Corporate Risk Management - Unknowns

Corporate Risk Management - unknowns

Proactive and responsible risk assessment is one of the most important elements in managing a company. It is however also one of the most challenging aspects. The main reason for this is the factor of the unknown. Particularly, the "unknown," as defined by Donald Rumsfeld is particularly problematic in this regard.

Known risks are the easiest to handle and mitigate. Risks become known by means of investigation and assessment. These actions are essential, particularly in a business that poses substantial physical danger to its workers and/or to the public. Physical risks are probably the easiest to assess and mitigate, because of their fairly obvious nature. It does not take a large amount of investigation to investigate physical risks. Furthermore, legislation also provides a valuable framework for mitigating potential physical dangers. Protective clothing and other safety regulations such as sings and fencing are then used in handling known risks of this nature.

According to Rumsfeld, unknown risks are divided into two categories: "known unknowns" and "unknown unknowns." In terms of risk assessment, the former is more challenging than known risks, while the latter presents the greatest difficulty for a company.

In a fishing company, for example, the category of "known unknowns" might include factors such as the weather and storms posing dangers to the fishing endeavor. This can then be mitigated by means of weather forecasts and electronic equipment to estimate the type of weather that is likely during the excursion. This unknown is particularly problematic, as weather equipment can only estimate probabilities, while occurrences such as freak storms and sudden changes in the seabed may be hidden from view. Nevertheless, the potential instability of the weather is a known factor that can be proactively handled by a number of means.

The manager of the company can for example ensure that all fishing equipment and craft are in excellent condition, and thoroughly checked on a regular basis. Furthermore, weather and navigational equipment should be state of the art and also checked regularly for possible malfunctions. These risks are unknown, but can become known on a daily basis by means of monitoring and careful investigation and planning.

Risks that are not known are the most challenging of a company's risk management program. Such risks might occur by means of unforeseen accidents or oversight as a result of noncompliance with existing risk regulations. In addition to unforeseen natural occurrences such as earthquakes, for example, the human factor also plays a significant role in unknown risk factors.

The employer of a company may for example be unaware of an employee's increasing mental instability. The looming breakdown may be the result of a number of personal factors that the employers has not been informed about. Such instability may also be difficult to monitor, particularly in a company with a large number of employees. Concomitantly, significant financial implications are possible for the company, including the possibility of law suits or a loss of worker hours as a result.