By David Webb
The current Coronavirus pandemic has tested governments and businesses, both large and small, to breaking point. Many businesses will fail, a few will emerge stronger. Governments and businesses will be laden with debt and must find a way ahead that ensures we can recover as quickly as possible.
Enterprise Risk Management (ERM) is the tool that will, or should, have shaped the reaction of many organisations to COVID 19. ERM requires that potential threats and opportunities are identified, and their likelihood and impact assessed. Depending on the severity of each risk measures are put in place to reduce threats and increase the benefit from opportunities.
ERM is implemented across the whole organisation and considers all categories of risk. There will be numerous other risk related activities such as Health & Safety, Environment, Project Risk Management that are conducted at “local” level and contribute to the ERM programme. In large organisations with subsidiaries, ERM will usually be implemented in each subsidiary and “rolled up” to group level.
As no organisation has unlimited funds, their boards decide which risks to address after taking advice from executives and managers. A range of measures are put in place for high severity risks changes to designs, procedures, policies, insurance arrangements etc will be implemented immediately. For less severe risks, contingency plans will be prepared and used when needed. Very low severity risks may be acknowledged and placed on a watch list. Critical for effective ERM are regular updates to respond to internal and external changes.
It is impossible to identify every risk, particularly external risks. However, potential impacts can be imagined, for example; loss of supply chain, closure of retail outlets, industrial action, demand failure, sudden increase in demand, etc. By considering these impacts, contingency plans can be outlined ready for fine tuning when needed.
There is also a vital link to crisis management. Public and private organisations need crisis management plans. These are designed to respond to a crisis and should address threats and take advantage of opportunities. Considering the current coronavirus pandemic:
- Retail companies have been able to:
- Take advantage of on-line shopping
- Reduce costs by using government backed continued employment schemes
- Slow down supply chains.
- Construction companies have been able to develop safe ways of working to avoid the spread of the virus. Although this delays completion, it does ensure progress continues.
- Some manufacturing companies have been able to turn to manufacturing critical equipment such as respirators and PPE.
- Home working has become normal for many office staff, on-line sales and service teams.
- Governments have been implementing programmes to protect jobs and help the economy recover as the pandemic eases.
For the current pandemic, most governments had contingency plans but how soon they were activated for COVID 19 varied. Those that moved to shutdown early have avoided the worst death rates, while those that delayed have generally suffered terribly. However, very few commercial organisations had contingency plans and have relied on their crisis management response.
Understanding why governments and other organisations delay action can improve decision making. All organisations need to balance a variety of issues, for example; income protection, reputational damage, risk to staff or environmental damage. The COVID pandemic illustrates this; governments wanted to keep their economies running and at the same time, minimise deaths. With the benefit of hindsight, we can see many governments got this wrong.
One of the factors driving behaviour is the natural “optimism bias” of government and business leaders. Government leaders instinctively promote positive messages about their policies and denigrate any opposing voices. Business leaders need to convince investors and financial institutions to back them; this requires positive messages. These behaviours brought these leaders to power and they continue to use them in a crisis.
Presidents, Prime Ministers and CEOs are often not the right people to manage a crisis. I advised a major international oil company on crisis management and had to tell the CEO that while he could be the public face of the company, he should not lead the response. He and the board agreed to a policy where funding authority passes to those leading the crisis management.
Another challenge is that few organisations have experience of the full range of possible risks and crises. This is where independent experts can work with the organisation to help them design and deliver an effective ERM and Crisis Management plan. LR Consultants can provide experts able to work with your organisation – although much of this will be via Zoom at the moment!