RELATIONAL RISK OVERVIEW
Relational Thinking treats risk as an inherently relational issue. While some adverse events have purely natural causes, most are a product of human interaction, and in every case the impact is absorbed, transmitted and mitigated through relational networks. For organizations, relational risk can be measured, assessed, and managed.
- Formal mechanisms for transferring risk – like insurance, hedging and securitization – are recent developments, and risk management as an academic discipline and corporate function is still emerging.
- In current usage, a risk is defined as a probability or threat of damage, injury, liability, loss or other adverse event caused by internal or external vulnerabilities and, at least theoretically, avoidable through pre-emptive action.
- There is a difference between pure risks, which are unavoidable and can only result in loss (earthquakes, pandemics, identity theft), and speculative risks, which are accepted by a risk-taker on the basis of a cost-benefit calculation (advertising campaigns, military ventures, any purposive action).
- For large organizations, risk is complex and normally – and with some difficulty – reduced to a common measurement of financial exposure.
- Companies and other organizations are starting to take seriously the measurement and management of Relational Risk, externally in relation to investors, suppliers, staff, customers, environment, community, and government, and internally in relation to Boards, staff and divisions.
Relationships create networks of risk exposure
There is a sense in which all risk beyond natural disaster is relational risk – because nearly all processes depend on cooperation. Any decision to associate yourself with another person or organization comprises an extension of risk exposure. Partners entering marriage or civil union are formally combining not just their strengths but their vulnerabilities. Taking on a new employee requires active trust in that person’s competence, operational ability, and willingness to comply with health and safety regulations. Similarly, no relationship fails in isolation. The impact of a separation, resignation or betrayal ripples through families, friendship networks, workplaces and sometimes whole organizations.
Relationships are the channels of moral hazard
Moral hazard – the tendency to be lax about risk-taking if the cost is borne by others – is a familiar term in insurance, but is actually a relational risk set up in any situation where one party to some degree guarantees the wellbeing of another. Failures to tackle current environmental problems or to pay off national debt are, in effect, decisions to load risk onto the next generation. The principle of caveat emptor addresses the risk taken on by giving currency in exchange for goods that might or might not justify the valuation. Moral hazard arises in all kinds of relational settings, from company expense accounts to bailouts, tax evasion, price-fixing and the abuse of NHS services.
Relationships as role definitions generate systemic risk
At the same time, exposure to moral hazard is unavoidable in the sense that the inability to spread risk leads to risk aversion and stagnation. A good example is limited liability, which institutionalizes moral hazard by shielding investors from risks undertaken by the company they invest in. This stimulates growth – but it also creates obvious injustices and sometimes staggering economic reversals. Behind these problems lie weak relationships. Regulation is often patchy, insufficient, or applied after the fact. And the scale and pace of the modern economy tends to connect people as classes, relying on dealings transacted over distance by people whose lives otherwise barely intersect.
Relationships as a fundamental asset are subject to depreciation
There is a risk from relationships – to organizational goals like profitability. But there is also a risk to relationships. The way in which people and organizations relate to one another add up to a form of capital that can appreciate or depreciate in value and utility. Relational capital can be damaged by catastrophic events like wars and natural disasters. But it is also – and far more relentlessly – subject to systemic relational risks, including both the rules of engagement set by organizational practice and the wider political-economy, and the cultural attitudes governing the way relationships themselves are conducted and valued.
The way to achieve greater trust in business and government is not to make ethical appeals, but to restructure the kinds of relationship that connect stakeholders together.
Take pre-emptive action on relationships
Relationship problems multiply when unaddressed. Poor communication up the chain of command can mean that employees’ grievances build up unnoticed by management, and are likely to become contagious, becoming visible in sick days and diminished productivity. Sometimes success and sustainability rest on apparently simple adjustments to relational proximity, including prioritizing regular face-to-face meetings, willingness to accommodate, keeping adequate records, and holding information in one location where different parties can get access to them.
Know your crucial relationships
In organizations, some relationships are more crucial than others. They may be internal or external. They may reference specific pairings of individuals, or – typically in larger organizations – roles between office bearers or between stakeholder groups. With developments in IT and social media, many important connections are now discovered and maintained online. Search engines have produced something of a relational opportunity dividend, exponentially increasing the ease with which like-minded people can find one another and associate. By contrast, connections with key stakeholders or collaborators may be underused, unmanned, never created, or degraded or lost in the process of staff turnover.
Know how likely relationships are to fail
The obsession with trust in modern business signals a relational problem – but misses a relational solution. It’s possible to assess the chance of a relationship failing by using relational risk mapping based on the relational proximity criteria of touch, time, breadth, overlap and balance. These provide a reading of a relationship’s “bandwidth”. Touch, time and breadth deal with the nature and frequency of interactions. Overlap and balance indicate how far the parties pursue the same goals and the steepness of the power gradients that separate them.
Don’t just trust
Much of the discussion of trust in business makes a weak appeal for morality. But organizations can substantially increase the amount of trustworthiness in relationships simply by paying attention to the way the organization defines and cultivates relationships. Greater relational proximity creates greater alignment, greater loyalty, greater understanding, and greater motivation. It also helps to eliminate vulnerabilities of the kind that have led to abuse of the disabled, elderly or children in care or mission drift of the kind that led to the recent resignation of Tesco’s CEO Sir Terry Leahy for “eroding customers’ trust.”
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