Rethink Your Risk Analysis
Over the past month or so, there have been several stunning examples of systemic failures in our society, all of which resulted in significant damage but could have been much worse. I would like to take a look at three such systemic failures and offer you the opportunity to rethink certain aspects of your risk analysis.
The three cases are the Jan. 6 attack on the United States Capitol, the mid-February Texas power failure and the Gamestop short squeeze on Wall Street. I would note that as all of these events are relatively recent, any discussion of the root causes of these failures is to some extent premature and based only on information that has been made public thus far. Nonetheless, I believe there are already some important lessons we can take away from these events.
The Jan. 6, 2021, attack on the U.S. Capitol resulted in six deaths and 140 police officers injured and could have been much worse if the attackers had penetrated the chambers where senators and representatives were in session before they were evacuated. Recently there were hearings in which certain key players in the Capitol police force testified. I heard two key things: The risk assessment was not conveyed to those who were responsible for protecting the Capitol on Jan. 6, and there seemed to be a lot of bureaucracy and politics in the decision-making process that resulted in slow and ineffective decision making in the midst of the crisis.
The recent massive Texas power failure resulted in more than 4 million homes and businesses in Texas losing power, many for several days in the midst of dangerously cold weather conditions. The state also experienced water and food shortages, and at least 58 deaths ensued from the crisis. At the time of writing, the crisis was ongoing.
While the initial causes of the disaster were two unusual storms and a long cold snap, there were many signs that foretold the disaster. In Feb. 2011, an ice storm caused rolling blackouts, and the situation was studied by lawmakers and regulators. There were recommendations to winterize power generation equipment and pipelines and to provide for reserve generating capacity.
Notably, the Texas power grid is much less connected to other grids than is common, further exacerbating the situation during the crisis. The rationale for this is debatable but goes back many years. According to many accounts, it is largely due to desires to avoid federal regulation. While terrible, the crisis could have been worse, as the president of the Electric Reliability Council of Texas reported that the grid was “seconds and minutes” away from a total blackout, which could have crippled the state even further and taken longer for recovery.
The Gamestop situation was this: In a community on the website Reddit, certain traders were touting purchases of Gamestop, a stock that was trading below $20 per share but at the time had extremely high short interest. Gamestop is primarily involved in selling video games in physical stores rather than over the internet. The discussions on Reddit spurred investors, many on the Robin Hood mobile phone application, to buy Gamestop stock, and the resulting “short squeeze” led to a high stock price of $483 per share.
Robin Hood suspended investors’ ability to purchase Gamestop stock on Jan. 28, which led to extreme dissatisfaction among its investors. It later emerged that Robin Hood was forced into taking this step, as it did not have sufficient capital as required by the National Securities Clearing Corp.
Robin Hood did secure the additional capital and trading was resumed, but this episode did some damage to its reputation and could have resulted in more serious issues for investors and the company, if not the wider stock market. As revealed in congressional hearings, the root cause appears to be the actions of a young company that had not done sufficient risk analysis of what it called a “one in 3.5 million event.”
Here’s my take on how you may want to rethink your risk analysis based on lessons from these events:
Ensure your risk analysis is communicated up the chain of management, including the top leadership. I would refer to you to my column in the May 2014 issue on how to conduct risk analysis and decide on selective risk mitigation plans. Functional managers at each level should have an understanding of the key risks in their business area. If new risks emerge, they should act to evaluate and communicate them accordingly.
Drive politics out of your risk analysis and risk mitigation plan. There were significant political and turf issues in the Capitol police response and in Texas’ decision to keep their grid separate. Consider whether your company has any political or turf issues inhibiting the best decision making with regard to risk analysis and mitigation. Also consider whether historical biases or preferences are lurking in some of your decisions on taking risk mitigation steps.
Take actions to mitigate the biggest risks, and ensure risk analysis is not a paper exercise. In the Texas case, the risks had previously come to light and actions were recommended, but little happened. You do not want to find yourself in this position!
Strengthen your business analysis process in new business areas. This is particularly important in our industry over the next decade as so much change is occurring, such as growth in electric vehicles and deployment of greener technologies.
Consider weather risks in a new way. Whether you are a believer in climate change or not, it is clear that weather is becoming less predictable. Storms are more severe and more frequent. Making future decisions based on historical weather patterns is not a successful strategy. As in the Gamestop case, maybe what you think is a one-in-a-million possibility is not that at all. You obviously can’t mitigate every risk, but weather risks in your operations deserve a fresh assessment.
Ensure your decision-making process in a crisis is robust and nimble. There was a lot of finger pointing in the Capitol police situation. It is still somewhat unclear who was empowered to call for the National Guard and why it took so long for them to respond. Empower your crisis management team, and ensure they know how to secure resources as needed.
Sara Lefcourt of Lefcourt Consulting LLC specializes in helping companies to improve profits, reduce risk and step up their operations. Her experience includes many years in marketing, sales and procurement, first for Exxon and then at Infineum, where she was vice president, supply. Contact her at saralefcourt@gmail.com or (908) 400-5210.