The Precautionary Principle and managing risk

The precautionary principle says, in part, that protective action should be taken early to mitigate risks.

In essence, the precautionary principle says that despite there being a lack of proof or scientific evidence, protective action should be taken early to mitigate those risks that may lead to long lasting and possibly devastating impacts.

“In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” - US President Theodore Roosevelt

I was recently reminded of this famous quote during a discussion on the much debated, and now widely used, precautionary principle.

This principle has come a long way from its humble origins in Germany in the mid 1970s as a general principle of “good housekeeping” in environmental management.
Today it has found its way into legal cases, guiding public policy debates and directing and informing major regulatory decisions.

This shows just how quickly and dramatically new thoughts, ideas and concepts can spread. But what does the precautionary principle actually mean for business, for developed and developing economies and for the future of government regulation?

In essence, the precautionary principle says that despite there being a lack of proof or scientific evidence, protective action should be taken early to mitigate those risks that may lead to long lasting and possibly devastating impacts.

It has had a major impact on some of the most significant and far reaching political and regulatory decisions over the last decade. The two obvious examples which come to mind are climate change and the regulation of genetically modified food.

Whether you are a supporter of this line of thinking or not, I cannot help but draw the obvious parallel between the principle and the decisions that most businesses and leaders need to make on a daily basis.

Uncertainty is a part of life. What matters is how you incorporate risk and reward, what value you place on the consequences your decisions have on a market, the wider community, an industry sector or even a country, and what information you need to make the “best” or “right” decision.

It comes down to a matter of choice under uncertainty, itself a defining characteristic of business management. Choices about appetite for risk, choices about innovation.

Yet, applied in its strictest terms , in a regulatory context, the precautionary principle would stop all innovation, halt all development and stifle economic growth. There is no such thing as a risk-free world. At its most open, it becomes ineffective and fails to address the identified risks and fails to look beyond the short term.

As in business, this really comes down to making an informed decision - not just for the short term but with a view to a business' future success.
Uncertainty is a part of life. What matters is how you incorporate risk and reward.
I would struggle to find many businesses these days that do not look beyond this week, this month or this year. Leaders need to deliver near-term results and drive long-term visions.
This is where the precautionary principle comes into its own - as a way of thinking about, and incorporating, the future into today's decision-making.

With globalisation, the emergence of information technology and the use of big data, we are seeing uncertainty increasing rather than being reduced. Today, few local businesses would know all of their customers by their first names; rather, they may just as easily be selling to a customer or firm half a world away.

Despite that, they are likely to know a lot about their social-economic circumstance, their buying preferences and their point in a global supply chain, and can service them much better than they ever could previously. Global personalisation. This is the world we now live in.

The precautionary principle is just the latest idea that has evolved from its specific purpose into being a useful tool to inform choice and decision-making in times of uncertainty.
Despite its humble beginnings this should not detract from its value as a useful tool to inform decision-making for business, government and for society.

President Roosevelt may have been right, and it is certainly clear that it is vital we continue to have open, unbiased and informed discussions and to continue to learn and to always consider the future. Throw in instinct and common sense and we are well on the way to making the best and most informed decisions.
 
Alex Malley FCPA is chief executive of CPA Australia.

This article was originally published in The Huffington Post UK.

December 2014
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