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Flirting with disaster

Predicting disaster

‘Being a whisteblower is extremely expensive. The consequences for the people who seek to silence them are usually fairly modest’

Marc Gerstein - Flirting with Disaster

Marc Gerstein’s Flirting with Disaster. Photograph: PR

What does the US sub-prime mortgage disaster have in common with the Challenger space shuttle crash? The answer, perhaps surprisingly, is quite a lot. Both were caused by similar organisational failings, including design flaws and people’s reluctance to speak up when things started going wrong.

Management consultant Marc Gerstein believes that nearly all disasters are caused by the same factors. In his new book entitled Flirting with Disaster: Why Accidents are Rarely Accidental he analyses catastrophes ranging from the space shuttle crashes Columbia and Challenger to the collapse of Arthur Andersen in the wake of the Enron scandal, Merck’s Vioxx disaster and the BP Texas City refinery fire.

“I have found the same distorted thinking, errors in decision-making, and self-serving politics at the root of many industrial accidents, product-liability recalls, dangerous drugs, natural disasters, economic catastrophes and national security blunders,” he writes.

In the book Gerstein, who runs a management consulting firm whose clients include Citi and Lehman Brothers, identifies widespread “bystander behaviour” as a major factor behind catastrophes. He thinks people are generally reluctant to “rock the boat” because of a deep-seated fear of being ostracised – which can be traced back to “ancient man” for whom angering the local elite and ostracism from one’s group was equivalent to a death sentence.

That fear is often justified. “In some organisations, the disclosure of unpopular or embarrassing facts is deliberately suppressed, and going against the grain often precipitates ruthless, vindictive retaliation that publishes the ‘offenders’ and sends a chilling warning to would be truth-tellers.”

He called for more effective legal protection for whistleblowers. “There are rules on the books both in the UK and the US, but how well they actually work is another story,” he said in an interview. “Being a whisteblower is extremely expensive. The consequences for the people who seek to silence whistleblowers are usually fairly modest.”

However, his views are not shared by Guy Dehn, director of the whistleblowing charity Public Concern at Work (PCAW). He believes Britain has been ahead of other countries in passing legislation that offers unlimited compensation to whistleblowers who are victimised. The Public Interest Disclosure Act is 10 years old today, and BSI British Standards, the UK’s national standards body, and PCAW are marking the anniversary with the launch of a new code of practice on whistleblowing. Only 40% of UK businesses provide a safe environment for staff wishing to report misconduct, according to PCAW, which runs ahelpline for whistleblowers.

The highest payout awarded to a whistleblower in the UK was £3.8m, which the estate agency firm Chesterton was ordered to pay to its former chief executive Neil List in 2005. He was sacked for disobeying chairman Peter Brooks by informing shareholders of a takeover approach. Chief operating officer Mike Backs, who was also fired, was awarded compensation of £1.5m, though the company had by then collapsed into receivership. 

Shipman’s legacy

“The main purpose of the legislation is to encourage people to blow the whistle so that disaster is averted,” Dehn said. He believes that it has succeeded in changing people’s attitudes towards whistleblowing. He pointed to the health sector where major catastrophes on the scale of serial killer Dr Harold Shipman or the Bristol Royal Infirmary disaster have not been repeated.

Gerstein takes a more pessimistic view, talking of many “near-misses” in the UK health sector. In the US, deaths caused through incompetence, administrative or procedural mistakes number more than 55,000 every year, according to conservative estimates. UK statistics are equally worrisome although getting precise numbers is difficult, he said.

Similarly, the storm clouds had been gathering over the sub-prime market for a long time before its crash last year, Gerstein argued, noting that former Federal Reserve chairman Alan Greenspan had warned of its dangers two years before.

His comments came as America’s biggest sub-prime mortgage lender,Countrywide Financial, faces a prosecution for unethical business practices.

It is accused of using misleading marketing to sell mortgages packed with hidden fees and risky terms in its quest to dominate the US home loans industry.

Gerstein said the problem with sub-prime products was that they were priced without appropriate benchmarks. “It is not as if you can price them on the basis of a stock price which is a clear market tangible,” he said. “The people pricing the products were guessing, and they knew they were guessing.” Sub-prime mortgages were sold on the basis of promises that were “unrealistically optimistic”, he added. Customers were not informed about the risks and in many cases the sales people themselves did not know about the full risk.

“People sell what they are rewarded to sell and if those things happen to be risky then they sell them anyway,” Gerstein said. “If as a society we want to lower the risk associated with this then we would design an incentive system that encourages people to take prudent risk. The current one does not.” He noted that there are currently moves under way in the US to regulate investment banks – which until now have enjoyed greater freedom – in much the same way as commercial banks.

Certainly, it is easy to pinpoint problems with the benefit of hindsight. Gerstein acknowledges that it is often hard to know when bad decisions will lead to a major disaster (he calls it the “weak signals dilemma”). He runs seminars encouraging people to eliminate routine accidents, particularly in healthcare, rather than focusing on low-probability catastrophic events.

“It is very difficult to get people to accept the likelihood of future catastrophes on the basis of past catastrophes,” he said, with companies willing to spend millions on innovation but much more tight-fisted when it comes to taking measures designed to avert future disasters. “There is almost no limit to what people spend on innovation chasing breakthroughs – the proverbial next iPod – even though the probability of that happening is similar to that of a horrific catastrophe.”

Flirting with Disaster: Why Accidents are Rarely Accidental. By Marc Gerstein. Published by Union Square Press. £8.99

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