The SCRP Philosophy
Risk is more than a management jargon. Risk is an advanced mathematical concept called probability and statistics.
The application of risk has evolved from gaming and insurance to warfare, economics and management science over the past 400 years. Practically every discipline that exists today applies the laws of probabilities.
Nobel Laureates Albert Einstein (photoelectric, 1921), Neils Bohr (quantum theory, 1922), Harry Markowitz (portfolio theory, 1990), John Nash (game theory, 1994) and Kip Thorne (blackhole, 2017) used probability theories to unlock some of the greatest discoveries in physics and economics.
Risk is an advanced concept that defines the boundary between modern and ancient times. Today, top global corporations stay ahead by using probabilistic concepts like big data analytics and artificial intelligence as a product and as tools for decisions.
Divergence and Rise of Enterprise Risk Management
Enterprise Risk management became prominent at the turn of the Millenium, after a series of economic crises in developing countries during the 1990s. Regulators began to infuse risk management concepts into corporate governance to protect investors and the public. A sudden surge in demand for risk specialists within the corporate community made them turn to business consultants who took a cue from financial and banking practices. They chose to adopt a quick, non-scientific intuitive scoring method like 'high-medium-low' and 'red-yellow-green'.
These methods use ordinal scales that are problematic. Risk has 3 base concepts; causality, probability and consequences. Causality is the relationship between events and their knock-on effects. Probability measures the degree of likelihood. Consequences measure outcomes. How is risk management possible without these 3 key concepts?
This calls for some understanding in the area of social psychology. In pluralistic ignorance, simplistic enterprise risk management is practised because the regulations require everyone to do so and there is a collective incentive to keep compliance cost minimal. Individually, they don't believe in its technical veracity. In a false consensus effect, risk practitioners who adopt intuitive scoring methods truly believe that they are doing the right thing when the entire scientific and engineering community think not.
The ISO 31000 series is the most prevalent risk management standards adopted by enterprises. In ISO 31010 - Risk Assessment Techniques, two-thirds of the 70-page document is dedicated to Bayes, Markov Chain and Monte Carlo processes. Most organizations that claim to adopt ISO 31000 do not know how to apply these methods.
Economic crises compelled authorities to impose risk management regulations despite the lack of readiness. Business consultants and accounting firms took full advantage to sell intuitive risk scoring methods to their clients. Yet today, businesses seem powerless against risk. The 10 largest bankruptcies in the history of mankind came after the introduction of enterprise risk management (AS/NZ 4630:1995) and half of these failures were contributed by the financial sector.
Need to Converge Science and Management for More Effective Risk Management
Macy Conference: Cybernetic Roundtable, New York, 1947.
John Von Neumann (2nd fr. left), Norbert Wiener (3rd fr. right)
"Simplicity before understanding is simplistic. Simplicity after understanding is simple".
Edward De Bono
Author of 'Lateral Thinking' and 'Simplicity'.
In 1941 the Macy Conference began as a meeting of scholars in New York to facilitate interdisciplinary exchanges. Over the next 20 years, it established the foundation of Cybernetics, a transdisciplinary approach for exploring regulatory systems. Norbert Wiener, Ross Ashby and Alan Turing were key contributors to cybernetics.
Norbert Wiener defined cybernetics in 1948 as "the scientific study of control and communication in the animal and the machine." In other words, it is the scientific study of how humans, animals and machines control and communicate with each other.
Likewise, in risk management, we study the relationships between economic, environmental and social factors and organizations. Information technology and communication play a big role. We then find ways to control, monitor and steer them towards targeted outcomes. Risk management is similar to cybernetics.
To control a system, the controlling mechanisms must have an equal or higher number of sub-states. This is according to the Law of Requisite Variety by Ross Ashby. Switching on the light or pressing a call button is made easy only because of the complex engineering in energy production and telecommunications.
In the 1950s, Anthony Stafford Beer introduced cybernetics in management. In any value chain, a wide range of expertise; "variety", is needed to run an organization effectively and sustainably.
The degree of collaboration and level of system sophistication affect the optimality of an organization. The simplistic practice of enterprise risk management today is below the minimum complexity ('variety') required to function properly.
Risk management without probability and statistics is not risk management at all. There is an urgent need to bring together the scientific, engineering and business management communities to collaborate and manage risks more effectively.
The SCRP Platform
The founders of SCRP were inspired by the fact that risk management is becoming mainstream because of regulatory requirements set by the securities commission, stock exchange and governmental authorities. Management practices have taken a big step closer to the application of management cybernetics.
What moved us was the potentially huge benefits to businesses, government and people with the proper application of risk management methods. The challenge was to warm the scientific community to the idea of collaborating with corporate executives. An innovative framework and tools are needed to fuel the concept.
The founders of SCRP already have access to the corporate, financial, scientific, academic, governmental and innovation communities. Since our inception in 2017, we have held roundtables to address common corporate concerns like sustainability, consumption tax, technology and trade regulations. These activities became testbeds for our cooperative concept.
Conducive environment, attractive reward system, scalable knowledge infrastructure, technically sound application of a universal risk management process form the cornerstones of the SCRP platform.
At its core, the SCRP platform is an advanced collaborative mechanism to define and measure uncertainties for better decision-making and innovation.
"The most important questions of life are, for the most part, really only problems of probability".
Pierre Simon De Laplace, 1812