Disaster Planning Needs More Attention

Tuesday, May 31, 2011 @ 04:05 PM gHale

Disasters like the one occurring at the Fukushima Daiichi nuclear plant in Japan are not only difficult to contemplate, but they are also challenging to plan for financially.

Why would any company want to spend hard to come by funds on something that most likely will never happen? Stuart I. Greenbaum, the Bank of America Professor Emeritus of Managerial Leadership at Olin Business School, Washington University in St. Louis, asked.

From earthquakes, tsunamis, to tornadoes and hurricanes, natural disasters around the world have focused attention on the methods and processes used by organizations to manage risk known as Enterprise Risk Management (ERM).

Greenbaum said low probability disaster scenarios are among the risks overlooked by business, but deserve more attention and planning.

Even the most aggressive disaster management program could not have prevented the earthquake or the resulting tsunami in Japan, said Greenbaum, speaking in Lille, France at Enterprise Risk Management and Corporate Governance for Insurance Firms, a conference sponsored by the International Center for Financial Regulation and EDHEC Business School. But businesses must consider all potential disasters and risks inherent to their operations.

“Herein lies the behavioral side of ERM and the most basic motivation for formalizing the management of enterprise risk,” he said. “ERM is a process, and effective ERM is all about process integrity. Thus, we can think of ERM as protection against the inclination to ignore those risks that are most menacing and inchoate. ERM elevates vigilance and thereby reduces the probability of calamitous events. But, it does more, much more.”

“Calamities are inescapable, but their costs are not altogether foreordained,” Greenbaum said. “ERM reduces both direct and indirect costs of untoward events. Typically, for financial institutions, calamities, especially those owing to moral hazards, are accompanied by regulatory sanctions and class-action lawsuits. The best protection against such knock-on effects is a credible ERM program. Well-documented and thoughtfully structured processes for managing existential risks will be the most disarming response to the inevitable question of what was done to protect the organization against enterprise risk.”

ERM is a process, Greenbaum said, but is also a frame of mind. “It is a collective assertion that the organization will bring its best talents to bear upon the challenge of avoiding surprises that threaten sustainability,” he said. “It will consciously and judiciously forego current earnings in order to reduce the probability and severity of existential hazards,” Greenbaum said. “ERM can never eliminate disastrous outcomes, only those of our own making.”

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