Last year marked the 100th anniversary of the first and onlyvoyage of the RMS Titanic. On Apri 15, 1912, the demise of the“unsinkable” ocean liner caused 1,502 fatalities, one of thedeadliest maritime accidents of all time. For more than acentury, scholars have researched the many contributing causes ofthe disaster, hoping to prevent future loss.

This enormous ship was designed to be the “state of the art” insafety, with no expense spared by the White Star Line to ensurefirst class passengers the utmost in comfort and luxury. Yet, the“biggest and the best in the industry” failed miserably—a statementthat rings true in many industries, includinginsurance, today.

As noted by risk expert Michael Rasmussen in his recent blogpost, “The Titanic: AnAnalogy of Enterprise Risk,” the lessons we learn from theTitanic can help us understand and make a case for enterprise riskmanagement (ERM) today. In particular, one of the most significantlessons learned from the experience bears frequent repeating:Never underestimate human capital risk.

Human capital risk can be generally defined as a workforce'sability to achieve strategic business objectives. As confirmed in a2011 report by The Conference Board, “ManagingHuman Capital Risk: A Call for a Partnership Between EnterpriseRisk Management and Human Resources,” even companieswith robust ERM programs may not fully incorporate risks from theirstaff and workflow-management issues into their overall riskframework. Human resources (HR) issues also tend to be moresiloed than other parts of the business, and HR managers may not befully integrated into ERM committees or strategy teams. Specific issues like continuity planning, orhiring staff for new operations, may come into the spotlight fromtime to time. However, the depth and breadth of analysis of humancapital risks in an ERM program, particularly for insurers, may beless thorough than for other risk areas suchas underwriting loss or capital planning.

Human Activities and Assets

Strategic, legal/compliance, and operational aspects of humancapital management must be thoroughly considered in an ERM programin order to develop a complete picture of risk to the company, andput into place necessary controls or systems to ensure that humanerror is either eliminated, minimized or supported by back-upplans.

Just a few examples of contributing causes to the Titanicdisaster show how both individual human error and staff or workflowmanagement, if not properly evaluated as part of personnel risk,can significantly affect results of any major operation:

Several poor key strategic decisions were made.According to an inquiry by the U.S. Senate's Commerce Committee,the ship's speed was excessive, considering its size and steeringcapabilities. Neither Captain Smith, nor the White Star owner Mr.Isling, heeded three distinct warnings of ice flows in the vicinitysent by nearby [sources]. The Captain reasonably should havediscussed the warnings with other officers or placed additionallookouts on duty.

Another major factor in the Titanic's sinking was its coredesign. Ship architects boasted that its multi-compartment designwas “watertight” because the bottom was double-walled, and exteriorsliding doors were sealed. However, water seeping from icebergpunctures could fill multiple compartments side-by-side, making thebase much heavier than anticipated. Also, thematerials chosen for the construction of the hull and rivets wereof a metallurgy becoming brittle in icy water, making it easier forsoldering rivets to pop out. Designers of the Titanic either werenot aware of, or consciously chose not to implement, sounderbuilding practices that other vessel designers of that time haddiscovered. Risk managers must consider the fact that even themost up-to-date technology and operational practices are notfoolproof, and that simple errors in judgment can still causesignificant loss.

Captain and crew may have had insufficient experienceand training. Another issue was that the Titaniccrew had not been trained adequately incarrying out a full-scale evacuation. Many did not know the fastescape routes to higher floors, and there was a delay in gettinglower-level passengers to the deck. We also know that numerousofficers were not told how many people they could safely put aboardin the newly designed lifeboats. As a result, the crewlaunched many of the lifeboats barely half-full.

Also of note, while Captain Smith was an experienced seaman, hehad not headed a ship of the size and complexity of the Titanic,and may have been missing crucial background knowledge about howquickly it might stop or turn, considering its speed and itsunusually small rudder size. Today, many companiesstill provide insufficient attention and funding to educationand training initiatives, often favoring investment in capitalassets and technology. It's important, though, to consider the fullrange of costs and benefits of a state-of-the-art system ormachine, if staff cannot use it properly.

There were few standards governing work shifts, and soshort-staffing caused problems. Only two Marconi radiooperators were on board to relay messages from passengers viawireless radio, and the men were expected to simply work around theclock, taking breaks and relieving each other only as one felttired. There was evidence that one or both had received icebergwarnings from local ships, but were either unwilling or unable torelay those messages to the bridge, or did not follow properprocedures to recognize and transport messages to the bridge. Evidence later indicated the men were, infact, inundated with Easter telegraphs to and from passengers anddid not focus on the warnings partly because of their generalstressful workflow. Risk managers and HR professionals benefit fromclose cooperation in evaluating the wide range of potentialproblems that can arise from staffing shortages.

The Letter and the Spirit

Key men complied with the letter, but not the spirit, ofthe law.The ship's lifeboats had capacity to hold onlyhalf of those on the voyage, and merely a third of passengers andcrew if the ship had been fully-loaded. Because of outdatedmaritime safety regulations, this minimal coverage was sufficientfor the ship to be deemed “legally compliant.” Clearly there was amismatch in what was required as “safe” from a legal perspective,and what was truly necessary. Often, it is only a small amount ofmarginal trouble, extra time, training, or expense preventingcompanies from fulfilling their ethical and moral obligations tothe staff and to the public. Mere legal compliance alone is notenough.

The complicating factor of human “optimistic bias” mustbe considered. In a prior Property-Casualty360.com blog,“Rose-ColoredRisk: Reducing Bias in ERM Risk Assessments,” it was noted thathumans have a natural tendency or bias towards self-deception aboutsignificant risk, called “optimistic bias.” It proposesthat people expect things to turn out better for them than theirpeers, or that they expect that the future will be brighter andbetter than the past.

Optimistic bias of the owners, staff and crew was a keycomplicating factor in the poor evaluation of many of the Titanic'spotential risk areas. The Titanic experience demonstrates inextreme detail how an overly–but naturally—human optimistic view ofthe world can lead to one overlooking the small details that mightaffect measurements of the true likelihood and magnitude of risk.ERM practitioners must appreciate that all evaluation of riskitself is subject to human interpretation and bias, and adoptappropriate mitigation techniques to ensure a clear, sharp view ofthe future.

Practical Solutions For Better RiskManagement

To begin tightening risk management around human capital, HR andERM professionals must step up their efforts to catalog and fullyassess the range of risks involving people. This includes both therisk of losses to personnel and staff, as well as lossespotentially caused by employees and mismanagement—a numberof scenarios that can be difficult, but not impossible,to quantify.

During this process, it may help to first categorize the lossesinto subcategories of risk, such as a.) strategic, b.)operational and c.) legal/compliance risk, then assess themyriad risk scenarios found within the appropriatecategories:

1. Strategic human capital risks would include high-levelbusiness planning issues, such as:

• Overall workflow and management design for delivery of thecompany's products and services.
• Identification of key personnel whose loss would affectstrategy of the company. This may refer to the CEO, CFO, orhead of a financially sensitive unit such as underwritingor claims.
• Constitution and charter of the board of directors andmajor committees.
• Strategy decisions with major staffing impact, suchas opening or closing a branch office, or creating a newproduct or entering a business line.

2. As for operational risks typically faced on a day-to-daybasis, considerations may include:

• Death, resignation, retirement or disability of keyperformers whose contributions are key to business planachievement. An example would be a top sales person.
• Overall staffing levels for departments, includingturnover and retention.
• Large-scale layoffs or major departmentalre-organizations.
• Compensation issues, which could in turn affectturnover and retention for particular jobs.
• Training and education of staff to ensure corecompetencies in job skills.

3. Legal/compliance risks associated with employees,violation of which can incur fines, fees, penalties or spawnlitigation against the company. Related issues might encompassthe following:

• Compliance with wage and hour laws, orhiring practices, such as background checks.
• Training and education, as well as policies andprocedures, to prevent sexual harassment, workplace violence, anddiscrimination of any kind.
• Ensuring employees follow regulatory compliance and safetyprevention policies and procedures.
• Implementing practices and controls to prevent theft,fraud, embezzlement, bribery, or other criminal acts.

Assessment Assistance

To this end, companies should take full advantage of the rangeof risk assessment tools available, including creatingquestionnaires and surveys; reviewing personnel loss histories andworkers' compensation claims records; interviewing managers andstaff, reviewing flowcharts and organizational matrices; andconducting on-site inspections. In addition, HR professionalsshould have a clearly defined role in the ERM process, to assistthe company in having a full and properly aggregated view of risks,root causes, interactions, and impacts of business strategy as itaffects, and is affected by, the workforce.

Human capital risk comprises a significant part of the riskprofile of any major organization. The identification andmanagement of human capital risks in relation to business strategyshould not only be a core skill of every HR executive, butalso such skills and experience should be shared–andmaximized–through HR participation in the organization's ERMprogram. Don't let unidentified and unmanaged human capital risksink your ship.