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Red tape ties up risk management efforts for public sector organizations

Higher scrutiny, regulation make it tougher to implement ERM strategies, avoid risks


SAN DIEGO — The public sector lags the commercial sector when it comes to emerging best practices and particularly when it comes to enterprise risk management.

Public organizations are usually subject to more scrutiny and more bureaucracy than private companies, and they are often required to provide services regardless of the potential liability.

Still, public sector risk managers do have some advantages over their private sector counterparts, such as sovereign immunity protections that limit liability, risk management experts said.

“In the private sector you want to ... push the responsibility for the risk as close to the source of the risk, get away from the hierarchy of risk management,” said David Dolnick, San Diego-based risk manager for construction firm The Brady Cos.

Incorporating risk management across an organization to create better outcomes has spread among companies in the private sector and gained recognition among risk managers generally as a way to reduce exposures. Yet the public sector faces greater restrictions and organizational challenges, Mr. Dolnick said.

“If (a private company) wants to make changes, (executives) can do so behind closed doors,” he said. “Public boards have to do things in the open, and that can slow them down. (In turn), the private sector tends to be more nimble.”

Speaking earlier this month during a session of the Risk & Insurance Management Society Inc.'s annual conference, risk managers from opposite realms also said the adoption of enterprise risk management is another major difference between the public and private sectors.

Joseph Mazza, Oceanside, California-based director of risk management for MiraCosta College, agreed that public sector adoption of ERM has been slow, but also said the college and other California public institutions are well on their way to implementing ERM programs.

Citizen and media scrutiny affecting decision-making is a key challenge for public sector risk managers, Mr. Dolnick said.

“You never get away from that public eye,” he said. “In the private sector, we try to stay away from that.”

There are fewer options in the public sector because of stricter accountability, said Mr. Mazza. There are “many bureaucratic hurdles in the public sector. We have a board of trustees (and) transparency is critical. If someone in the community asks, "Why did you do that?' (the board of trustees) has to answer.”

In addition to the politics of working in the public sector, there are numerous codes to comply with, which slows the implementation of ERM. In California alone, Mr. Mazza said, public organizations in California face 28 sets of laws, ranging from an elections code and family code to a vehicle code and water code, that strictly guide day-to-day operations.

Another key difference is the tolerance for risk. Whereas the private sector can avoid certain risks, the public sector is required to provide a wide array of services and cannot avoid all risks.

“If taxpayers want it done, (we) have to find a way to get it,” Mr. Mazza said. “We are not concerned about profit. We are given a budget (and) we have to operate and squeeze every dollar out of that.”

Public entities, however, can use some of the same risk management techniques as private firms. At MiraCosta Community College, for example, the board elected to hire a landscaping service to trim the tall trees on campus. This eliminates some risk of having the college's own maintenance workforce performing risky work on campus.

Another difference between public and private entities is sovereign immunity, which protects public entities from some law suits.

The public sector, for example, may provide photocopies of a book or manual if it is used for educational purposes, said Mr. Mazza. “In the private sector, you are looking at copyright infringement.”

Mr. Dolnick also said public entities are shielded by law from punitive damages.

The private sector has “less infrastructure, but a higher level of liability,” Mr. Dolnick said. “You are trading one for the other.”

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