Risk Management Blog - ClearRisk

BP found its “Company Killer”: Do you know yours?

Posted by Craig Rowe on Thu, Jul 8, 2010 @ 10:07 AM

Time will tell if the Gulf of Mexico oil spill will kill BP or just severely cripple it, but whatever the case I’ll bet they didn’t see it coming! Will you?

It looks like this spill will be (if it isn’t already) the biggest man-made disaster ever. The extent of the spill, the scope of damage and the resulting impacts on the environment, marine life, economies, and people remains to be seen, but catastrophic sums it up. BP and all of the other world’s oil companies plan for spills. They build complex risk models, examine alternative worst case scenarios, look at maximum probable losses, and they are generally very good at measuring and managing risk. But what if the worst case scenario that you imagined turns out to be wrong?

In BP’s risk modeling they would have factored in the US government’s cap on environmental clean-up and damages at $75 Million. Did they predict that the government would significantly raise the cap or remove it all together? Did they predict that in addition to the significant increase in damages that their ability to earn would be affected by Obama’s restrictions on new drilling; or that taxes and royalties would be increased significantly ; or that people would boycott their products on mass?

The point is, no matter how sophisticated your risk management process, you can be wrong. Don’t take that to mean that it isn’t worth trying! What I’m saying is that no matter how much you prepare and plan and execute, things can happen that are worse than you could have imagined.

When it comes to company killers, all companies big or small have them lurking around and if the perfect storm happens you could be next! So what can we do? Most company killers are closely related to reputation risk. Whether it’s an oil spill, a product recall, or a fraud scandal, the resulting damage to the company’s reputation is where the biggest losses are felt. Incidents such as these rattle customer and shareholder confidence which can often lead to a rapid and irreversible downward spiral. Reduced sales, increased costs, battered share value, employees leaving the sinking ship and on it goes until there’s nothing left to salvage.

Do not despair! As with any risk, big or small, there are ways to manage reputation risk. Here are a few general tips:

  • Consider all underlying risks that can lead to damaged reputation, and mitigate them as best you can within your means. Ask yourself (and your team), what things could happen that would damage our reputation enough that it will cause significant harm to your company?
  • In addition to managing the underlying risk, treat reputation risk as one of your company’s biggest risks.
  • Develop emergency and contingency plans that deal directly with reputation risk. How will you respond? How will you communicate to customers and other stakeholders? How will you control the damage?
  • Look for ways to diversify your operations enough that significant harm to one division or company won’t necessarily damage the others.
  • Check with your Insurance Broker to make sure you have the necessary coverages and limits to deal with the fallout from reputation related risks. For example, coverages such as products recall, environmental impairment and business interruption are often not carried and are seen as unnecessary, but can provide the necessary buffers in the case of major losses, so that reputation can be dealt with effectively.

All organizations need to start to understand reputation risk and realize that it is one of their greatest risks. The following are starting points to consider in managing reputation risk using a hotel chain as an example. For more information on this and other risks, please visit the free ClearRisk Library.

Tools:

ClearRisk’s Reputation Risk Management Tool

ClearRisk Library

References:

http://www.businessweek.com/news/2010-06-30/senate-panel-moves-to-lift-cap-on-oil-spill-damages.html

http://www.foxnews.com/story/0,2933,521341,00.html 

 

Topics: reputation risk, oil and gas risk, reputation risk management, company killer risk