Icarus: On operational safety and organizational downfall

Abstract

Man-made disasters never fail to shock, especially when accompanied by loss of life. The degree of shock is even greater when they involve a highly regulated organization, as in the case of Boeing that has a decades-long reputation for engineering excellence and safety. This study seeks to uncover the underlying dynamics that can result in such disasters, using system dynamics modelling. We consider the institutional (regulatory) context, as well as the effect of size when an organization is "too big to fail". Our analysis indicates that organizations may be tempted to take risks with the complicity of the regulator in that the latter does not pay sufficient attention to their operations. This oversight is compounded by previous instances of risk-taking having paid off, leading to an erroneous belief that continuing to take risks in the future will pay off-a phenomenon known as "the confidence trap". Being too big to fail introduces a moral hazard problem that "supercharges" the confidence trap, prompting unwarranted risk-taking by the organization and regulator inaction. This ultimately results in greater frequency and magnitude of disasters. To attenuate the consequences of these dynamics, we suggest two policy levers. First, financial clawbacks that entail executives having to pay back part of their renumeration in the event of a disaster. This is intended to weaken the "too big to fail" effect by subjecting individual decision makers to market mechanisms and better aligning the objectives of the operator and regulator, making disaster avoidance a shared priority. Second, third-party monitoring and auditing that serve to mitigate regulatory oversight and better utilize expertise. These levers are expected to significantly reduce the likelihood and impact of disasters. We discuss the implications of our study for high-risk industries as well as its limitations.

Keywords: Confidence trap, Too Big to Fail, Boeing, Disasters, Governance, Regulations, System