In a world of ever changing risks, it’s impossible for risk managers to know what they will be dealing with next.

That fact was brought home once again at a conference recently, during a discussion with a risk manager from California. Since medical marijuana is legal there, a number of issues for employers are cropping up.

For example, what are the parameters of drug testing for marijuana, since it is a legal medical drug? Could a contractor, for example, who is subject to testing for alcohol be tested for marijuana? Even if the drug is legal, the risk manager said, the substance could impair judgment, jeopardizing the safety of the user and others.

One case being followed is a lawsuit in Michigan against Walmart, where an employee who used medical marijuana was fired after failing a drug test. This case, understandably, is of particular interest to corporate risk managers and HR directors.

NACS, an international association for convenience stores and petroleum retailing, noted that 14 states and the District of Columbia permit the use of medical marijuana by patients suffering from certain medical conditions, such as cancer or glaucoma. The Obama administration, it said, has directed federal prosecutors to respect medical marijuana users following their state laws—even if it conflicts with federal law banning marijuana use.

States vary on what is allowed in dealing with employees taking marijuana, leaving companies in a quandary, especially those with employees doing potentially dangerous jobs, such as construction. I can think of others, too, including mining and electrical work and anyone operating a motor vehicle, such as taxi drivers and long-haul truck drivers. In these situations, an impaired employee—legally or not—could be a danger to him or herself and other employees as well.

The question is what is an employer allowed to do in these situations and which laws, federal or state, should be adhered to? 

Risk managers, have you have any experience with these types of situations and have you had to deal with these issues yet?

Does the GAO need to look into whether state regulators are overstepping their authority in overseeing risk retention groups?

Off-hand, I can name at least eight people who are composting their kitchen and garden waste. In fact, composting has been a hot topic on a number of occasions. I’ve even heard debates of the benefits of backyard composting versus worm composting. Other discussions include water conservation using rain barrels and the many ways unused items can be kept out of the landfill.

Not only is this a nice surprise, it also means people are taking more responsibility for their lives and safeguarding their environment.

And if this all sounds off the wall, here’s a statistic that I recently read: Mother Jones, the magazine known for covering environmental issues, just last week announced that unique visitors to its website have jumped 125 percent year over year for the second quarter of 2010. Its digital revenue has climbed 61 percent over the same interval. There’s a message here.

While this is all great, I’m also seeing growing concern and even anger from people I talk to about how businesses and governments are lagging behind in these areas.

Harmful insecticides are still being used along with outdated methods for everything from trash and garbage disposal to weed control. In fact, at a recent conference for risk managers, I attended a seminar where use of insecticides and the associated hazards were discussed. But when I asked whether these dangers were being addressed by less harmful chemicals I was met with a wall of silence. To be sure, environmental risks are the next hot button.

With an increasing number of people growing their own vegetables and farmers markets and community gardens popping up everywhere, isn’t it time for businesses and municipalities to get with it? I’m happy to say that some things are being done. More businesses advertise going “green,” towns and counties are acquiring land for green space and setting aside plots for community gardens, but much more is needed.

The disgust and rage towards BP for its inept handling of the Gulf oil spill should be an indication of where many people stand on these issues. Hopefully this ongoing, out of control spill isn’t a sign of things to come. This is a good time for businesses and municipalities to take the lead in finding creative ways to do things—and still keep costs down.

In fact, maintaining the status quo isn’t always the best way to get the job done and keep spending down.

Here are a few suggestions:

• Instead of mowing the entire green area along highways and parkways, why not mow the strip adjacent the roadway and leave the rest of the grass alone? Nothing wrong with wildflowers and this would save a bundle of money.

• When cutting down dead trees, where there isn’t a danger of a tree falling directly onto a structure, leave the entire trunk and just remove the limbs. A tree without limbs isn’t going to be blown over and there is a lot less time, labor and space in the landfill needed if the trunk remains standing—not to mention providing habitat for wildlife.

• Instead of clear cutting for a parking lot, leave islands of mature trees. Shade is a good thing in the summer and having exposed land will greatly help the problem of water runoff after a storm.

• Municipalities can go even further by installing porous parking lots and requiring them of business. As water becomes scarcer and much of it is lost to runoff, new ways must be found to save this precious resource. Do the math—saving water is much cheaper than building desalinization plants.

• Rather than resorting to dangerous, indiscriminate use of insecticides, look into other, less lethal products. Keep buildings clean and empty trash quickly. By using strong products such as insecticides and herbicides, we are simply growing “super bugs” and poisoning our soil and water. This is another problem that will eventually have to be dealt with. Why not now?

It’s clear why Bermuda remains the world’s largest captive domicile. After attending the Bermuda Captive Conference in late June, I saw again how Bermuda is eager to show its support for the captive industry. Members of Bermuda’s government made a show in force to welcome attendees.

Bermuda Premier Ewart Brown welcomed attendees; while other officials participated in a panel discussion about the domicile. Bermuda has consistently made it clear that the country stands behind the companies domiciled there, tweaking regulations, changing or tightening them when necessary and keeping an open dialogue with business.

In the U.S., by comparison, Vermont’s Governor frequently welcomes conference attendees and Hawaii also has shown long term support of the captive industry.

Like other captive domiciles, Bermuda has had to overcome a down market, but it also has fought the “offshore” image of “tax haven” and easy regulations. It has done so by meeting with the U.S. government to set and meet standards and with Solvency II policymakers.

Bermuda appears to be staying the course, going for stability and long term growth and if its conference was any indication, its efforts are being noticed. Attendance was the highest since the start of the conference six years ago. Last year, I was told, it topped 350.

I talked with captive owners, several of whom have had a captive in Bermuda for years. They said they are happy with the expertise there and the convenience of travelling there. The perception of boards and coworkers, however, is a different issue that some have had to deal with on a regular basis.

Perception is the dirty word that will have to be dealt with. How, remains to be seen.

Any suggestions from captive owners or managers?

BP’s CEO Tony Hayward can’t cut a break. He does something to “get his life back,” but that something happens to be yacht racing. And who should be there, but the media.

Here is another CEO who doesn’t appear to have a clue. How did he get to be CEO in the first place? No one is saying he needs to sacrifice his life to this disastrous oil spill, but he could lay low, at least until the leak stops!

It looks like none of this will be a problem for long, however. BP wants him, and the poor public persona problem to “go away,” but it can’t even get that right. BP’s chairman announced Tony is exiting his oil spill command to be replaced by Bob Dudley. Other company officials, however, have indicated Mr. Hayward may remain at his post until August, after the spill is stopped.

What a PR nightmare. Either there is no public relations plan in place there, or the heads of the company are flat-out ignoring it. Both scenarios are bad for the company and its image at this critical time.

As for Tony’s recent botches, such as his yacht outing and his sullen mono-syllabic answers in the recent hearings, I have to wonder, doesn’t he watch U.S. reality television—AKA televised Congressional hearings? Didn’t he watch the Enron execs, or recently the heads of the failed U.S. banks, have their days on the hot-seat? Like dolts, there they sat, either not recalling anything or denying knowledge of a situation’s existence.

OK, so maybe the CEO doesn’t always know everything that goes on in his (or her) organization, that’s understandable. But since there generally is ample notice of a hearing, my advice to these CEOs would be this: for Pete’s sake, study up. Pull a few all-nighters if need be. Talk to people in the organization and find out what went wrong, why and when. Constantly saying you don’t know or don’t recall only leads to embarrassing questions like, “Do you know what day this is?”

Most of all, listen to the people in your organization who can help you to do your best, or at least put up a front—your PR team. Listening only to lawyers, after all, will make you appear to be insensitive. Ask Kenneth Feinberg after his work with the families of 9/11 victims. After being publicly trounced for his callous attitude towards victims’ families, he took a hard look at himself and admitted that as an attorney he had a lawyer’s demeanor towards people who were suffering. He changed his attitude and in the end was seen as a hero of sorts.

Reputation risk, especially in this age of the Internet, is right up there with every other risk. For some reason, it’s also the risk that gets ignored during a crisis, such as BP is going through. Possibly because some CEO’s think they are above listening to anyone, and possibly because a contingency plan was not exercised. In any case, the results can be disastrous.

As one risk manager recently told me: It can take 30 years to build up a company’s good name and only a day to destroy it.

“Where was the risk management?” asked PRIMA’s outgoing president, Ron Hayes.

Mr. Hayes, who lives and works as risk manager for the Calcasieu Parish School Board in Louisiana, has a lot to lose from this disaster. He spoke to me about it a few days ago at the Public Risk Management Association annual conference in Orlando, Fla. 

Visibly upset by what is happening, and could happen to his state, he said that while he is aware that BP has a risk manager, he wondered how this could have come to pass. “We’re required to ID risks and have a plan in our school system. How was this allowed to happen?” After all, he said, a risk manager’s job is to identify risks–no matter the size.

The ramifications of the spill are huge, he said, not only for himself, but for his entire state and the region. From the governor on down, he added, Louisiana residents are angry. And with hurricane season looming, thoughts are on the possibilities a tropical depression could bring. Homes flooded with sea water and mud is a bad enough scenario. Mixing crude oil in with that water would be a nightmare. One underwriter told me that oil in a home or building would mean a tear-down rather than a renovation. Imagine the impact this could have on coastal real estate as well.

Mr. Hayes talked about the stench in some areas—of oil and dead animals and rotting vegetation wafting inland—and this is only the beginning. This huge plume is growing every day and could travel up the East Coast, according to reports.

Other risk managers I’ve talked to here are also puzzled. One risk manager told me he didn’t think this spill was getting the attention the Exxon Valdese in Alaska did. “But wait until it starts staining the sandy white beaches up the East Coast,” he said. “It’ll get attention then.” 

BP is being criticized for paying out shareholder dividends and airing a national TV ad touting its environmental efforts.

I’ve seen the ad, portraying BP pulling out the stops to arrest the flow, clean up wetlands and save wildlife—and vowing to do everything possible to take care of the mess.

 Meanwhile, Tony Hayward, BP’s executive director and group chief executive, declared he wants this all behind him so he can “get on with his life.” Tell that to the people who lost their lives in the blast, the fisherman without a livelihood and the coastal business owners. And tell it to the shore birds and animals losing their habitat and their lives.

For more on the BP oil spill:

http://www.property-casualty.com/News/2010/6/Pages/Ambac-Commutes-Remaining-CDO-Obligations-Future-Uncertain.aspx

In a complex industry such as oil exploration, there can be no margin for error. And if there is a failure, there had better be a very good—tested—contingency plan in place to take care of it.

This was not the case with the BP oil spill, to say the least. It’s a huge disaster on every level. The failings and oversights are everywhere.

It appears that risk management and contingency planning were non existent here. Risk management, it seems exists for appearances—for the government and shareholders, basically. Because these companies are so concerned with cutting costs and making a profit, real risk management isn’t being employed.

In fact, I’d bet these companies spend way more on lobbying against government intervention than on their risk management programs or on planning for such emergencies. These are the same people who now want the government to clean up the mess when they can’t fix it.

And speaking of the government, where was the oversight in all this?

What came out after the recent coal mining disaster was that the mine was allowed to continue operations, despite myriad safety violations and citations. Why the mine was even allowed to operate is a mystery. A mining risk management expert I spoke to explained that the government policy is to shut down any mine that doesn’t rectify serious violations. He was shocked at the long list of open violations and that nothing had been done to correct them. You can read the article at http://www.property-casualty.com/News/2010/4/Pages/Mining-Disaster-Raises-Safety-Concerns.aspx?k=mining+disaster

I checked out the Web site of MPA—the Marine Preservation Association. This organization was formed as a result of the Oil Pollution Act of 1990, for the sole purpose of addressing problems caused by oil spills on water.

Among its members are BP, Chevron, ExxonMobil, CITGO, ConocoPhillips and Shell.

According to the site, www.mpaz.org, “anyone involved in the transportation, distribution or receipt of petroleum products on water must establish an approved plan that—should they cause a significant oil spill—responds to the ‘maximum extent practicable.’ Such a response must be immediate, comprehensive and safe.”

The site continues that the “key word here is ‘immediate.’ Because during an oil spill response, time is of the essence. That is precisely why MPA created—and entirely funds—the Marine Spill Response Corporation.”

MSRC, the site said, is “the most comprehensive, dedicated standby oil spill response program in the U.S.”

I think you get the picture here. It all sounds great, but rings hollow, especially now. In fact, when I clicked on the “In the News” tab at the site, all that was there were two 2006 links to articles about how MSRC had come through to help oil companies after the Gulf Coast hurricanes.

When I tried to do a search for “risk management” on the site, I got the “couldn’t be found” message. This is all a sad commentary, especially in light of executives testifying before a Senate panel in Washington yesterday. Lamar McKay, chairman of BP American; Steven Newman, president of Transocean Limited; and Tom Probert, president of Halliburton each pointed fingers at the other operations, defending their own.

Why am I questioning the value of risk management to these companies? Because the believed-to-be-unlikely “black swan” events have been happening almost bi-weekly. And these are giant fiascos—causing financial ruin to the economy, deaths in both the coal mine disaster and the oil rig catastrophe and an environmental calamity that worsens every day.

In all of these instances risk management, the very thing that could prevent such disasters, appears to be an afterthought.

Is risk management being practiced in name only, where it is most critically needed? Is it being practiced when it’s convenient to these organizations and why isn’t it given more consideration?

Enterprise risk management is an obvious solution to assessing and preventing such disasters, but it appears this discipline has a very long way to go, at least with these mega-corporations that seem to be above the law.

According to media reports, solutions to the sort of disaster that’s unraveling right now off the Louisiana coast were never even tried. Nobody knew if the giant box lowered to stop up the well a few days ago would work at all—they were surprised when ice crystals formed, preventing its success.

This are sad days. Unfortunately, I believe risk managers may have a bigger battle ahead of them than anyone might have imagined.

A political cartoon by Matt Davies in today’s newspaper said it all. Labeled “Offshore Drilling Technologies,” two side-by-side drawings depicted, on the left with the caption “extraction,” a detailed oil rig. On the right with the caption “cleanup” was a simple roll of paper towels. Check out the cartoon at http://davies.lohudblogs.com/files/2010/05/0511davies1.jpg

It’s no secret that some risk managers have been concerned about a lack of talented, fresh faces in a growing industry.

If the students I met at the RIMS conference are any indication, however, I’d say the risk management profession will be in good shape in days to come.

At a Spencer Educational Foundation reception in Boston, I met four students who are studying risk management at Virginia Commonwealth University. They were bright, friendly and very excited about attending RIMS and about their careers in risk management.

They were also savvy about mining career prospects, readily passing out their Gamma Iota Sigma Alpha Mu Chapter business cards.

One student I spoke with, Kanwar Anand, a junior at VCU, told me that during his rounds in the exhibit hall, he had met some people at the Lloyd’s booth. They recommended that Kanwar apply for an eight-week 2011 internship. No slacker, he already has completed two four-week internships.

This is all good news, since several risk managers lately have told me that even if good candidates are attracted to the industry, they may be discouraged by a dwindling number of jobs. As a result, those candidates could be lost to other areas of the industry, such as broking or underwriting.

While this is a possibility, I have faith that dedicated students will find their way to the challenging field of risk management.

Why? For one thing, the risk management profession has been behind many of those students the whole way. Take scholarships. In 2009 Spencer awarded 37 scholarships totaling $188,000.

It also has given $300,000 in grants to the Anita Benedetti Student Involvement Program since 1979. And there are the “Risk Manager in Residence” program grants, that have enabled risk managers to speak to students about the profession. There also have been grants for internships to RIMS member companies.

There is much more, including information about companies contributing to these programs on the Spencer website, www.spencered.org.

I wish these students the best in their chosen profession and I’m pleased to see that the entire community is behind them.

Although risk management is a system for controlling the exposures an organization has experienced and might conceivably face, it is by no means fool-proof, mainly because no one can possibly foresee every calamity that could befall an organization.

Take a major headline of the past couple of weeks, with plumes from a volcano in Iceland halting air traffic between several of the world’s largest hubs. As a result, thousands of travelers were stranded in major airports with no relief in sight.

While this may not be a major insurance loss, it is most certainly a risk management crisis. People were trapped in airports with nowhere to go. Businesses were crippled.

From what I’m hearing, airport contingency plans for dealing with stranded passengers kicked in well. Cots were provided for people to sleep on. Food and beverages were available, and there were even temporary shower facilities set up.

In fact, this is exactly what risk management is all about—being prepared for the unforeseeable.

This brings me to a report by the World Economic Forum released this month, “Rethinking Risk Management in Financial Services—Practices From Other Domains.” The report makes risk management recommendations to the global financial sector based on the experience of several other industries.

The report explains that leading up to the recent economic crisis, many financial institutions had similar exposures not widely seen as important. And so when liquidity contracted suddenly and violently after the dive in housing prices, prompting the collapse of derivatives linked to mortgages, many institutions suffered horrendous losses simultaneously.

“As these institutions had similar funding structures, risk-management practices and mitigation strategies, it was as if someone had yelled ‘Fire!’ in a packed theatre, and all ran to the same exit,” the report said.

What was lacking was risk diversification. The report uses the example of a Chilean salmon farm, which lost millions of fish to a virus, costing thousands of jobs. It was found that the salmon were raised in over-crowded conditions, causing the virus to spread rapidly. Antibiotics made the fish more vulnerable in the long run as the bug became drug resistant.

The solution seems simple—don’t pack the fish in so closely—but the organization, obsessed with short-term profits, ignored the obvious risks.

Similarly, financial institutions should vary their modeling assumptions for risk management. Boards, executives and investors need to think for themselves rather than implementing me-too strategies and depending on outside verification.

But while the report makes many good points about sharing findings across industries, it also stresses that all of this is futile if upper management turns a blind eye.

Many top managers in the financial sector, it said, had never experienced a significant crisis. Many also believed they were “too big to fail,” and operated under the “black swan” belief that a system-wide crisis was extraordinarily unlikely.

The biggest lesson here is that arrogance and ignorance will cause the most seemingly sound risk management systems to fail. Why? Because arrogance is blind to risk.

For this reason alone, it’s imperative that upper management make room for and support criticism from within their organizations without fear of retaliation—something that was lacking in the troubled financial sector, the report found.

Part of sound risk management is putting the proper incentives in place, keeping the entire organization focused on the bigger picture. Yet the financial crisis was fueled by perverse incentives, including big bonuses based on short-term gains.

True risk management requires a much longer-term outlook.

Have you seen the animated movie Wall-E? One of the remaining robots on the planet is assigned the task of collecting, crushing and stacking mountains of garbage. It’s soon evident that what appear to be tall buildings are really stacks upon stacks of compacted blocks of refuse.

While the premise of the movie is interesting and at times humorous—as when the robot, who has his own collection of favorite finds, discards a diamond ring and keeps the ring box—the movie is also poignant. And it rings true, as more and more our planet is literally swimming in trash.

It’s by now well known that plastic garbage has accumulated in an area in the ocean larger than the size of Texas-I’ve seen reports that it’s up to three times the size, in fact. Just last week I read a newspaper report that another massive swirl of trash was discovered not far from the stunningly beautiful island of Bermuda.

Most of this garbage is plastic—water and drink bottles and scads of other items we discard daily without thinking.

The scary part is that this plastic is being churned into tiny particles, which are being ingested by marine animals, including the fish we eat.

As a commuter, I’m a daily witness to trash that is literally choking canals adjacent to the tracks, canals that feed into wetlands and filter into our water supplies.

Just thinking about the future, as the volume of trash in landfills, streams, lakes and our oceans continues to build is depressing. What’s more, businesses and municipalities don’t appear to be doing a very good job of recycling plastics and other materials. Garbage disposal has been viewed as something someone else needs to take care of—something we want out of sight and out of the way, no matter where it ends up.

Some are starting to take positive steps, however. I know that Lloyd’s, for example, took on the project of reducing, if not eliminating the truckloads of paper the market produces every day, by doing more business online. It’s a good sign to hear the chairman of an organization that size addressing its waste.

Looking ahead, I believe there is hope for our massive garbage problem. Recently I’ve read about new technologies that allow for burning trash, yes our garbage, at extremely high temperatures—3,000 degrees. This would process would create more than enough fuel to create electricity for homes and businesses.

The way I see it, mining our own garbage is about our only hope for keeping the planet from turning into the set of Wall-E. The way to begin tackling the issue is to bring value to waste products, and so far, recycling just isn’t enough. 

Risk managers, do you have any innovative methods or solutions at your organization or municipality? Any advice to pass on? If so, I’d love to hear it and to write about it in future blogs.