RMBE is licensed to operate a high-speed rail network directly linking several cities in the large country of Vinland. The government of Vinland heavily subsidises the rail network as it believes it to be critical infrastructure for the economic prosperity of this vast country. In return for the state finance, the government has set RMBE challenging performance targets, the results of which it is required to publish monthly, as well as explaining any significant variances to the transport ministry.
The board of RMBE acknowledges that severe delays or cancellations, even if caused by problems outside the company’s direct control, present it with a risk to its reputation with the travelling public, and loss of financial subsidies from the government which allow it to charge its customers attractive, low prices. Therefore, RMBE proactively manages risk to ensure that customers receive the services they expect and demand by employing an enterprise risk management (ERM) framework. ERM aligns RMBE’s corporate objectives with its key performance indicators and targets, clearly implying that it takes the management of risk very seriously. Indeed, the culture of putting the customer’s needs first is embedded into everything RMBE does.
Recently, a weather-related train accident in an outlying area resulted in fatalities, casualties and major operational disruption on the RMBE rail network. The actions taken by managers at all levels of RMBE were highly commended, as it was recognised that their prompt and effective responses to this serious situation significantly reduced the number of deaths and injuries sustained. The coordination of emergency services meant that help was on the scene quickly.
The conclusions drawn from the findings of an independent accident investigation report accepted that although risks in operating a rail service could not be entirely eliminated, they should always be reduced to as low as reasonably practicable (ALARP).
Required:
Describe how risk awareness could be embedded in RMBE’sculture and values.
There are a number of ways in which risk awareness could be embedded into RMBE’s culture and values, which are particularly important for a company operating in the rail industry.
Control environment
The strength of RMBE’s control environment will significantly influence the ability of senior management to instil a more risk aware culture throughout this rail company. However, in order to embed risk awareness in the collective mind set at RMBE, the senior management team will need to clearly communicate the risk philosophy of the company as well as what is expected of all its employees. The publication of enterprise risk management (ERM) policies and procedures, together with statements of compliance, will help to make risk an integral aspect of RMBE’s standard railway operating practices and its business culture.
Top level commitment
For the directors of RMBE, risk should be a prime consideration when developing business strategy. Shareholder value is largely driven by taking risks in pursuance of future growth opportunities, so care should be taken during the planning process to identify those risks which may prevent the achievement of corporate objectives and take appropriate mitigating action. One positive initiative which would clearly indicate top level commitment to greater risk awareness at RMBE would be to establish a board level risk committee to provide the necessary leadership and direction for the company. The risk committee would have the knowledge and authority to address rail industry specific risks.
Risk register
At an operational level, risk is an inherent feature of the core business activities of RMBE as a railway company, and it thus cannot be totally avoided. Employees must be aware that some operating processes are higher risk than others and be constantly vigilant about them. A risk register which lists and prioritises the main risks which the company faces can help employees decide which risks need most attention. The register can then be used as an objective and consistent basis to manage risk, committing sufficient resources as necessary and providing a holistic view of how risk is being managed throughout RMBE.
Human resource management
Culture has been described as the way we do things around here, so if greater risk awareness is to become a key feature of the RMBE culture, it needs to be inculcated into all aspects of human resource management, including:
(i) Individual job descriptions which should be drawn up with a greater emphasis on the duty of all employees to recognise and act on risks which may arise in their area of operations, particularly health and safety risk.
(ii) Induction programmes for new employees to include detail of RMBE’s ERM initiatives so that risk becomes ingrained in employee behaviours from the outset.
(iii) Regular training workshops for existing staff to reinforce the key elements of the risk management philosophy and ERM processes, particularly pertinent to running a rail business.
(iv) Individual performance appraisals to evaluate objectives relating to risk. This way risk management will be considered a key feature of staff appraisal and reward systems, and so become more important to all of the railway employees.
Discuss the risks which RMBE is exposed to, and explain how the ALARP principle in risk assessment relates to impact and probability.
The risks currently facing RMBE include:
Health and safety risk
This is the potential source of harm or adverse health effect on a person or persons directly impacted by the operation of the organisation. This is particularly relevant to a business like RMBE, where its passengers are transported at high speed along a railway network linking cities throughout Vinland. The inherent risks of rail travel in remote areas significantly increases the danger to safety to which RMBE’s passengers and employees are exposed.
Political risk
This refers to both the stability of a government, and the degree that it chooses to intervene in business activities. There is no suggestion that the Vinland government is likely to change in the foreseeable future. However, its recognition that the railway system is a key economic resource for the country by offering financial subsidies means that RMBE is highly dependent on it as a major stakeholder in its business. Failure to achieve the challenging performance targets set by the Vinland transport ministry could result in the risk of a significant reduction in income for RMBE, and all that entails for its core operations.
Regulatory risk
Such risks arise from those specific regulations which directly impact on the operation of an organisation. RMBE holds a licence to deliver a safe and reliable railway service to the paying public of Vinland. The recent unfortunate accident and the findings of the consequential independent report may result in additional safety regulations which could impact on the systems, operations, resources and investment plans for RMBE.
Reputation risk
This is the potential harm to an organisation’s reliance an organisation has on its brand, image and standing with the public at large. The fatalities and casualties which occurred from the tragic accident may result in negative publicity and adverse public attitudes towards RMBE. If passengers believe that the RMBE service is unsafe, they may opt for alternative forms of transport, and this would in turn harm the company’s financial and competitive position.
Technology risk
This arises from those possible changes in the technology essential to support ongoing business operations. The accident investigation report may recommend that RMBE invests in new safety equipment, rolling stock or even track to avoid a recurrence. Apart from the additional cost which would be incurred, the introduction of this new technology could negatively impact on the operational performance of RMBE in the short term. This could then affect the level of subsidy it receives as well as the reliability of its reputation with passengers.
Market risk
Represents the risk of potential losses on capital markets from the change in value or volatility of share price. The market risk at RMBE is influenced by:
(i) Operational performance, and its ability to meet the pre-determined performance financial targets.
(ii) Sourcing the necessary finance from capital markets to meet its investment plans.
(iii) Maintaining sufficient liquidity for the day-to day running of the business.
(iv) Obtaining the required resource inputs to deliver a reliable and safe rail service to its customers.
Financial risk
This is a general term which describes a company’s reduction in revenue streams and profits, or even the risk of incurring a loss. As a railway service company, RMBE is heavily reliant on fare paying passengers as its primary source of finance, so any reduction in passenger numbers is likely to impact heavily on its financial performance particularly as it is likely to have a high proportion of fixed operating costs. Compounding this with the risk of losing state subsidies for under-performance makes RMBE very sensitive to financial risk.
The ALARP principle
The primary focus at RMBE will be to reduce risk to a tolerable level rather than eliminate it, because in market based systems managed risk-taking is fundamental to success and profit generation. As a general principle, the higher the level of risk, measured in terms of its impact and probability, the less acceptable it will be to the company.
For a rail business like RMBE, certain aspects of its core activities could be viewed as potentially hazardous and even dangerous, exemplified by the recent weather-related accident on a remote part of the rail network which resulted in casualties. It is clear that such risks cannot be completely avoided, but that they can be reduced to an acceptable level by investment in infrastructure, safety systems and support services. In effect, the level of acceptable risk becomes a trade-off between the assessment of the likelihood and impact of risk materialising and the cost to RMBE of taking action to mitigate it, such as a decision not to run rail services during short periods of extreme weather.
National legislation in Vinland and safety regulations governing the operation of railways will stipulate the minimum acceptable standards with which RMBE must comply. The role of the board of RMBE is to decide what level of risk is as low as reasonably practicable (ALARP) for it to operate within the law and at a safe level expected by its passengers and regulators.
The residual risk which remains after the necessary action has been taken needs to be subject to constant review. This is because of the dynamic nature of the environment in which RMBE operates, where risks can change both in terms of their severity and the probability of them arising, so management may need to regularly refine and update operational practices. Indeed, it is possible that the level of residual risk may no longer be deemed as low as reasonably practicable, so alternative internal control actions will be required. An example could be when extreme weather conditions occur more frequently, so extra measures are necessary to protect the rail track allowing services to continue to run.
Assess how RMBE uses risk management techniques to mitigate various types of business and financial risks which it faces.
RMBE can use techniques to mitigate the various risks it faces as follows:
Training sessions
Compulsory awareness training for all operational staff will help them to identify health and safety risks before they become a potential hazard. Regular and structured planned maintenance of trains, track and signalling equipment will reduce the likelihood of accidents and injury. Standard operating procedures should to be designed and implemented with the safety of RMBE’s passengers and staff at their core.
Enterprise risk management (ERM)
RMBE employs an ERM framework to align the corporate objectives which arise from its strategic plans with its key performance indicators and agreed pre-determined targets. This approach should mitigate a number of risks identified, including political risk and market risk. The setting of targets orientates the business culture towards maintaining high levels of operational performance, but in a risk managed environment.
Marketing
The marketing orientation advocated by the stated policy of ‘putting the customer’s needs first’ suggests that RMBE is aware of the critical importance of its paying customers in all of its business operations. Such an awareness will help to mitigate the reputation risk of the company as well as a significant element of its financial risk. The dependence on government subsidies to keep passenger fares at a competitive level has its own inherent risks, but indicates the commitment of RMBE to offer its customers value for money.
Performance information
The publishing of RMBE’s actual performance against its pre-agreed targets every month focuses management attention on the necessity to maintain consistently high standards. This approach could reduce technology risk, since there would be a need to regularly upgrade systems and invest in new technology simply to achieve the required standard. The additional requirement to explain any significant variances against target to the transport ministry is an added motivation to the board of RMBE to manage business performance effectively.
Contingency planning
RMBE’s management was highly commended for the speedy and effective action taken in response to the recent serious incident, as it significantly reduced the number of fatalities and injuries sustained. The scenario implies that by employing its internal control systems, RMBE was able to coordinate emergency services in a remote part of the country. This report would have helped to mitigate RMBE’s reputation risk with the general public, and reduce the risk of regulatory action by the authorities.