During the holidays, television stations always run a consecutive loop of the yuletide log with a soundtrack of recognizable Christmas songs. It reminds us of shared values and gives people a sense of the holiday spirit and warmth. Presently, we are watching a 24/7 “continuous loop” of the BP disaster with up to 100,000 gallons of oil being released daily, portraying the greatest offshore oil spill in U.S. history and providing a testimony to mediocrity at many levels.
If you’re like me, it’s extremely difficult to watch – causing mounting frustration directed at the company and the government. In addition, shareholder value continues to erode barrel by barrel.
From a board perspective, it raises questions for all of us who serve as directors regarding enterprise risk management, which by definition evaluates business opportunities vs. outstanding risks and how to mitigate those risks.
The public response to the crisis from the leadership of BP raises questions in my mind about their strategic communication and an understanding of reputational risk. There are severe consequences in these situations. It underscores the need for board level conversations and process that review financial performance, risk and ethics. BP’s brand will be an exhibit for discussions regarding catastrophic events and management’s responses. Statements attributed to BP’s CEO indicate a clear lack of planning.
Enterprise risk management is not limited to crisis situations. Establishing governance best practices to anticipate confrontations or threats is a critical part of the new challenges facing boards. This often requires the running of campaigns based upon data, analyzing risks and threats long before boards are in crisis mode. Assessing a situation, providing a risk assessment with a strategic view and conducting confidential shareholder and board interviews to determine a company’s situation, are all part of developing a communication plan and strategy that includes message development and media responses that are on target and impactful.
Many boards today may not have the experience or tools to deal with the convergence of financial, ethical, corporate, government and political forces. Intelligent responses on the part of the CEO are critical to restoring the confidence of regulators, investors and employees.
Periodically people will inquire as to the definition of Duty of Care. In plain terms, that means being prepared for meetings and conversations. To fulfill fiduciary responsibilities, questions and preparation both strengthen a company’s ability to respond to unforeseen events and challenges.
Another interesting vantage point is the impact of what happens in a global economy whereby the intellectual capacity for problem solving is diluted. A crisis situation can take on insurmountable challenges without the ability to bring together an historic and experienced perspective on what went wrong and how to solve it when there are multiple layer of people and companies involved. Being able to bring together the right people quickly to solve a crisis is a critical part of risk management and the questions directors should always ask.
Allegedly flawed decision-making, such as choosing cheaper, faster and riskier designs for wells than their peers and using a single shut off, rather than a second redundant system, all contributed to this catastrophe. Chevron’s head of North American exploration and production, Gary Luquette, explains, “You can make choices early on to cut costs, slim down your project to make it economic today and have dire consequences down the road, or you can build in that reliability and philosophy of dependability up front and save yourself a lot of headaches in the future.”
Enterprise risk management reflects a company’s choices regarding financials, integrity, safety and soundness. Knowing what these choices are, feeling comfortable with them and planning for the future consequences of these choices, including coordinated preparation and planned responses, is each board’s responsibility.
Stuart R. Levine, the Founder, Chairman and CEO of Stuart Levine & Associates LLC, is a director of Broadridge Financial Solutions (BR) and Chairman of the Governance and Nominating Committee, and Lead Director for D’Addario & Company.