As a risk management specialist, I was surprised to see recent environmental violation citations charged by two state Departments of Environmental Protection in the news. A homebuilder in California and a pipeline in Virginia both violated two critical risk categories – A) Regulatory Compliance Risk and B) Reputation Risk. Some may wonder how or why these events happened.
A properly functioning enterprise-wide risk management (ERM) process, if followed correctly, should have prevented both of these losses. The ERM program for either company would have identified the violations that occurred and developed a procedure to protect the company using traditional risk management techniques.
Each company will have developed their own the risk management process steps based on their business operations. Here are the basic steps briefly outlined below for a typical risk management program.
- Identify & define the risk: In both cases the compliance risks of being fined for violating environmental regulations were obvious based on the amount of the fines imposed.However, the damage to each company’s reputation is not so obvious but will impact each company by loss of contracts or loss of the sale of their products through potential customers reading press and blog reports of their violations.
- Assess the risks that have been identified: Assessing the risk basically is to determine what will be the negative impact on the business’s goals and overall financial performance if a major event occurs.Assuming that the risk of environmental regulatory violation will be a major impact on the business the next step is to develop an action plan to deal with the risk.
- Review & Control: This step is to evaluate each potential risk and determine if it is a risk that should be Assumed (self-insured), Reduced (by quality control and establishing monitoring procedures), Eliminated (quit doing) or Transferred (through insurance or contract with another firm to provide the services who will accept the responsibility that their product or service will meet or exceed environmental protection requirements).
- Monitor & Correct: This would be used with a process that would monitor job sites to make sure they follow the company’s quality control and environmental compliance procedures. Corrections to environmental infractions would be made as needed.
Rick has over thirty years of food and agribusiness industry experience. He provides industry-specific experience with an emphasis on risk identification, assessment and solution development for strategic risks, and other high-impact financial volatility risk exposures of a global food system. Rick currently serves as president and consulting practice leader of Strategic Risk Solutions, Inc. (SRSI).