covid-19 and corporate survival: Managing risk under conditions of uncertainty
Dr. Emmanuel Moore ABOLO is the President, Institute for Governance, Risk Management & Compliance Professionals/GMD, The Risk Management Academy Limited.
April 20, 2020993 views0 comments
According to Richard L Tso- Senior Marketing Manager for Microsoft-, “the future is discovered in the unexpected. It’s found where no one has thought to look. And where no one, yet, has had the courage to go”.
Uncertainty, according to Wikipedia, refers to epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to physical measurements that are already made, or to the unknown. Uncertainty arises in partially observable and/or stochastic environments, as well as due to ignorance, indolence, or both.
So how well are you as an organization prepared to face global risk or uncertainty? Do you need an additional level of preparedness in your organization?
The global COVID-19 pandemic is having an unparalleled impact on our societies, economies, and supply chains. It has trended toward the worse end of possible scenarios. It has become the sort of once-in-a-100-years public health shock that sinks unprepared businesses. There is no doubt that the virus poses evolving risks to economic activity of every nation.
The IMF predicts worst recession since the Great Depression. The International Monetary Fund Chief Economist Gita Gopinath projected that the global economy would contract by 3 percent, a downturn three times greater than the contraction after the 2008 financial crisis.
“It is very likely that this year the global economy will experience its worst recession since the Great Depression,” Gopinath said. She added that although a “partial recovery is projected for 2021” countries should still expect their economies to be 5 percent smaller.
As our socio-economic system adapts, businesses and their employees around the world are already feeling the effects. Minimizing impacts and finding a safe, responsible and productive way forward is the collective responsibility of businesses, investors, and governments around the world.
Billionaire philanthropist Bill Gates, writing in the New England Journal of Medicine, noted that “Covid-19 has started behaving a lot like the once-in-a-century pathogen we’ve been worried about.” He warns that even without knowing the full extent of the virus’ ability to cause real damage to human life and health—questions persist about its case fatality rate—governments and businesses should be treating it like an epochal event.
Managing risk effectively has always been a hallmark of the most prosperous companies. But in today’s risk-filled business environment, it can be hard for executives to have self-assurance that their plans and strategies will play out as anticipated.
A big reason is that risks – including those that either affect or are created by business strategy decisions – can strike more quickly than ever before, accelerated along by rapid-fire business trends and technological innovations such as social media, mobile and big data.
Companies that fall behind on the innovation curve may quickly fall prey to innovation’s evil twin – disruption. That is just one of the reasons managing risk has become a high priority for many executives.
“It used to be that if certain risks were to happen, a company could have up to a news cycle to respond,” says Phil Maxwell, Director Enterprise Risk Management, The Coca-Cola Company. “The speed of risks is so much greater now, and as a result you have to be more prepared – faster to respond than you were in the past. That’s one of the biggest differences today versus some years ago.”
Traditional approaches for managing risk, as against enterprise risk management [ERM], tend to focus on monitoring leading financial indicators as well as the evolving regulatory environment.
However, because they are generally grounded in audited financial statements, the resulting risk strategies and hedges are largely driven by prior performance and past negative events – and do not necessarily serve to detect future risks or predict future performance. As such, they are more focused on protecting value than creating it.
A critical part of any risk manager’s job in times like this is to anticipate the unforeseen and plan in advance on how to address it effectively. When unexpected events occur, senior management will inevitably turn to risk managers.
Coming to the table prepared with answers in advance requires foresight, planning and time. While no risk manager can possibly foresee a viral outbreak, past outbreaks like SARS in 2002-2003 can teach us lessons for what should be done to manage such risks. That is where stress testing, using historical scenarios, comes to play.
Some of the steps risk managers should now take include the following, inter alia:
• Obtain requisite forms of business interruption and related insurance coverage and ensuring that they are current and adequate to account for up to medium-term interruptions;
• Establish corporate procedures for relocating employees and replicating their workflow at another location;
• Identify alternative sources of supply in advance that may be implemented on short-notice; and
• Create a standby budget for such emergencies that can be utilized at a moment’s notice.
There are other things the risk professional needs to do.
No amount of advanced planning can possibly account for every contingency that may occur in a world filled with unknown unknowns, but it makes little sense to presume that black swan events, i.e. unpredictable events that are beyond what is normally expected of a situation and has potentially severe consequences, will not impact business.
Too many business practitioners pay too little attention to accounting for the unforeseen, as they are simply too busy either putting out fires or prioritizing near-term needs. That approach will only take businesses so far.
Those that will survive, and perhaps even thrive, in the current environment will have taken many precautions. Given the growing and ongoing clash between man-made and natural risks, it is probably only a question of time until a black swan comes knocking on your door. Use COVID-19 as the impetus to create or enhance the risk preparedness of your organization.
Have you reviewed your exposures? If your company has not undertaken a pandemic risk assessment it should make this a priority. The source of exposure as a result of the coronavirus can be far-reaching – from employee health, to supply chain disruption, to rapidly changing government advice or regulation.
Companies must understand the main scenarios that could most impact them and invest in appropriate control and response measures that reflect the exposure.
Have you reviewed your policy for coverages? If you are likely to depend on insurance as a part of your coronavirus risk management strategy, it is strongly suggested that you seek professional advice on whether current policies will provide coverage, and where.
Have you reviewed and tested your Business Continuity Management plans? Even companies that have made significant investments in their business continuity should review and test these in light of a potential pandemic. The coronavirus presents a potentially different threat event – impacting a business in numerous simultaneous ways and potentially limiting options around recovery if other businesses are also affected, or there are logistical limitations.
Companies should continue to think of business continuity as a phased response – short term emergency response (to limit impact on the health of employees or the public), crisis management (to ensure key stakeholders retain confidence in the ongoing viability of the company) and business recovery (enabling the most important, value generating parts of the company to recover, as quickly as possible).
Have you considered the implications to supply chain and have you identified other suppliers? How well risk managed are you – do you have a plan B for your most critical, strategic suppliers? Do your contracts protect you from liability to your customers, or could your suppliers point to force majeure clauses in their contracts with you?
Have you activated your plans? If you are not activating your plans in some way today, do you understand the triggers or risk indicators that would cause you to do so?
The coronavirus needs to be treated as both a health risk issue and a business risk one.
It is important that an assessment of the risk is provided by a suitably broad range of professional advisers, including Health and Safety professionals, who will be able to ensure that appropriate action is being taken by the company to mitigate the impact of the virus on your business.
Let me now move to the role of the Board which is quite critical.
The COVID-19 pandemic highlights how vital the oversight of the board of directors is during periods of crisis. During crises, boards need to think about both the short-term risks and the long-term ones, and any opportunities the crisis presents, of which there may be many.
Proper oversight requires both familiarity and knowledge with a company’s plans, workings, and risk tolerance. It also requires diligent gathering of information that relates to situations that may come up.
When an unprecedented event like the coronavirus outbreak occurs, the board has to consider the various impacts on corporate prospects and operations: these include analyzing contracts and relationships, managing and protecting its human resources, analyzing capital access/liquidity, reviewing both the long-term and short-term revenue impact, and keeping a strong conversation going with the any and all regulators.
The Board must pay close attention to the following:
• Strong Communication with All Management Personnel;
• Make Use of Board Committees;
• Focus Energies on Liquidity and Planning Capital;
• Get Knowledge from Experts: During times of crisis, boards and their committees should take advantage of experts’ opinions on the things that matter most. During the coronavirus pandemic, boards might contact legal and financial advisors for advice on matters within their respective expertise.
• Prepare a Response for Possible Acquisition Overtures
• Oversee management’s handling of the crisis
o Board members want to help the organization, especially in a time of crisis. But having satisfied itself as to management’s current plan and capabilities for handling the COVID-19 pandemic, it is important that the board gets out of management’s way and lets management handle the day-to-day issues which arise during the crisis.
o Where the board can add value is by being a resource to management and providing an opportunity for sober second thought by:
• considering and asking probing questions regarding management’s plans;
• considering the long-term implications of decisions that are being made in the heat of the moment;
• helping management find the right balance for communications;
• assessing and advising management on its handling of the crisis; and
• helping management prepare for the eventual transition back to the new reality
• Carefully consider the company’s COVID-19 disclosures. This includes the need to provide adequate disclosures about what the company knows now and additional information regarding the ongoing impact of this pandemic on the company’s operations
• Be cautious in your written communications. As you ramp up virtual communications, the volume and scope of electronic communications will increase. This not only creates an increased cybersecurity risk, but it also creates a litigation risk. Best practice is to maintain an official written record in the form of minutes and minimize written communications especially for sensitive topics.
• Keep a long-term focus: The COVID-19 pandemic will eventually end and the extreme measures currently being taken to mitigate its impact will cease. But the changes it has precipitated will linger and some will become permanent. The board needs to consider how to best position the organization for success in the brave new world to come.
The coronavirus pandemic will put heavy demands on companies’ board of directors. This is also true of any other big challenges companies will face now or in the future.
If directors are able to meet responsibilities by actively reviewing the available knowledge and information, taking part in committee and board meetings, having a strong relationship with the management, talking to experts as needed, and acting in the company’s and stakeholders’ best interests, they’ll be adequately protected from all oversight second-guessing of these challenging decisions they’re faced with.
Let me conclude this write-up with the following words from Chuck Palahniuk, Invisible Monsters that “Our real discoveries come from chaos, from going to the place that looks wrong and stupid and foolish.”