Risk management is based on timely knowledge management of the inside-out impacts of the business model and the business strategy on the social, environmental, economical and governance/political context (ESG context). It forms the basis, the very first step of managing sustainable business.
These impacts are from a business economics perspective “cost externalities” which enhance the cost advantages of the business but may sooner or later become controversial if they touch on the formal and explicit social contract(s) the business operates under. The informal social contract of implicit or emerging expectations is the subject of the next chapter on issues management.
The formal social contract context(s) the business operates in determines explicit expectations which require compliance with the letter and the spirit of legislation, with international codes and standards, both hard law and soft law, from, for example, the ILO, OECD, and the UN Global Compact.
Manifest risks include social risks, environmental risks, political risks, regulatory risks, even cultural risks, and may be located in the supply chain, the distribution chain, in product liabilities, in production facilities, in joint ventures, in mergers and acquisitions (hence importance of ESG due diligence), and may be specific to geographies like conflict zones and cultural risks in new markets.
Apart from manifest risks, there are always underlying risks such as managerial risks related to competencies and management attitudes, risk/return balances, organisational risks in organisational culture and structure, processes, systems and skills as well as corporate governance risks in lack of oversight of Boards, and in not critically questioning.
Risk management requires in the last instance proficient crisis management and communications.
What is the business model of the company?
What are the ESG impacts of the business model and business strategy?
Which are the inherent risks (social, environmental, political, regulatory) in this model?
Apart from manifest risks, can one identify underlying risks?
Which risk prioritisation and risk mitigation processes are being applied?
Where could/did the risk management process derail?
What improvements can you suggest to risk mitigation management? To crisis and communications management?
The externalities of the business models of oil exploration, transportation, refining and distribution are considerable, hence the importance of risk management in this industry. Scenario planning is a useful tool for charting possible future risks and to prepare management for adequate responses to whatever scenario materialises. In addition, Shell’s scenario planning charts geo-political and cultural risks and how they play out in different parallel scripts. This forms the basis for strategic decision making, but foremost for preparedness for different risks to the business model, according to different scenarios. Shell’s scenario scripts include economic, social, environmental, (geo-) political and even cultural factors that play into the futures of the energy markets.
This BP case is illustrative of many of the troubling risks an oil company can be exposed to. Deep water drilling enhances risks, especially so if involving joint-ventures with other companies on the same platform. If the safety and environmental policies of the mother company (BP) are not wholly supported by merged or acquired businesses (Amoco), risks are exacerbated. If continuous signals from the acquired businesses (e.g., Alaska pipeline affair, Texas refinery incident) fail to be addressed in a structural way, disaster is waiting to happen. If the crisis management and crisis communication by senior management adds disaster to disaster, the very existence of the company is put at risk. BP lost 52% of its share value, an equivalent of $105 billion in the aftermath of the Gulf of Mexico disaster in 2010. In the meantime, the share price has recovered but it is still hovering at 35% below 2009 levels.
Walmart is a successful business offering every-day low prices and thereby conveniently serving urban and rural communities, including many poor people who otherwise would not be able to afford the goods provided. Walmart also employs hundreds of thousands of low-skilled people who find it otherwise difficult in the labour market. Crucial to its success as a low price/low cost leader is the rigorous elimination of costs in both the supply and the distribution chain, which can give rise to negative environmental and social impacts. This has created serious challenges in the court of public opinion in the past and Walmart was forced to implement policies reducing these impacts, whilst keeping the business model largely intact. In this case study, Walmart tries to mitigate the ongoing risks by rallying consumers into a more sustainable way of consumption. Will it work? Is Walmart trying to shift part of the blame on to consumers? Is this a credible and sustainable risk mitigation strategy?
Tetra Pak in China is deeply integrated into the dairy supply chain and its main customers are the biggest domestic milk (and other dairy) producers in China in a market with exponential growth up to mid 2008, when the melamine milk contamination scandal hit the domestic producers. The supply chain in China is highly fragmented beginning with millions of dairy farmers and an extensive network of milk processing plants. Tetra Pak finds itself in a typical emerging market risk situation: rapid (unsustainable) growth, local production (but of variable quality and safety standards) preferred by the socio-political context, and an underdeveloped regulatory framework. Moreover, despite its track record of engaged stakeholder management and a long-time commitment to a life cycle approach to packaging, Tetra Pak could not straightforwardly capitalise on this track record in China as it could elsewhere. Risk mitigation in emerging markets needs to be very much locally tailored.
This risk management case is particularly interesting from a number of perspectives. First come the risks associated with a product and a production process with considerable alleged hazardous impacts. Responding to NGO pressures and mitigating EU regulatory risks was key in the first phase. External relations management and internal change management were quite good. But getting the rest of the industry to join in to mitigate the risks of looming cost disadvantages is key in a second phase. However, embarking on a high quality sustainability journey creates new global risks, especially if Chinese producers enter the global market without adopting high standards, and global trade agreements prevent European regulators from imposing tariffs on low quality market entrants.