Risk Management: A Priority Executives Should Not Ignore

riskThat Boards of Directors (BoD) and corporate executives, especially of publicly traded companies, are particularly focused on financial performance metrics such as sales, earnings, and cash flow is no surprise. Capital markets and quarterly or semi-annual shareholder expectations exert constant pressure on the C-suite to deliver sustainably strong performance results. However, rarely are strong governance and management of Health, Safety and Environment (HSE) and corporate responsibility risks (i.e. impact on climate change, human rights, etc.) considered essential to healthy financial performance during board room discussions, despite the impact they can have on market capitalization and company reputation.

Today, BoDs are confronted with several global trends and forces that give consideration of HSE and corporate responsibility risks a much higher sense of urgency requiring more thoughtful dialogue. The increased activism of younger generations (i.e. Millennials and Generation Z) is shining a spotlight on corporate responsibility regarding health and safety of workers, ethics of contractors and suppliers, and operational impacts on nearby communities and the environment like never before. Also, social media now provides a much larger number of stakeholders with a real-time view of the daily operations of companies and behaviors of leaders. Those stakeholders expect a significantly higher level of transparency, and have higher expectations regarding the company’s social responsibility efforts. In that vein, younger workers increasingly expect companies to serve a greater purpose beyond mere financial performance – they expect companies to pursue clear health and safety, social, and environmental goals. Demonstrating strong commitment to these goals is becoming a key factor in attracting and retaining new talent.

Of course, granting adequate financial return to shareholders will continue to be a priority for publicly traded companies, but the rise of environmental, social and corporate governance (ESG) investing and socially responsible investment funds are enabling investors to exert even more influence on organizations. The amount of money invested in managed funds that use socially responsible investment strategies increased from less than $1 trillion in 1995 to more than $8.7 trillion in 2015, according to the U.S. Forum for Sustainable and Responsible Investment. BlackRock investment firm CEO Lawrence Fink has observed, “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” This should be leading BoDs to consider and manage HSE and broader corporate responsibility matters in a much more proactive, strategic and decisive manner.

“It is important to remember that the Board’s role doesn’t end once members cast their votes.”

It is important to realize that HSE risk management and the reputational and performance concerns of a company are not mutually exclusive. In fact, successful HSE is critical to improving the reputation and performance of organizations. This can be seen today among many leading publicly traded companies that are demonstrating strong HSE and corporate responsibility leadership and experiencing a correlating rise in market performance. Conversely, poor HSE and ESG practices have shown to reduce shareholder value and damage corporate reputation. Alarmingly, two-thirds of executives participating in DuPont Sustainable Solutions’ (DSS) 2017 global operations risk management executive survey acknowledged they are not devoting enough resources and capabilities to risk management in their companies.

To understand the value of HSE initiatives and how they contribute to improved corporate responsibility performance, it is best to think about and discuss HSE in terms of managing operational risk rather than merely safety compliance. Too often conversations about HSE become mired in jargon and technical terms, and are incorrectly perceived by those without HSE backgrounds as simply a matter of following standards, procedures and checklists.

Instead, these conversations should focus on how effective operational risk management contributes to the business performance and corporate reputation of the company. In this context, discussions of risk management are framed in terms of how it improves productivity and asset performance, in addition to risk minimization. For instance, how it prevents major environmental consequences and legal action in the surrounding community resulting from a facility incident, or reduces the time employees must miss work because of significant injury. As an example, upstream oil & gas companies lose an average of 3 percent working time due to Lost Workday Cases only, according to the International Association of Oil & Gas Producers.  That figure increases to 6-8 percent if the time lost for less serious injuries and administrative time for incident management is taken into account.

Such discussions can be facilitated by evolving the way HSE and corporate responsibility performance are analysed and reported. Leading indicators such as incident near-misses, unsafe conditions or early-function failure in critical equipment are far more informative than lagging indicators, which typically get the most attention, but by the time they appear have already taken a toll on business performance and reputation. Integrated and comprehensive business cases built on statistical data, scenario analysis, and stress tests should be leveraged to provide Board members a clearer picture of how strategic decisions about HSE and corporate responsibility generate value to the company, both financially and in terms of future business performance and resilience.

Accessing the data necessary for these business cases is no longer the challenge it used to be. Information such as health of assets and equipment, stability of operations, occurrences of near-misses and unsafe conditions, supplier and customer data, trends and changes in regulations, and stakeholder expectations can all be captured much more regularly and frequently today. What is essential is extracting key insights from this data to enable the BoD to make effective and strategic decisions.

The use of predictive analytics can play a particularly valuable role in making the business case for risk management and corporate responsibility initiatives. Technologies exist that mine and analyze data to better identify leading indicators and help predict future performance. These technologies can be used to build more robust scenarios based on which informed decision-making can be taken at Executive and BoD level to drive desired productivity, asset reliability, and ultimately business growth and company reputation.

It is important to remember that the Board’s role doesn’t end once members cast their votes. Their leadership is essential to setting the tone for the company, establishing expectations, and steering the company toward making HSE and corporate responsibility efforts a daily priority across the organization. Eight out of ten executives participating in DSS’ 2017 global risk management survey felt that senior executives of their organizations were aligned in understanding the top operational risks facing their companies, but only 45 percent felt front-line operators had such alignment. Board members must “walk the talk” and increase direct engagement with employees to help them understand why it is important to integrate operational risk management practices into day-to-day processes and tasks. This facilitates cultural change in the company that results in sustainable safety and operational improvements and an organizational commitment to corporate responsibility. Otherwise, the organization risks delivering “check the box” results that don’t achieve desired goals.

Now more than ever Boards of Directors and company executives must be conscious of corporate reputation due to changing societal trends. By framing HSE and corporate responsibility initiatives in terms of operational risk management and including business cases and scenario analyses in these discussions, company decision makers will be in a much better position to drive improved business and corporate responsibility performance.

Davide Vassallo is President and Marco Pagnini is Principal with DuPont Sustainable Solutions. DuPont Sustainable Solutions, a business unit of DowDuPont Specialty Products, is a leading provider of world-class operations consulting services to help organizations transform and optimize their processes, technologies, and capabilities. DuPont Sustainable Solutions is committed to improving the safety, productivity, and sustainability of organizations around the world. Additional information is available at: www.sustainablesolutions.dupont.com.