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An Organization Behavior Approach to Risk Management

Author(s): Darwin B. Close


Source: The Journal of Risk and Insurance, Vol. 41, No. 3 (Sep., 1974), pp. 435-450
Published by: American Risk and Insurance Association
Stable URL: http://www.jstor.org/stable/252046 .
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An Organization Behavior Approach To


Risk Management
DARwiN B. CLOSE

ABSTRACT
This research seeks to discover further theoretical base for the area of
Risk Management by incorporating aspects of Organization Behavior
Theory into the processes of risk identification and risk measurement.
This is done not only to help the individualrisk manager,but to a larger
degree to provide a base for the teaching of Risk Management in the
college classroom.A systems model by William G. Scott of a complex
organizationis adapted to the study of risk. The basic system and its
subparts are described and the goals of the system are related to the
general goals of the Risk Manager. Each subpart is then examined for
its contributionto the processes of risk identificationand measurement.
The interrelations between the subparts and the dynamic nature of
these interrelationsare noted.
Historically, the subject of risk management has been viewed as a threestep process consisting of recognition of risk, measurement of risk and
handling of risk. One description of the current process of risk management
is illustrated on the next page.'
Once these three steps of risk management were stated, the majority of
articles and texts on the subject then set about the task of finding the best
methods of carrying them out. In many works in the area of risk management, the first two steps are given only brief, cursory treatment.2 Risks
Darwin B. Close, Ph.D., CPCU is Associate Professor of Insurance and Finance in
The Ohio State University. He was Executive Director of the Griffith Foundation for
Insurance Education, 1965-69.
This paper was submitted in February, 1973.
1 Charles T. Bidek, unpublished research, The Ohio State University, January, 1972,
taken from an extensive survey of current literature in risk management.
2 For example in Risk Management and Insurance by Williams and Heins, one twenty
page chapter is devoted to risk recognition and measurement. Robert Mehr and Bob
Hedges devote three chapters in Risk Management and the Business Enterprise to these
subjects but cover many potential losses, leasehold interest, improvement and betterments, extra expenses, etc. almost completely from an insurance point of view.
Donald L. MacDonald, Corporate Risk Control, Ronald Press Company, 1966, has
nothing clearly identifiable as risk recognition and measurement. One minor section
titled "The Intelligence System" by implication is addressed to these areas.
The Growing Job of Risk Management, American Management Association, Inc.,
Times Square, New York, 1962, provides one case entitled "Alertness to Changing
Needs" and one article by A. J. Ingley on the "Problemsof Risk Analysis."
William M. Howard's casebook, Cases on Risk Management, McGraw-Hill, New
York, 1967, does not contain a single case on either subject.
( 435 )

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The Journal of Risk and Insurance

436

THE PRESENT STATUS OF RISK MANAGEMENT


START
for
risk

The search
manageable

identified?
Yes
*
Can the risk be
measured?

No

Yes
Measuree
via least

criterion.

]tt

Handle
cost

Can the risk


|i
ab a t~g'

..)Yes

aS
|

top

*No

Can the

risk
*

Can the

be

id

Stop

Sto

No

risk

economically

Yes

be

es

~~~~~~~~~retained?Can the risk be

Yes

transferred?

nuac
Transfer

LT

No
Can combination
make handling
ble
No

0-4

ei
l~vauate ririoN
No

___

1ther
O
Yes

it feasible
desirable?

Yes

ombie

No

as reevaluation
a metho
provided
the
of handling
risk?
Yes

Source:
Charles T. Bidek
Unpublished Research
The Ohio State University
January 1972

are first classified, i.e., fundamental vs. particular, pure vs. speculative,
etc., and typically some schemes of risk recognition are described. The
insurance survey, insurance policy check list and risk-enumeration approaches are those most often described.
Risk measurement is often described in terms of probability distributions
and measures of variation, perhaps with some reference to utility functions
or indifference analysis accompanying the discussion.
H. Wayne Synder, ed., Risk Management, in the Huebner Foundation series, Richard
D. Irwin, Inc., Homewood, Illinois, 1964, has one page on analysis and one chapter
on evaluation.
Tom C. Allen and Richard M. Duval, A Theoretical and Practical Approach to Risk
Management, American Society of Risk Management, New York, 1971, devotes less
than one page to both topics.
Author Matthew Lenz, Jr., Risk Management Manual, Insurors Press, Santa Monica,
California, 1972, devotes one part of one small section, 19 pages, to identification and
another 14 pages to risk analysis out of almost 400 pages.

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An OrganizationBehavior Approach to Risk Management

437

In any event, the brief treatment accorded risk recognition and measurement has been due to the rudimentary state of the art. There is, in fact,
little in the way of a theoretical base for risk management as a whole and
discussion, specifically of the topics of risk recognition and measurement,
has been entirely descriptive in the "how to do it," reporting sense of the
word. Teachers in the area have really had little to work with aside from
a simple "this is how it is done" approach.
One university recently dropped its course offerings in risk management
because of what was viewed as a lack of anything concrete to teach.3
This is why most texts pass quickly into the third step; that of handling
the risk. Here the authors are getting closer to firmer, more familiar ground
because it is only a short step to insurance. But even in this area, other
methods of handling risk: hedging, buy vs. lease, other contractual transfers
of risk, etc., are given short shrift. Once again there appears to be a distinct lack of much to say about these subjects, little in the way of theory
to be used either in the teaching of risk management or in its practice.
One text even defines the term risk management in a way that accommodates this state of the art. Mehr and Hedges define the term as "the
management of those risks for which the organization, principles, and techniques appropriate to insurance management are useful."4
As a result, the risk management works cited are about ten percent risk
identification and measurement and about 90 percent "here is how the
insurance mechanism works as the most effective way of handling risk."
Thus risk management becomes insurance oriented and emphasizes the
handling of risk.
One recent incident demonstrated this emphasis. The August, 1971
Annual Meeting of ARIA in Montreal presented a session termed "What's
New in Risk Management." This session was interesting and lively, but
it should have had a different title, more appropriately, "What Are the
Current Problems in Insurance Coverages for Larger Business Concerns?"
The topics discussed, "product recall" coverage for example, dealt almost
exclusively with the problem of securing appropriate insurance coverage
for unusual exposures. No new aspects in the areas of identification or
measurement were discusssed.
The major problem of risk management, then, appears to be related to
the lack of any underlying theory of risk management and so the historical
emphasis on insurance seems to be a nervous grasping for something concrete and explainable. The result has been many courses in principles of
insurance masquerading as courses in risk management, and many articles
about insurance topics which the authors have cloaked with a pseudo risk
management flair.
Perhaps the reason for this situation is the fact that the emphasis has
been upon "risk"rather than upon "management." Risks to the organization
3 University of Pennsylvania discussion with Dr. Dan M. McGill, Spring, 1972.

4Robert I. Mehr and Robert A. Hedges, Risk Management in the Business Enterprise (Richard D. Irwin, Inc., Homewood, Illinois, 1963), p. viii.

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438

The Journalof Risk and Insurance

claimed the emphasis. The organization itself under such an emphasis


has been considered as an entity, a bathysphere in an ocean of pressures
(risks) acting upon it. The viewpoint is external, seeing the effects of
something untoward acting upon the organization. Viewing the organization as an entity creates distortion because any complex-goal oriented
organization is a system with subparts and subsystems which are usually
in a sort of dynamic juxtaposition, constantly being rearranged, in response
to external and internal forces. This view sees a forest without realizing
that it is made up of individual, differing trees. A much closer look at
organizations and organization theory seems warranted. Perhaps by looking
for "theory in organization," one can find help for "theory in risk management."
Organizations are dynamic systems and all have goals. Perhaps the major
goal of any organization can be considered as survival and growth, the
ability to exist and prosper. Such a goal requires that risks to it be
handled. Perhaps then some answers to risk management problems can be
approached by way of organization theory.
Organizations As Systems
Scott describes the distinctive qualities of modern organization theory
as being its conceptual-analytical base, its reliance upon empirical research
and its synthesizing, integrating nature. He accepts the premise that the
only meaningful way to study organization is as a system.
Understandinghuman organizationrequires a creative synthesis of massive
amounts of empirical data, a high order of deductive reasoning, and an
intuitive appreciation of individual and social values. Accomplishing all
these objectives and including them in the framework of the concept of
the system appears to be the goal of modem organizationtheory.5
Scott presents a model which appears adaptable as a framework for
risk analysis. This model, depicted below, will be explained and the
subsequent discussion will indicate how it can be used in risk management.
This model is useful to insurance scholars because it does provide a framework within which to consider risk identification and measurement. Perhaps the best indication of such value is the subsequent discussion here of
just how a practicing risk manager may be able to use it. This discussion
then presents Scott's model adapted to use as a framework for the study
of risk management as well as for the risk management practitioner. Such
a use of this model is perhaps an illustration of the "synthesizing-integrating"
nature of organization theory.
A Framework of System Analysis
The large box represents the organization and the circles represent parts
of the organization, linked together by solid lines; within each circle
5William C. Scott, Organization Theory, A Behavioral Analysis for Management
(Richard D. Irwin, Inc., Homewood, Illinois, 1967), p. 123.

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An OrganizationBehavior Approach to Risk Management

THE SYSTEM

439

THE GOAL OF
THE SYSTEM

0_ STABILITY
INPUT- IND|

8.1f

GROWTH

INTERACTION

(part) are intrapart links, jobs to jobs, individuals to individuals, for


example.
The various parts of the system are:
A- Individuals-the people within every organization,
B-The

Formal Organization-the structureitself,

C-The Physical Environmentof the Work Systems-the task environment where people, processes and equipment interface,
D -The Informal Organizations-the peculiar qualificationsand alterations of the formal organization so as to make it livable and
bearable,
E - The Structureof Status and Role-ExpectancySystems-literally the
effects of individuals on the formal organizationand how values
are built into the system.
Scott then described the goal of an organizationas being any one, or
combination of: (1) Growth, (2) Stability, and (3) Interaction.
These goals may be interrelatedor they may be completely independent.
Or they may be sequential, for example a short term goal may be growth,
then would come stability as a desired state. One of these goals, interaction,
refers to the end of providing a mechanism for association of members
from which they gain satisfaction. Scott interprets this as meaning that
any system which is dependent upon the properfunctioningof interrelated
parts must seek the interaction goal.6 This suggests that all organizations
have to be responsiveto the needs of their members.
The first two goals are perhaps of more direct interest to a risk manager.
First, he has a substantial interest in the stability of his organizationand
stability of his organizationcan be directly affected by his treatment of
B Ibid.,

p. 128.

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440

The Journal of Risk and Insurance

risk. Reduction of risk and uncertainty means reduction in the frequency


and severity of deviations from the stated goals of the enterprise. Any
increase in knowledge, any increase in the level of certainty, leads to
increased stability.
The goal of stability implies a closing of the system, an attempt to
reduce the ability of a firm's external environment to affect it adversely.
All systems, all people, try to become closed in order to reduce the ability
of external factors to affect them. It follows that systems which are static
are more successful in closing themselves. Where all things are known and
nothing changes, a system can adapt, and unchanging, remain adapted to
its environment. The search then is for certainty and knowledge as a way
of reaching such a state. The risk manager's function is precisely in this
direction, a search for certainty by way of a reduction in uncertainty.
The second goal, that of growth, is the property of open systems. Growth
means change, characterized by Scott as movement along two vectorsthose of development and structural evolution.
The term "development" is used here to describe the stages that an
organization goes through as it grows to maturity, and the term "structural
evolution" is used to describe changes in an organization stemming from its
adaptation to new environmental conditions. But whether it is development
or structural evolution, the risk manager knows that growth means
dynamism, the introduction of change and uncertainty, and new risks to
the organization. Growth often means destabilizing influences so to a certain extent the relationship between growth and stability is antithetical.
Certainly there appears to be a trade-off between growth and stability
in many situations. The risk manager, then, must recognize that the goal
of growth complicates his function.

The Risk ManagerIn The System


But how can a risk manager utilize this systems approach?Where does
he fit? How can he utilize the system to improve his own function? He
simply puts himself into the model which now would appear as follows:

la

Usk Mauager's Fir

Zput) >| Status and


Role Expectancy
,System

T
ThRio
ZManager _

\Tmenfo

Oraniztio

INGROWNR

\eWr

ronment

STABEITV

This is, after, the realistic position of a risk manager. He is in the


middle, encompassed by his organization, acted upon by individuals, units
and sub-units and in turn acting and reacting himself in response.
7bidb , p. 128.

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An OrganizationBehavior Approach to Risk Management

441

Within the system he would view his job in relation to the various subparts. He would ask himself two questions:
1. How can my knowledge of this system and the individual sub-sets
help me perform my job more effectively?
2. How will the incidences of change in any one sub-part affect the
interrelations between the sub-parts?
In this paper the object will be to take the first steps toward utilizing
this systems approach for risk management. The intention is not to explore
exhaustively the aspects described above but rather to illustrate how each
of the steps subsequently described can be used in risk management.
But how can he use the system? The risk manager should begin by
attempting to identify and classify risks in relation to the sub-parts most
directly affected. This suggests that an internal classification of risks might
be more helpful than some more familiar dichotomy such as fundamental
vs. particular, pure vs. speculative, etc. It would seem logical to state that
if those risks affecting each part are identified, then the risk manager has
gone a long way toward identifying the risks acting upon the system.
Simply put, the risk manager tries to identify those risks which affect each
sub-part. The sum of the risks affecting each sub-part will become the
first total of risks impinging upon the total organization.
A-The

Individuals

Looking at the first sub-part, the individuals in the organization, the


risk manager might first try to identify those dangers to the organization
which are likely to be felt by way of their effects on individuals. Perhaps
the organization via the risk manager should ask itself to what extent and
in what manner is each individual important to it.
This approach suggests some enumeration of the "key men" in the organization. March and Simon discuss this concept of key men from the
viewpoint of the organization by relating inducements offered to employees
to the contributions they make.8 They believe that employee motivation
and job satisfaction will be high when the employees perceive the inducements they receive to be equal to or greater than the contribution they
make to the organization. The organization would define a key man, however, as one who is making a contribution which substantially exceeds the
inducements which are required in order to retain his services. It is the
employee with a unique worth or an employee who consistently makes
a contribution far in excess of the inducement level necessary to retain
his services who is the "key" employee.
March and Simon would say that when inducement is less than contribution (I<C) the firm is in danger of losing the individual, but this is
not always true. First, the firm's perception as to an employee's worth may
differ from the employee's own idea of his worth. Also, the employee may
feel his contribution is greater than his inducement but may have no
8 T. C. March and H. A. Simon, Organization,Wiley, 1958.

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The Journal of Risk and Insurance

viable alternative. Thus, when there is a difference between the firm's


idea and the employee's own conception of his worth or if the employee
sees no alternative employment available, there can be a contribution
considered greater than the inducement necessary to keep him. The loss
of such employees would damage, perhaps even destroy, the organization
and is therefore a risk, and is normally transferred to a professional risk
bearer via the product of life insurance.
Even the temporary loss of key people, because of illness or accident,
can be damaging. This suggests additional approaches are necessary since
such remedies as key man life insurance would not adequately handle the
risk.
But the real reason for concern about the key man lies perhaps in the
development of that management theory concerning people within organizations and the functions which they perform. Henri Fayol9 described
the function which a manager performs as being: (1) Planning, (2) Organizing, (3) Commanding, (4) Coordinating, and (5) Controlling.
Davis10 took a similar view and now authors such as Koontz1" describe
the important functions in very nearly the same way. These writers
represent the "Classical School" of management thought and although
modern management theories go far beyond these views, the concept
of the individual remains of value because it helps to focus attention upon
the individual functions in an enterprise.
The key personnel of an organization should be viewed in relation to the
management functions performed. To what purpose should risk management be directed toward consideration of these basic management functions? The response to this query would appear to lie in the use of these
functions as a means of identification, measurement, or handling of risk.
Job or position analysis, the aspect of manpower and personnel study
dealing with job descriptions and duties, is a fertile area for the risk
manager. Here is the place to start, here is where he should ask the
questions: (1) What functions do you perform? (2) How do you perform
them? (3) What aspects of these functions do you believe could be the
basis of risk to the organization? (4) How can we eliminate, reduce, or
otherwise handle these risks?
An alert risk manager, especially attuned to risk origin, should be able
to gain much valuable information from this source. Certainly the enumeration of duties by any important employee should help identify potential
dangers to the organization should these duties not be performed.
The first sub-part of the system, then, should help in the area of risk
management by directing attention toward those key people within the
"Henry Fayol, General and Industrial Administration, International Management
Institute, New York, New York, 1930.
"ORalph C. Davis, The Fundamentals of Top Management, Harper and Brothers,
New York, New York, 1951, p. 23.
11Harold Koontz and Cyril O'Donnell, Principles of Management: An Analysis of
Managerial Functions, McCraw-Hill Book Company, New York, New York, 1972.

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An OrganizationBehavior Approach to Risk Management

443

organizationand toward analysis of the functions which these key people


perform.
B-The Formal Organization
The formal organization itself has been subject of much discussion
12
in general managementtheory. Weber, in his "Theoryof Bureaucracy,"
established a framework within which formal organizations could be
studied. In this pioneering work on organizationaltheory he demonstrated
the need for a clearly identified hierarchy of authority, a deliberately
planned structure containing rules, regulations, and procedures necessary
for it to function. He identified the necessity for an impersonalorientation
and a career dedicationon the part of the managementforce.
Such a structure exists in any entity and along with it the rules and
regulations,processes and procedures necessary to carry out the business
of the enterprise.This formalorganizationcan be of help to the riskmanager.
The key is to use it as means of risk identification.
Criddle uses the formal organizationas the key to his approachto risk
management. He utilizes the financial statements and other records as
a means of ferretingout risks to the firm.13
The organizationchart of a concern could be useful in identifying key
men and potentialkey men. The ledger is obviously a source of information
concerning the real property and other assets of the firm which are of
critical importanceto the risk manager. Profit and loss statements reflect
risks of consequentialloss and so it goes. Certainly all the records of the
firm can be useful to the risk manager. The risk manager'sproblem is to
identify and use those records which have most applicability to his own
function.
The major point is that the formal organizationis but one part of the
total system. It can yield importantinformationto the risk manager. It is
not, however, sufficientin and of itself as an approachto risk management.
Once again the entire system must be examined.
C-The Physical Work Environment
The physical environment of the work system relates quite closely
to that school of management thought termed "Scientific Management"
and represented by the philosophy of Frederick W. Taylor.14Taylor's
work, viewed today as too simplistic,nonethelesshas been of majorimportance in managementtheory because of its scientific approach.
Taylor focused attention on the man and machine relations in manufacturing concerns.He believed that there was "one best way" to accomplish
a task and that the proper role of managementwas to find it. Study of the
12 Max Weber, Theory of Social and Economic
Organizations (The Free Press, New
York, New York, 1947).
13A. Hawthorne Criddle, "Evaluation of Risk" incorporated in H. Wayne Snider's
Risk Management, (Richard D. Irwin, Homewood, Illinois, 1964), p. 19-32.
14Frederick W. Taylor, Principles of Scientific Management, Harper & Brothers, New
York, New York, 1911).

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The Journal of Risk and Insurance

job, the man, and the equipment would lead to job specialization, job
simplification, and logically, to greater efficiency. Taylor's emphasis upon
the physical environment of the job points out a natural area of interest
to a risk manager.
Two aspects are immediately evident; first, the industrial safety engineering considerations and secondly, the concepts of the flow chart as advanced
by Ingly.'5 Both of these ideas arise logically from the risk manager's
interest in the physical environment of the work.
In relation to safety engineering, Brereton and Peterson describe specific
methods of searching out and identifying risks in the physical work setting
and state them in the form of guiding principles of safety management.'8
The first principle: "An unsafe act, an unsafe condition, an accident-all
are symptoms of something wrong in the system." 17 An accident suggests
that a risk was not identified and that the risk manager has had a failing,
large or small as it was. This is true because the function of job safety must
be performed by someone or some department and part of a risk manager's
responsibility must be to observe these results.
The function of safety engineering is to define and to locate these
operational errors, whether they occur because of poorly defined responsibilities, organizational deficiencies, inadequate planning, or imperfect
tool or process design. Brereton and Peterson believe that each accident
opens a window through which the system can be viewed; that different
accidents may indicate the same or similar factors responsible.
Certainly all risk managers in organizations where machinery is used
must consider employee safety as one of their major concerns. This is one
area in which reducing dangers reduces risks. The savings in human lives
and productivity make this job most important.
Equally rewarding are endeavors at risk identification which follow
Ingly's ideas of the flow chart method of risk management.'8 Ingly believed
that the risk manager should diagram the entire operations from initial
acquisition of raw materials, through the processing and marketing to the
final use of the product by the consumer. Such a diagram would indicate
bottlenecks and other possible risks. He defined the measurement of risk
as being the costs associated with elimination of these bottlenecks.
Ingly believed in physical inspections of the process flows as an important adjunct to flow charting. Visual inspections are always advantageous.
Such an approach, somewhat akin to current management concepts of
critical path analysis, is of great importance exactly because it focuses
attention on critical processes, critical points in processes, and critical
people performing them. The risk manager will find this area a fertile one
15 A. J. Ingly, Corporate Risk Management Insurance Series 112, New York American
Management Association, 1956, p. 3.
16 Philip R. Brereton and Daniel C. Peterson, "Safety Management for the Risk
Manager," Risk Management, February, 1971, p. 31.
7 Ibid., p. 31.

18A. J. Ingly, op. cit., p. 4.

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An OrganizationBehavior Approach to Risk Management

445

for risk identification. Frederick Taylor's contribution to the risk manager


then lies in focusing attention on the work environment and the relationships existing between employees and machinery.
D-The

Informal Organization

The informal organization, is not as obvious in its relationship to risk


management as are the first three sub-parts. Subpart A, the individuals
and the processes they perform, Subpart B, the organization structure,
and Subpart C, the physical setting of the job, have immediate, obvious
relativity to risk management. Informal groups are important largely
because they are not obvious. Informal groups often act to qualify, except
and alter formal relationships.
This area, first identified as an aspect of management theory in the
famous "Hawthorne studies" by Mayo and others, acts in many organizational settings as an implicit compromising afgent between the work force
and the formal organization.'9 There is the explicit labor contract between
the organization and the workers through their union. Mayo's work
describes how the informal organization exists to "adapt" such arrangements to a more realistic level.
The Hawthorne studies identified the existence of many noneconomic
aspects of worker behavior and documented the existence of informal
leadership. Informal groups were identified as a source of satisfaction for
employee needs of sociability, affiliation and belongingness, esteem and
prestige. What this means is that the informal organization, typically found
in all formal groups, is a means of establishing realistic work goals, aspects
of democratic, worker-selected leadership, and in general acts to interpret
the explicit, legal contract of employment. It is at this informal level that
the daily production norms are often established. It is here that workers
find ways of making dull, assembly line kinds of jobs bearable.
While the feeling of belonging to a group helps satisfy employee's needs
for warm supportive relations on the job, the group performs other functions
related to the task. This is where the risk manager may find the informal
groups useful.
Almost all approaches to risk management advocate visual inspections of
the plant and the processes. Most risk managers actively engage in walks
around the firm. The question here is how a risk manager is viewed by
the workers and their informal organizations. There is no reason to believe
that such inspection tours would be viewed as threatening to such casual
groups. It is difficult to picture the risk manager in any direct relation to
rank and file workers; rather he would probably be viewed as some
bothersome staff snooper who, at most, is likely to inconvenience them.
But given a degree of acceptance, the risk manager could gather much
useful information from the groups. What jobs are avoided because they
are considered dangerous? What processes have been devised to beat the
I Elton Mayo, Human Problems in Industrial Civilization (The MacMillan
Company,
New York, New York, 1933), pp. 35-76.

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The Journal of Risk and Insurance

safety regulations which act to slow piecework output? Have workers


unknowingly developed dangerous ways of performing tasks?
The informal groups would be a factor improving the productivity of
such inspection tours if for no other reason than that such groups ordinarily
are task oriented, and perform the function of helping each other with
difficult work tasks. Such group expertise and cooperation mean workers
do not have to ask superiors for help and can thus avoid looking dumb
or inefficient because the members can help each other. Understanding
group behavior and utilizing informal groups positively give the risk
manager a better grasp of potential personnel and work environment risks.
But informal groups are important beyond their use in identifying personnel and work environment risks. Those groups in and of themselves
are a source of specific potential losses to the firm. Whether or not such
losses are within the purview of the risk manager is a separate consideration
but there is no denying the potential harm to a firm which can arise when
such groups feel threatened or when they perceive that the firm's goals
are different from their own. Perhaps the most obvious illustration of such
dangers are the common production losses created when groups decree
different and lower production quotas. Slow downs, establishment of
low level quotas and piece rate norms are examples. The effects of such
tactics on production, and, therefore, profits, are well understood. Another
perhaps more potentially serious risk arises from the decision of some such
groups to engage in outright sabotage. Not only can production be damaged
but also building and expensive equipment.
The point is that the risk manager can improve the efficiency of his
job by recognizing the existence of informal organizations-their effects on
the firm. Informal groups can be the source of risk identification and
are of themselves sources of risk and potential loss.
E-Status

and Role

The last subpart-status and role expectancy systems-is important to


the risk manager because status is important to every employee. The need
for esteem, as described by Maslow,20 is a need felt by everyone. These
needs can be satisfied by employment and many individuals look to their
jobs as their principle source of ego satisfaction.
The formal organization, with its formal ordering of people and positions,
its hierarchy of authority, is a natural place to seek status satisfaction.
It is obvious that in any formal organization,statuses and roles are internally
linked by hierarchicalordering. At the same time, there are also informal
orderingsof statuses and roles in terms of prestige groups and occupations.2'
Viewing this subject first from the aspect of the formal ordering, it is
suggested that the position held by the risk manager himself will have
20 A. H. Maslow, Motivation and Personality (Harper Brothers, New York, New
York, 1954).
21Ibid., William G. Scott, op. cit., p. 125.

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An OrganizationBehavior Approach to Risk Management

447

a bearing upon his ability to perform his job effectively. If he is attached


to the formal organization at a relatively high level, his office will have
prestige. His comments and suggestions will carry more weight because
they become equated to the power of that level of the formal organization
to which his office is attached.
If the risk manager is the firm's insurance buyer, with a fancy title,
his prestige will reflect this fact and so will his effectiveness. Support for
this function must come from above, a point sufficiently high in the firm's
chain of command that the risk manager's function is of obvious importance.
The organization runs a risk that it may be passively retaining risks
simply because the risk manager hasn't sufficient clout to make his function
appear important to others. This could be manifested by department heads,
for example, failing to cooperate in locating company problems and dangers.
Status is important. Appropriate status for the risk manager means enough
to enable him to perform his function effectively.
From the standpoint of the informal ordering of statuses the risk manager
may find significant problems involving his function. The effect of status
upon safety is perhaps an obvious example.
In some circles a white laboratory jacket carries the status of a scientist. This jacket, while protecting one's clothing, can be a sign of status.
There should not be any problem in getting any employee to wear such
garb, and the safety value of such clothing is easily achieved because such
equipment is readily accepted.
Safety helmets, on the other hand, have currently taken on a political,
reactionary connotation. The "hard hat" image is one of political conservatism. People may, or may not, wish to wear one, depending upon their
own political philosophy. This means that a worker's decision concerning
this protection will perhaps be made on the wrong basis, since the only
correct reason for wearing the hat is because one is near dangerous processes.
In addition to any political connotations, safety equipment in general
carries a distinct lack of status. With the exception of groups like engineers, safety equipment is the sign of the rank and file worker. An individual may be reluctant to wear safety gear, or use it, because he is marked as
a common employee.
Further, safety gear may become the mark of the sissy, the timid man
who is afraid of his machine. This is especially true if the informal leader
is a he-man type who disdains use of such equipment. Obviously, safety
equipment not in use is of no value, and risk of industrial accident can
increase dramatically.
Status and role then become important to the risk manager as they
cause human behavior which may tend to accentuate dangerous working
conditions. Perhaps this is of no great moment in the risk manager's procedures for identifying risk. It is, however, of vital importance in measuring
risk. Any risk manager who believes he has substantially reduced industrial
safety hazards when he has had some new equipment installed without
consideration of status systems is over-simplifying his position.

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448

The Journal of Risk and Insurance


Intra- and Inter-Part Interaction

Referring back to the original model, Scott indicates that intrapart


relations exist; individual to individual, job to job. These relationships
are dynamic in nature, subject to constant change. Intrapart shifts are
both the starting point for major organizational changes as well as the end
point focus of deliberate organizationally induced changes.
Looking within each of the subparts the risk manager must focus upon:
(1) Changes in the internal structure, (2) Changes in personnel, and (3)
Changes in interpersonal relationships.
Looking within the subparts, individuals must first be considered because
the people within organizations are constantly entering it, shifting their
positions within it, and leaving the organization. This observation should
serve to remind the risk manager that his analysis of these individuals,
their functions and value to the firm must be reviewed periodically.
Observation of the formal organization through its various records is
a must for the risk manager since it is this very dynamism which creates
risks for the enterprise.22 Shifts, demonstrated by changes in the formal
organization chart, the process flow charts, profit and loss statements,
balance sheets, and other formal records, often present the risk manager
with his greatest challenges.
Changes in the work environment bring about new exposures to danger
and the ebb and flow within the informal organizations create new leaders,
new influences, and new group opinions on jobs, processes and people.
Movement causing new intrapart relations within the status systems of
the organization introduce further dynamism. Each of these intrapart
variations requires recognition by the risk manager and his response.
It is the interpart relationships, however, which demonstrate the real
value of a systems approach to the subject of risk management. These interpart relations describe the total interdependency of the system. A change
in personnel can lead to new informal groupings with new leaders emerging and new group cohesiveness developed. A change in the physical work
environment, occasioned perhaps by a new machinery installation, can
produce profound changes in accident rates, machinery breakdown, and
product output. Scott states that "system and the interdependency of
parts are interchangeable ideas." 23
Turning back to Scott's model, imagine the limits of the system as
being a relatively rigid framework from which is suspended the various
subparts by a series of rubber bands. (See illustrations on next page.)
Each part is connected to the frame and to each other part by an elastic
band. Now, imagine movement, perhaps caused exogenously, of one of
the parts. For example, the effects of a new government safety regulation
on the man-machine subpart. This movement will cause further movement
22A risk manager for a large group of companies recently discovered a new potentially highly dangerous risk accepted by the company by reading the minutes of the
Board of Directors meeting.
2"William C. Scott, op. cit., p. 120.

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An OrganizationBehavior Approach to Risk Management

449

by the subparts as each reacts to the new strain caused by its connection
to the affected part. For example, new safety regulations may cause
changes in part C, which alters the job's prestige which alters that worker's
place in the informal organization.

RIGID FRAMEEXTERIOR
WITHELASTIC.
FLEXIBLE
CONNECTIONS
BETWEEN
THE SUBPARTS.

STRAININTRODUCED
ON SUBPARTC.

li,
TENSION
INCREASED
One can expect that a new equilibrium will develop within the confines
of the system. Even the periphery itself may well bend a little; however,
if it is assumed that the organization survives the change as a viable force,
one must assume that the perimeter remains intact. The risk manager now
must look at a new set of relationships, new connections between the parts.
It is precisely at this point that the systems approach to risk management
becomes of such great importance. Previously used methods of risk identification have been relatively static in their operation. Searching for risk
was like viewing one frame of a motion picture, a snapshot of the organization at one particular point in time and space. Emphasis was upon the
risk and not necessarily upon its effects on all parts of the organization.

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450

The Journal of Risk and Insurance

Emphasis on one part created by some change could be handled but there
was no way to analyze the changing relations between the various parts
of the organization. Each change was handled as though it affected the
organization only through its effect on one part, thus the perception of
interdependency was missing.
This systems approach, with its emphasis upon inter-relations, gives
the risk manager a framework within which he can begin to assess the
effects of change upon an organization. It is, after all, dynamism which
creates risk and the systems approach lets the risk manager handle change.
What are the effects of a change in A on parts B, C, D, and E? The systems
approach provides a theoretical framework within which such questions
can be approached.
Conclusion
The systems approach to risk management is of value because of several
attributes. It focuses attention upon risk identification, a function long
neglected in the literature. It provides an emphasis upon the organization
rather than upon some artificial, external classification of risk. This approach
tries to classify risks by means of identifying those risks impinging upon
each of the subparts of the system. Such a classification makes sense
because the very nature of the process customizes the classification to the
specific organization served by the risk manager.
It is believed that by identifying the risks acting upon each subpart that
the risk manager has gone a long way toward identifying the risks acting
upon the whole. This seems logical since the whole, barring substantial
synergistic properties, would appear to be the sum of the parts.
Finally, the systems approach emphasizes the inter-relations present
within the organization, providing the risk manager with a framework
with which to measure the incidence of risks effect on the total organization. Dynamic conditions can be handled.
It has not been the aim here to describe exhaustively the risks affecting
each part but only to illustrate some obvious ones. The goal rather was to
describe the system and indicate how it can be used by a risk manager.
By concentrating upon the system, a risk manager has a new tool, a framework wherein his identification and measurement process can be attacked
more systematically, more logically, and more completely.

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