The Icelandic volcanoes have erupted before; there have been major oil spills in the past.
Forward View by Tapestry Networks
In the wake of a deep-sea oil rig explosion, an erupting volcano and a global financial crisis, audit committees are worried anew about catastrophic risks. Audit committees also need to consider recovery plans in the event of a major catastrophe.
This concern is even more acute for companies operating on the edge of technological advancement and in activities with a strong public interest element, such as in oil and gas, robotics and nanotechnology, life sciences and pharmaceuticals.
Even with imaginative thinking and new approaches to risk identification and oversight, no company is immune to the woes of unforeseeable events such as large-scale operational failures. In todays world, audit committee chairs are pushing harder than ever to ensure their companies have robust crisis response and business recovery plans.
Recent discussions in Ernst & Young’s audit committee networks meetings reveal that oversight of catastrophic risks — so-called “black swan events” identified by author Nassim Nicholas Taleb — is top of mind for audit committee chairs today. New approaches are being used:
- Make sure risk reporting to the board focuses on “gross risks.” Rather than over-relying on management’s assessment of mitigation plans, audit committee chairs recently suggested boards should make sure they have an understanding of the total magnitude of each major risk (the “gross risk”), before factoring in management’s assessment of the impact of its mitigation efforts (the “net risk”).
- Push harder to “think the unthinkable.” Risk managers and board directors alike recognize that it is very difficult to explore every catastrophic risk scenario, but also question if some events are so unthinkable.
- Use ”what if“ scenarios to test crisis response plans. Much of the attention on risk has focused on the identification of catastrophic risks. Recent events have reinforced the need for robust business recovery planning. Audit committee chairs also emphasized the importance of a swift and thoughtful communication response, conscientious ongoing communication to key stakeholders (such as shareholders, regulators and the media), and the need to retain key executives and keep the rest of the company focused on business as usual throughout the crisis period.
- Remember the importance of a good “tone at the top” and a robust compliance culture. An audit committee chair noted: “Yes, boards should “think the unthinkable,” but it’s [critical] to get the basic “blocking and tackling” done — to fulfill the policies and procedures that are laid out to help to prevent significant risks from being realized. In my opinion, this part is actually harder.”
Forward View is written by Tapestry Networks. Views expressed by Tapestry Networks are those of Tapestry Networks and not necessarily of Ernst & Young. Tapestry Networks convenes eight audit committee networks sponsored by Ernst & Young that collectively consist of more than 120 individuals, who chair more than 170 audit committees and sit on over 300 boards at some of the world’s most admired companies.
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