The six mistakes executives make in risk management

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Courtesy of Richard MacLean & Associates, LLC

“Black Swan” events are all but impossible to predict. What should you do to protect your company?

This article was inspired by a recent piece with the same title in the Harvard Business Review.1 While the authors structured their message to reach executives facing a broad range of business risks, it is particularly relevant to environmental professionals for two reasons.

First, preparing for low-probability, high-impact events—so-called “Back Swan” events—requires the same type of strategic thinking regardless of the nature of the potential risks.

Second, one of the greatest challenges for environmental managers is to secure the resources required to address crucial issues. Black Swan events are among the most difficult of all, since they do not present an immediate, obvious threat. The risks are sometimes esoteric or technical in nature and thus difficult for managers to grasp and place in perspective with competing business needs. It is also easy to be dismissed as an alarmist if the warnings are delivered in extreme terms.

The Harvard Business Review article provides an insight into business management’s thinking.

Environmental Black Swans
Management has become accustomed to believing that if the operations are in compliance with environmental regulations, especially if the facilities are concurrently ISO 14001-certified, they will not be at risk. Employee and process safety issues are another matter; there has been a continuing string of high-profile events that have made business managers aware that the mantra “safety first” is essential. But for the most part, environmental eruptions today are thought to be the result of rogue employees, companies, or even local authorities not following the rules.

The recent series of environmental issues in China is a case study in local regulators bending or not enforcing the rules in order to boost productivity, resulting in international embarrassment and loss of reputation. Closer to home, DuPont’s 2005 fine for failing to report to the U.S. Environmental Protection Agency risk information about a chemical used in the manufacture of fluoropolymers grabbed the headlines. But even this event can be rationalized away by business managers as a dispute over regulatory interpretation.

What are the significant environmental events that fall outside the realm of the regulations? I would argue that the future of all Black Swans will be unrelated to current regulations.

Regulations are established to control defined and predictable issues. For example, indiscriminate land disposal pre-Superfund was a Black Swan. Asbestos, chlorofluorocarbons (CFCs), and polychlorinated biphenyls (PCBs) were other obvious examples of miracle materials that went horribly wrong for the companies that used them in their products. Concern over global warming will inevitably lead to future Black Swan events. Back in the 1970s, the issue was completely out of the public eye and only beginning to enter the scientific and policy arena. That was the ideal time to begin a strategic, longterm strategy. In the 1990s, access to reliable water resources was a strategic issue and some companies competitively positioned themselves. Today, control of potable and irrigation water will be the source of not just business failures, but failed societies.

We are entering a fourth environmental wave based on control over both easily extractable natural resources and the rights to exotic new materials such as nanoparticles and bioengineered substances.2 What will be the long-term health and environmental concerns? What new regulations will they arouse? Will wars be waged over limited resources? What will be the impact on famine in developing countries? It will be these major dynamics with environmental issues at their nucleus that will generate the future Black Swans for industry (and nations).

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