Risk management lessons from winter weather

May 2021  |  SPECIAL REPORT: BUSINESS STRATEGY & OPERATIONS

Financier Worldwide Magazine

May 2021 Issue

In 2017, Hurricane Harvey decimated Houston and most of south Texas. Unfortunately, most of the damage to Houston came not from the storm itself but from the man-made event which was the opening of the floodgates on earthen dams on the west side of Houston. When the dams were originally built in the 1930s they were 30 miles west of Houston, but in 2017 they were simply in west Houston.

However, in the intervening 70-plus years from construction to Harvey, some 200,000 homes had been built west of these dams and the back up from the 50 inches of rain which Harvey brought caused the dams to be in danger of such catastrophic failure. The decision was made by the Army Corp of Engineers to sacrifice the needs of the few for the needs of the many.

Even though there was only four days’ notice of the hurricane, the city of Houston and Texas state officials were able to plan for the disaster and be as ready as they could be, even if they were not prepared for another group to make the decision which led to the worst flooding in the history of Houston. Private parties as diverse as grocery business HEB and the Oklahoma Navy delivered badly needed goods and provided lifesaving services to the city. The bottom line was that even though it was a 1000-year flood event, the federal, state and local government, private parties and individual citizens were prepared and did render assistance.

In February 2021, Houston experienced a 150-year winter event. Some two to four inches of snow fell in Houston, and the city experienced single-digit temperatures on Monday and Tuesday nights with those days’ temperatures remaining below freezing. Unfortunately, it was worse in north Texas with temperatures below zero in many places. In other words, a cold snap for the ages. As with Hurricane Harvey, these temperatures were forecasted well in advance. Everyone knew the unseasonably cold temperatures were coming. Many people had stocked up on food and water.

Assess your risks

Power generators in Texas seemingly did not perform even the simplest of risk assessments for their mechanical operating systems around cold weather. The first power generating system to go down were the massive wind farms in west Texas. Apparently, mechanical operating systems can freeze up. The next power generator to go down was one of Texas’ two nuclear generators at the South Texas Nuclear Power Plant. Here it was equally a lack of risk management. One of the two reactors, Unit 1, went down because the water storage facilities froze and the pipes taking the water to Unit 1 to keep it cool also froze. The highest technology available was not able to discern that the primary safety system in the plant, water, could be subject to a cold weather event. In contrast to the wind farms noted above, the bottom line is if you do not know how to manage risk, benchmark your competitors who do know how to manage risk.

Rank your risks

How can you conduct a risk assessment process which will allow you think through a dynamic approach to risk assessment, but grounded in the reality of doing business on an ongoing basis? According to Russ Berland, chief integrity and risk officer at Aventiv Technologies, LLC, Aventiv breaks its risk management plan down into four categories: (i) mature risks – in which the risk has happened and the company is dealing with the aftermath, such as the pandemic and office closure; (ii) emerging risks – which have recently been identified and need management attention and mitigation plans; (iii) risks under mitigation – which had previously been identified and are the subject of an active mitigation plan and monitoring; and (iv) risks under observation – which are being evaluated to determine if the company needs to actively address them and develop mitigation plans. This risk register is reviewed on a monthly basis to determine risk management effectiveness, determine if any risks need to change categories and look at risks which might be on the horizon.

The beauty of this approach is that it allows you have a framework to not only think through your risks but continually manage them, assess risks through your internal controls and keep apprised of new risks on the horizon. You can then use this framework to respond directly to the manner in which the Department of Justice (DOJ) lays out its thoughts on compliance best practices. If you live in a geographic location where weather can lead to a complete inability to communicate with your multinational organisation, then weather is a risk you need to assess, manage and monitor going forward. Houston had two 500-year storms and one 1000-year storm in one 18-month period. It then experienced a 100-year winter storm event.

What are the weather-related risks to your compliance programme? How can you communicate with them to make sure they are all as well as they can be if there is no power? Who is assigned that duty on your compliance team?

The winter weather disaster which befell the citizens of the state of Texas need not have occurred had those responsible for delivering electricity properly assessed their risks and then managed those risks going forward. Weather has always been with us and is here to stay. If you do not plan for extreme weather events, you may well lose your business.

 

Tom Fox is a compliance specialist. He can be contacted on +1 (832) 744 0264 or by email: tfox@tfoxlaw.com.

© Financier Worldwide

BY

Tom Fox

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