Seven Costly Risk Management Sins Committed by CEOs
Chief executives who ignore the very real threat of natural disasters are putting their companies at risk. Here are seven steps to take to mitigate the risks.
November 10 2013 by Shivan S. Subramaniam
The past decade has brought a series of unprecedented natural disasters, including Hurricane Katrina, massive floods in Thailand and Pakistan, the earthquake and tsunami that pummeled Japan and Superstorm Sandy. Eighty-three percent of enterprises surveyed by the United Nations Global Compact stated that weather poses a significant risk to their products and services.
Since 2000, economic losses from natural disasters are estimated at US$2.5 trillion globally—50 percent more in damage than previously expected – according to a report released by the United Nations Office for Disaster Risk Reduction in May 2013. In light of this gap, it would appear that potential economic losses from natural disasters necessitate more stringent board and senior executive management examination.
While companies cannot prevent a natural disaster, they can manage the considerable risks to their property, infrastructure, ongoing business operations and global supply chains, risks of which business leaders are certainly aware. According to a survey of chief executives by PwC, a “natural disaster disrupting manufacturing and supply chain operations” was considered the “worst impact” on their organizations by fifty-eight percent of the respondents. It is no surprise then that eighty-six percent of respondents to the same U.N. Global Compact survey described their ability to effectively respond to weather-related risk as a “competitive opportunity.”
A case-in-point is provided by the global electronics industry in the aftermath of the Japan earthquake and tsunami. Production of critical components for the automotive industry was severely disrupted, causing lengthy business interruption for the sector. One Japanese automobile manufacturer cited a loss of US$1.2 billion in product revenue from the earthquake, due to parts shortages which resulted in 150,000 fewer cars being manufactured in the U.S. In order to help organizations effectively mitigate these risks, we identified the “Seven Costly Sins” of chief executives who underestimate the potential impact of natural disasters. These are:
- Undervaluing the identification, assessment and mitigation of natural disaster impacts on their business.
- Making insufficient efforts to quantify supply chain exposures.
- Failing to insist that the board of directors and senior executives provide oversight on risk management.
- Seeing only the “statistical” risk, and not the real risk of whether a business is at peril.
- Relying on insurance alone to protect their business.
- Not having a tested emergency response plan.
- Ignoring the opportunity to create a culture of risk management within their organization.
These “sins of omission” provide a clear guide to CEOs seeking to re-evaluate how natural disasters impact their business resilience as companies continue to invest trillions of dollars in hazard-exposed regions. In the business world, as in the spiritual, prevention beats penance every time.
Shivan S. Subramaniam is chairman and chief executive officer of FM Global (http://www.fmglobal.com) , a $5.5 billion mutual business property insurer. The company’s expertise is solely dedicated to property risk management. Its client-owners, who share the belief that the majority of property loss is preventable, represent many of the world’s major organizations, including one of every three F1000 companies.