Preparedness, Risk Management, and What We Don’t Know

Michele Braun, Director IMR

No, we can’t be prepared for all eventualities.  “It’s a stochastic world,” my grad school stats prof would remind us.  There is variability associated with all possible outcomes:  just ask the National Weather Service’s forecasters or, for that matter, political pollsters.

Still, I was more than a little surprised to read the lead-in quotation for the New York Times’ post-election DealB%k coverage [November 15, 2016], in which the CEO of a major corporation admitted that “If you were to look at our game board of all the possible outcomes of the election, this one wasn’t even on the sheet.”  Given that there were only two possible outcomes to the November 8 U.S. presidential election—a Clinton victory or a Trump victory—and two possible timings for that outcome—immediate or delayed—how is it that two of the four cells in a two-by-two matrix weren’t “even on the sheet”?

Enterprise risk management is the practice of reviewing possible outcomes and preparing to take advantage of or avoid them.  Sometimes the focus is on the most likely, but sometimes the degree of impact drives consideration of responses to less likely events.  Turning to the New York Times again, the November 27, 2016, “Vocations” column featured a senior emergency preparedness administrator for a gas and electric power utility.  His job is to plan for the unexpected and deploy staff to respond, both on home turf and as-needed to other states.  “Everyone in the company steps in when needed, and we hold drills to give them practice.”  Yes, storms and storm damage generally can be anticipated, but not the specifics.  So experts practice, review their data, and anticipate far more than one possible outcome.

A December 10 Bloomberg article reports that a Group of 20/Financial Stability Board panel will shortly recommend that “Companies should tell investors how their profits may be hit by tighter pollution rules and extreme weather events coming from climate change.”  In September, Financial Stability Board chairman and Governor of the Bank of England Mark Carney, identified three key risk categories when considering risk associated with climate change:  physical risks, liability risks, and transition risks.  As identified, these are macro risks, that is, risks to economies on a broad scale.  They are also micro risks, that is, broad changes that might make significant differences in how an individual firm manages its business.   

Take that power utility contingency planner, for instance:  changes in weather patterns undoubtedly would change the “emergency” events for which his firm prepares as well as the amounts of electrical and gas power it needs to provide.

These examples raise the good questions of which outcomes should be anticipated and which prepared for as well as what level of effort and investment should an organization spend on preparedness.  The short, and not so easy answers, are that the answers will be different for every organization and will vary depending on industry, size, maturity, location, funding base, and other factors.   

Not every firm should have pondered its potential risks and plans for the election outcomes, but every organization should periodically assess what risks it should plan for, plan to avoid, or embrace.  And, every board of directors or trustees should be asking its executives what “what ifs” they are considering and which they plan to tackle or ignore, and why.

Michele Braun is the Director for the Institute For Managing Risk at the School of Business (IMR).
For more information on IMR email Michele.Braun@mville.edu

Photo courtesy of Norman W. Bernstein