How Risk, Responsibility, Sustainability and Resilience are Interconnected

What’s more, they know that even if they were to try to ignore these risks, they would be squeezed by two groups who would punish them for doing so: Investors, who are increasingly concerned about the ethical conduct of the companies they invest in, and customers, who are increasingly willing to boycott irresponsible companies and favour responsible ones.

For most, then, the right thing to do as a citizen of their community and the world, and the right thing to do as a business decision-maker, are one and the same. So why are so many businesses, including many Canadian businesses, still part of the problem instead of part of the solution?

For the most socially and environmentally irresponsible companies, like ExxonMobil, the cost of coming clean is just too great. Such ugly corporate citizens use a variety of tactics to obfuscate their wrongdoing and scare off anyone who would dare hold them to account:

• Spending massive amounts of ill-gotten gains on greenwashing ads and fraudulent PR campaigns
• Funding and promoting phony Lomborgian ‘junk science’ research and setting up phony ‘citizen’ websites attacking their critics
• Threatening critics and victims with massive countersuits if they dare sue them for their misdeeds
• Paying for politicians to pass laws protecting them and deregulating their industries, and regulators and enforcers not to enforce what weak laws remain
• Forming oligopolies with other massive reprobate corporations, so customers have no choice but to buy from one of them

For the majority of corporations though, the issue is one of ignorance, not malice or deliberate negligence. Like the majority of citizens, the majority of companies don’t know what harm they’re doing, don’t know that there are more responsible ways to operate without hurting the bottom line, don’t know that their practices are utterly unsustainable.

For them, it makes sense to bring the discussion back to risks. The chart above shows what large corporate executives in the US think is the probability and consequence of a variety of risks. For the most part, they think social and environmental risks have a low probability of occurring, but would have serious consequences if they occurred.

On the chart below, these risks are mostly perceived to fall in the lower right box, the ones executives (and individuals) tend to keep a watch on, but, because they are seen as longer-term risks unlikely to occur, not otherwise acted upon. They include these risks:

• the risk that oil prices will rise to, say, $160/bbl and stay there (remember that most of our food and all plastics depend on cheap oil; it’s not just transportation that would be affected)
• the risk of significant water rationing being needed, permanently
• the risk that the Chinese economy will collapse (and with it, cheap labour), resulting in a famine and humanitarian crisis for over a billion people
• the risk that reckless lending/borrowing and other factors will make the US dollar relatively worthless, and hence bankrupt the US treasury
• the risk that a global flu pandemic or bioterrorist attack, even if it only kills a few million people, brings the economy to a near complete halt for eighteen months or more
• the risk that Middle East instability leads to a decade-long regional war involving nuclear weaponry
• the risk that the current debt crisis will spiral into a major recession as discretionary consumer spending drops by 50%
• the risk that (as is now happening in India) artificially low borrowing rates boomerang to produce an interest rate spike to double digits
• the risk that global warming will produce global desertification, rising sea levels, huge and frequent storms, floods, droughts and other catastrophic consequences  
• the risk that one or more of the above problems will produce chronic long-lasting blackouts and telecom system failures
• the risk that a natural disaster like an earthquake will damage a major city so badly that it cannot be rebuilt and has to be abandoned
• the risk that a new and unforeseen competitor will introduce a disruptive innovation into an industry that will cut volume or margins of the major players in half
• the risk that activist shareholders and/or an ethical investor movement and/or a consumer boycott in response to a company’s perceived irresponsible social or environmental behaviour will reduce market price of the stock by one third

It’s the old important-not-urgent problem — it’s our nature to put off acting on these issues until they become more probable and hence more urgent. Even if (as often happens) that’s too late.

If we perceive the probability (and therefore risk) to be a bit higher, we’ll buy insurance, just-in-case. If the probability becomes even more certain, insurance becomes too expensive, so if the economic consequences are relatively small we’ll self-insure (set aside a bit of money to cover the cost when it occurs), and if the consequences are greater (e.g. we live in a major hurricane zone) it makes sense to have a substantial mitigation plan to prepare for, and if possible reduce exposure to, the risk. Maybe.

In other words, we will only act to become more sustainable if and when we are relatively certain that our sustainability is immediately at risk. That’s true whether we’re a corporation in denial about our dependence on low interest rates or cheap oil or cheap labour, or an individual in denial about the continued economic viability of our SUV for our hour-long commute.

So what can we do to persuade socially and environmentally conscious organizations to stop watching and start acting? Two things:

1. we can help them develop, and if necessary require them to disclose, what I call resilience measures; and
2. we can educate them when the probability of the risk is actually higher than they think it is (i.e. the risk is in the upper right quadrant, not the lower right).

Public companies are currently required to disclose ‘significant’ risks in their annual filings, so that investors can assess their vulnerability. What I would like to see is, for selected risks (like the bulleted list above), what would be the consequences if these events occurred — how vulnerable is the company to each of these risks? Perhaps the risk of each is low, but what happens if or when the probability increases suddenly. Shouldn’t investors have this information, and make their own assessment on just how low the probability is? Shouldn’t management know, and employees, and the people in the communities that depend on (and often subsidize) these companies? Shouldn’t the regulators?

I’m not saying companies should have to guess how likely these risks are, just that they should have to assesswhat would happen if these risks were suddenly realized. And then they should develop (for their own benefit, not just shareholders’) resilience measures — programs that would enable to organization to reduce either the negative impact of these risks, or their exposure to these risks, such as:

• lowering dependence on non-renewable energy, cheap labour, or low interest rates
• reducing consumption of resources, recycling everything, reducing waste and pollution
• sourcing locally and having alternative sources of supply
• reducing financial leverage
• enabling people to do their work from home
• recession-proofing the company
• eliminating socially and environmentally risky and harmful activities
• developing a continuous innovation program

I’m sure that quantifiable measures of these and other actions to increase organizational resilience could be developed. These are measures that matter, and they should be reported.

Education is a longer-term project, but I think just by starting to think about vulnerabilities to these risks, organizations will self-educate themselves and learn that some of the risks they thought were low-probability (lower right quadrant) are actually greater than they imagined. And some of this education should not be difficult — there is a ton of data that indicates that a pandemic is not only highly probably in the next twenty years (and it could happen anytime, with no notice), but it will last a year or two, and even if it is mild in death count it will be global and will wreak havoc on the economy worldwide.

Perhaps Canadians (and perhaps Europeans) are more enlightened than Americans, but the more I speak to Canadians in business in a position to make a real difference, the more I realize they do get it (most of them, anyway) and do care, and the more optimistic I get that we can be models, we can show the world that there is a better way. Not sohopeless after all.