risks. High costs are again a very integral challenge when adopting franchising, contracting and licensing as a regulation to prevent and manage risk. Under such a regulation risks are controlled by allowing the risk creators to function based on certain predetermined conditions and by limiting the time periods for which license or permission is given. This however involves high expenditure because the risk creators who are given permission or licenses may enjoy unfair incumbency advantages and monitoring their activities and replacing will result in extra costs and it may also prove to be difficulty due to lack of man power. The cost of this regulation is also high because sketching the initial terms and conditions will need widespread bodies of information to be processed and used. This regulation may also result in inflexibility as the tight rules for control may impede new measures that are drafted from time to time to control and manage risks. Lastly, the terms and conditions that are stated openly may bring about uncertainties that result in high cost and expenditure to both the country as well as the consumer. Another high cost regulation is the Right and Liabilities Laws. This regulation controls risks in a way that involves heavy public expenditure. Enforcing the rights of a person and establishing who created risk and who is liable to whom may prove to be an expensive task, in addition to being complicated and difficult. The victims of risk creators may be unwilling to approach the law for justice as it involves expenditure and increased amounts of time and due to this the risk creators may be undeterred. When the risk creators are insured, their incentive to take risks may be low and this strategy will not work where risks are very high and additional preventive measures are necessary. Self-regulation is another method of regulation, wherein professionals are allowed to regulate themselves. However, self regulation often tends to be secretive, unaccountable and poorly enforced. Enforcing self-regulation effectively will involve enormous amounts of time and manpower and this is one of the major reasons why it is a challenge to adopt self-regulation to prevent and manage risks. Furthermore, continuous governmental oversight of self-regulation can give rise to bureaucratic and cost duplications in addition to policy confusions. Self-regulation is often seen as an impractical form of regulation. Incentives are another form of regulation where the government aims to control and manage risks by adjusting the economic incentives. The primary challenge of adopting this to reduce risks the assumption of a higher degree of rationality from those who are regulated and the fact that predicting outcomes from given incentives is very difficult, inaccurate and impractical. One of the biggest challenges of this regulation is the time lag caused due to the free hand given to the risk creators, as long as they can afford to pay the relevant costs. Time delay and unaccountability are two other major challenges to using regulations to manage risks. The regulation of disclosure demands that operators and service providers must provide information to the public regarding their products and business. The primary challenge of using such a regulation is that the information supplied is most often sparse, unreliable or unintelligible. This particular aspect leads to further risks. Mistakes caused when providing as well as processing the information also causes undue, unforeseen risks and this factor totally nullifies the effect of the regulation which is in fact trying to prevent and manage risks. Disclosure does not fully prevent risk as price may prevail over the risks involved despite the supply of all related information. Disclosure also does not benefit the lower sections of people although it is meant solely for that purpose (Roberts & Hsiao, 2004). These challenges defeat the purpose of the regulation as disclosure. In State Action, when the state does not trust the private sector to limit risks, it can tae direct action by for instance, building an industrial premises with good ventilation and renting these premises to manufacturers whose processes involve harmful emissions and which need a hazard free premises. The challenge to adopting State Action as a regulation to manage risks is that public sector may not be good at maintaining and operating certain premises. Moreover, since public expenditure is involved in this, the possibility and incentive for innovation is low and access to such premises may distort the competition in the marketplace. Insurance mechanisms again pose a challenge as risks in some sectors cannot be foreseen or predicted. Some sectors have very sparse statistics available on incidents and possible risks and here insurance mechanisms may not function effectively. Moreover, the people providing insurance schemes and insurers may not be accustomed to the inspection procedures essential to make these controls function well. Hence distortion of competition in the marketplace and improper functioning of insurance schemes due to the limited resources available on the risks involved are two other major challenges when adopting State Action and Insurance Mechanisms as regulations to control and manage risks. From the above analysis it can be concluded that compliance issues due to various reasons, high costs and the necessity of increased manpower as well as resources are the primary challenges to using regulation as a means to prevent and manage risks. Apart from these three major challenges, other challenges such as time delay, additional responsibility, the limited capacity to predict risks and respond to them, unaccountability and the level of impracticality involved in some regulations cause a significant amount of difficulty in adopting regulations for risk management. A combination of two or more regulations, each complementing the other so that all loop holes can be handled is necessary for the effective control and management of risks involved in any given context. References Hubbard, D (2009). The Failure of Risk Management: Why It's Broken and How to Fix It, John Wiley & Sons. pp. 46 Ropeik, D & Gray, G M (2002). Risk: A Practical Guide for Deciding What's Really Safe and What's Dangerous in the World Around You, Volume 174. Houghton Mifflin Harcourt, 2002 Alaszewski, A and Manthorpe, J (2001). Interactive Review: Measuring and Managing Riskin Social Welfare. 21 British Journal of Social Work. Pp 277-90. Anleu, S, (2002). The Professionalisation of Social Work. Sociology 26. ISO (2007). Risk management — Guidelines on principles and implementation of risk management. Committee Draft of ISO 31000. Retrieved October 1, 2009. http://www.nsai.ie/uploads/file/N047_Committee_Draft_of_ISO_31000.pdf Baldwin, R, Hutter, B & Rothstein, H (2000). Risk Regulation, Management & Compliance. A Report to the BRI Inquiry. Crown Copyright 2000. Phillips, M (2006). Port Marine Security and Counter Terrorism 2006 Conference Maritime Security: A Shipping Industry Perspective. Retrieved October 1, 2009. http://www.shippingaustralia.com.au/Portals/57ad7180-c5e7-49f5-b282-c6475cdb7ee7/S_20060518PortMarineSecurity.pdf Livingston, M., Chikritzhs, T., & Room, R. (2007). Changing the density of alcohol outlets to reduce alcohol-related problems. Drug and Alcohol Review, 26, 553-562. Livingston, M. (2008). A Longitudinal Analysis of Alcohol Outlet Density and Assault. Alcoholism:Clinical and Experimental Research 32(6): 1074-1079. Gruenewald, P. J., Ponicki, W. R. and Holder, H. D. (1993). The relationship of outlet densities to alcohol consumption: a time series cross-sectional analysis. Alcoholism: Clinical and Experimental Research 17(1): 38-47. The City of Victoria. City Liquor Licensing Policy & Process. The City of Victoria Website. Retrieved October 1, 2009. http://www.victoria.ca/cityhall/departments_crpleg_lqrlcn_plcypr.shtml Consumer Affairs Victoria. The Liquor Control Reform Act 1998. Consumer Affairs Victoria Website. Retrieved October 1, 2009. http://www.consumer.vic.gov.au/CA256EB5000644CE/page/Liquor-Responsibilities+%26+Liquor+Laws-Liquor+Laws?OpenDocument&1=75-Liquor~&2=060-Responsibilities+%26+Liquor+Laws~&3=020-Liquor+Laws~\ Wagenaar, A. C. and Langley, J. D. (1995). Alcohol licensing system changes and alcohol consumption: introduction of wine into Australia grocery stores. Addiction 90: 773-783. Lin, V & Fawkes, S (2007). Australian public health functions. Public Health Practice in Australia: The Organized Effort, pp.415-421 Work Safe Victoria. Occupational Health and Safety Regulations 2007. Work Safe Voictoria Website. Retrieved October 1, 2009. http://www.worksafe.vic.gov.au/wps/wcm/connect/WorkSafe/Home/Laws+and+Regulations/Acts+and+Regulations/Regulation_Overviews/ Fischer, L & Brown, N (1995). Risk-Based and Deterministic Regulation. ASME/ JSME Pressure Vessels & Piping Conference Hawaii. Lawrence Livermore National Laboratory. Kagan, Robert A. (1994) ‘‘Regulatory Enforcement.’’ in. Rosenbloom David H and Schwartz, Richard D. (eds.), Handbook of Regulation and Administrative Law. Marcel Decker, New York, p 383-422 Hutter, B & Amodu, T (2008). Risk Regulation & Compliance: Food Safety in the UK. The London School of Economics and Political Science. Roberts, M J & Hsiao, W (2004). Regulation. Getting health reform right: a guide to improving performance and equity, p 247-281 Read More