Q&A: Coronavirus risk management and response
May 2020 | SPECIAL REPORT: BUSINESS STRATEGY AND OPERATIONAL PERFORMANCE
Financier Worldwide Magazine
May 2020 Issue
FW discusses coronavirus risk management and response with James Green at SAI Global.
FW: In broad terms, how would you summarise the impact of the COVID-19 virus on businesses to date? What is your take on the current outlook?
Green: The situation is changing by the day, but as we enter April 2020, the economic consequences of the virus have already evolved dramatically. We have seen a large and unexpected supply and demand shockwave ripple across the global economy. Large-scale quarantines, travel restrictions and social distancing measures are driving a sharp fall in consumer and business spending. Disruption of these flows is having a rapid and severe impact on the immediate condition of businesses. Many are already losing revenue and laying off workers, which will significantly increase unemployment levels. And we have not reached the worst yet. On the positive side, we are already seeing an aggressive policy response across the world to shore up businesses and workers. We believe resilient companies are starting to establish a health-check for how their business will emerge once the unprecedented impact of the pandemic ebbs.
FW: What steps do you recommend companies take to evaluate the actual or potential risks their business may face in the wake of COVID-19?
Green: At the present time, we are seeing businesses take measured approaches to safeguarding employees and mitigating financial and operational exposures. But the high severity, human impact and greater contagion effect the COVID-19 event poses necessitates the need for organisations to expand beyond traditional resilience planning strategies. The pandemic has already taught us that a robust vendor or supplier-monitoring system is a basic requirement. This means stronger and more robust methods of mitigating disruption in supply chains needs to be developed. Organisations should develop a thorough understanding of their critical third, fourth and fifth parties, and their resilience programmes, and develop alternate plans. Although it may be too late to conduct an elaborate test with your vendors, it is not too late to ask for their status and map out your sub-tier dependencies.
FW: What steps can companies take to mitigate labour and workforce risks?
Green: Companies must review strategies, policies and procedures. Not having adequate communicable-illness policies and response plans could expose organisations to a laundry list of employee-related legal concerns, including workers’ compensation, invasion of privacy, discrimination, unfair labour practice and negligence. Organisations need to adopt and apply a people-first mindset. As the severity of the pandemic increases, people will be increasingly on edge. We are already facing an ‘infodemic’, with misinformation spreading and adding to mounting levels of uncertainty and anxiety. Therefore, communicating regularly with accurate information is so important. A panoply of digital tools, such as corporate-messaging services including chat and videoconferencing, as well as employee intranets, can be used for companies to be clear, honest and open with their people. This may help to reduce anxiety in the workplace.
“It is in a crisis that those at the helm need to show their mettle. In everything they do during a crisis, business leaders need to express empathy and compassion for the human side of the upheaval.”
FW: What kinds of supply chain challenges have surfaced as a result of the outbreak? How should companies go about pre-empting problems and devising alternatives?
Green: Businesses are often unaware of what is happening across their supply chain beyond the first tier, so they are unable to know where threats exist. This has made it almost impossible to proactively manage a situation like the COVID-19 outbreak. Additionally, most organisations are operating reduced inventory levels. This just-in-time manufacturing may increase efficiency and lower costs, but it does leave supply chains less resilient to sudden shocks and supply shortages. This would not be a problem if businesses operated flexible supply chains. That way they could switch order volumes to alternative suppliers in times of stress. Unfortunately, very few organisations do this, leaving them unable to identify and connect with alternative suppliers during a crisis, which has a tangible impact on production. Post-coronavirus, organisations should move away from reactive to proactive supply chain management.
FW: What finance, capital and cashflow considerations do business need to make in connection with COVID-19?
Green: As we enter April, the sizeable economic effects of the pandemic are only just beginning to become apparent. And as the infection spreads, its effect on business is being amplified. Stock markets are in a fever. Supply chains are disrupted. Oil markets are in free-fall. Aggressive social-distancing measures have shifted industry structures and the global economy is moving toward a sharp slowdown. Given the importance of cash flow during ‘black swan’ events like this, businesses should actively evaluate their cash flow requirements, develop appropriate actions under various scenarios, and assess potential risks in and to their customer base and supplier network. Coronavirus is going to have a long-term impact on the global economy, requiring substantial adjustment of investment strategies. Which is why business leaders should consider reviewing and even deferring nonstrategic investments, and planning for a business environment that is equivalent to a quarter of a year recession.
FW: In general terms, should companies affected by COVID-19 expect their existing insurance coverage to provide some relief or restitution? How important is it to evaluate policies as part of a risk management strategy?
Green: Business insurance generally covers losses arising from disruptions to an organisation’s customers or suppliers. However, it is important to be mindful that there is a difference from the perspective of the insurance company between ‘definable’ and ‘undefinable’ risk. In addition, insurers are unlikely to have written a policy that covers a firm from the impact of an undefinable risk because standard business insurance policies are designed, and priced, to cover standard risks, not those that are very unlikely, such as the effects of COVID-19. Due to the significant insurance losses from the SARS epidemic, a lot of insurers have included exclusions for losses arising from epidemics and pandemics events. Businesses, therefore, need to understand if this is the case with their own existing policies and review the coverage they have in the event of significant disruption. It is also worth reviewing existing insurance strategies and policies in terms of force majeure clauses.
FW: In your opinion, do companies need to be proactive when it comes to communication, including issuing market updates and stakeholder briefs?
Green: Information is everything. We are in uncharted territory and organisations must strive to be clear, consistent, honest and open with all their stakeholders. It is vital that they keep their stakeholders, especially their employees and customers, well informed as to what they are up to. Customers and employees need to hear what businesses are doing to manage the impact on their operations and their working lives, respectively. Give them as clear a view of the future and how you see it panning out as possible. No doubt this is difficult given we are at the beginning of April and still in the early phase of the pandemic, but silence on such matters will prove dangerous for an organisation, especially regarding employee retention and customer loyalty.
FW: What advice would you offer to companies looking to build a resilient response plan for the COVID-19 threat? What should they do to ensure they can execute aspects of the plan if it becomes necessary?
Green: Crises generally play out over three time frames: respond, recover and thrive. The ‘respond’ phase is where organisations have been presented with a disrupting event and need to figure out how to manage business continuity. At this stage of the pandemic, businesses should already be living and breathing their response plan. If a business has already activated its plan, how does it know the plan is good enough? It is extremely important for businesses to record everything they try, test and activate. What are the blind spots? What is being missed? Most of the work in risk advisory right now is not building plans but assessing the strength of current plans. Analysis of these strategies will become vital in the aftermath of this pandemic, when an organisation takes what it has learnt to date and prepares for and shapes the ‘next normal’.
FW: Amid the uncertainty caused by the virus outbreak, and the panic it can induce, how important is it for senior executives to demonstrate leadership and develop an overarching strategy to deal with risks?
Green: It is in a crisis that those at the helm need to show their mettle. In everything they do during a crisis, business leaders need to express empathy and compassion for the human side of the upheaval. They also need to inject this into all stakeholder communications – employee, customer and shareholder. As we enter April, it is vital that companies can demonstrate a plan to deal with the virus, but also that company leaders can offer reassurance that the company has sufficient financial resources to survive the economic downturn. In short, no sugar-coating. Have a clear message, keep composed and be transparent. This should be general policy, of course, crisis or no crisis. For the broader strategy, it is crucial to analyse the tasks required for the business to continue operating and prioritise them. They should ensure essential functions can be performed and that employees are trained in different disciplines. And follow proven best practices for crisis management.
James Green is director of risk advisory services at SAI Global. He is passionate about life safety and helps the C-suite understand the importance of business continuity not just during an emergency, but as an integral part of day-to-day operations. He has worked on risk events that have occurred all over the globe, including civil unrest in Egypt during the Arab Spring, executive travel and protection in the Pacific Rim, and the effects of destructive tornadoes in Oklahoma. He can be contacted on +1 (813) 476 5723 or by email: james.green@saiglobal.com.
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Q&A: Coronavirus risk management and response