It’s a risky world out there

Directors and senior executives will be nervous.  In the wake of the February 22 Christchurch earthquake and the more recent Japanese earthquake and tsunami I would expect many organisations to be taking a long hard look at their risk management strategies.

Risk management (RM) has long been an agenda item for directors who are expected to have an oversight of risk management in their organisation and to satisfy themselves that risk management policies and procedures designed and implemented by executives are consistent with corporate strategies.  Part of this assessment is the risk appetite of the organisation but the events of Christchurch will be changing both risk profiles and appetites making many directors nervous.

The process of developing a RM response is to review all the potential risks and then rate them for probability (likelihood) and impact.  These likelihood and impact scores can be three or five or ten point scales or percentages based on subjective scales.  The scores are then typically multiplied to produce a numerical rating for the overall risk.  This quantification of risk provides a tool which is used to allocate priorities (management attention?) and resources to dealing with the different types of risk.

The problem with this methodology is that applying a mathematical approach to risk is meaningless when the unexpected happens.  From my experience the likelihood of earthquake was rated low throughout the country and the impact was never considered to be as catastrophic as has happened.  How many managers compiling risk profiles have researched the likelihood and impact of tsunamis in New Zealand?  The result has been risk profiles that focus on employee theft, plant breakdown, bad publicity and quality control lapses.

Directors and executives will need to revisit their risk management plans.  An assessment of the adequacy of insurance cover is an obvious starting point, but strategies for dealing with an inability to access business premises, the loss of vital records (and the backups which are typically stored in the same business district) and the personal impact on staff of a major event will all have to be revisited.

Many businesses are finding that suppliers affected by the earthquake are not able to meet their commitments or that the affect of the catastrophe on customers is having a direct impact on production, sales and credit collection.

Having realistic mitigation strategies in place and tested for such circumstances is now an important objective for all Chief Executives and senior managers, and directors will be putting pressure on them to ensure that these strategies (policies and procedures) are realistic, sustainable and effective in light of recent events here in New Zealand and around the world.

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  • mikes157240  On April 2, 2011 at 5:21 am

    Social Media would be a great way to gather information on potential risks in an organisation, using employees collective intelligence to discover risks that affect there particular situation

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