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StrategyDriven Editorial Perspective – Expanding Uncertainty in the U.S. Financial Sector, part 3

Major changes in any established regulation cause great uncertainty and the recent revisions made to the financial industry’s governance are no exception. Indeed, the law firm of Davis Polk & Wardwell estimates that 243 new rules will be developed by 11 different government agencies as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.1 What is misleading, however, is the notion that the act focuses only on the financial services industry. In reality, this ‘financial reform’ represents a Washington power grab that extends far beyond the confines of Wall Street and will undoubtedly affect almost all Americans.

StrategyDriven questions whether these intrusions into non-financial sector areas will really help prevent future meltdowns like that which took place in 2008. The fact that other sectors are included simply broadens the span of government control and scope of market uncertainty which will further hinder economic recovery and growth as these other sectors must now also come to grips with the regulatory changes; changes that are not likely to be defined for years to come.

Service Providers

While StrategyDriven has already spoken out against the quota system enacted under Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we have not yet discussed the breadth of organizations covered by this rule. Under this provision, Congress and the President extended the regulation not only to financial institutions but to the many organizations providing services to these institutions. Service organizations named within this section of the regulation include accountants and providers of legal services.2

The Dodd-Frank Wall Street Reform and Consumer Protection Act also increases the legal liability of service providers; assigning them vicarious liability for the legal wrongdoings of their regulated financial institution customers. Specifically, the act:

  • imposes vicarious liability on any service provider processing consumer financial transactions as ‘aiders and abettors’ for operational support in some cases
  • encourages employees of shared service centers and outsourcers to file claims of violation so that they can reap a bounty in an enforcement case
  • makes mere ‘recklessness’ the equivalent of a ‘knowing’ violation of 1) the Securities and Exchange Act of 1934, 2) the Investment Company Act, and 3) the Investment Advisers Act of 1940
  • extends the extraterritorial jurisdiction of U.S. courts in enforcement of U.S. securities laws3

Non-Depository Institutions

In its attempt to be all inclusive in financial matters, Congress and the President provided the Bureau of Consumer Financial Protection regulatory authority over non-depository organizations such as payday lenders, debt collectors, and consumer reporting agencies. In these cases, the Bureau is provided the authority to prevent unfair, deceptive, or abusive acts or practices although the Dodd-Frank Act is vague about what this actually means. The Bureau also has the authority to “require reports, conduct examinations, require certain record-keeping requirements, prescribe other rules to ensure that such entities are legitimate entities and are able to perform their obligations to consumers.”4

It is of particular interest to note that several non-depository institutions and activities having at least an equally significant financial impact to consumers were expressly excluded from this regulatory oversight including real estate brokerage activities, accountants, and tax preparers.5

Publicly Traded Companies

Congress and the President reached far beyond the financial sector with the executive compensation regulations contained within the Dodd-Frank Wall Street Reform and Consumer Protection Act. Many of these provisions appear to continue the Obama Administration’s challenge to the fairness of executive compensation. New rules regarding executive compensation include:

  • Say-on-Pay
  • Compensation Committee Adviser Independence
  • Compensation Committee Member Independence
  • Pay Disparity Disclosure
  • Pay versus Performance
  • Clawback6

It goes without saying that greater transparency contributes to greater accountability and that is a good thing. However, StrategyDriven questions whether employees in general or members of Congress and the President would themselves be willing to be held to these standards; particularly the say-on-pay, pay versus performance, and clawback provisions. It is also worth noting that no provisions of the Dodd-Frank Act directly address the awarding of large ‘golden parachute’ payouts to failed executives upon their departure.

StrategyDriven Recommended Practices

The significant marketplace uncertainty created by the Dodd-Frank Wall Street Reform and Consumer Protection Act will not end anytime soon – the need to define 243 new rules will see to that. It is clear the impact of this law extends well beyond the boundaries of Wall Street and that it is important for all company leaders to understand how their organization may be affected. In addition to our previously recommended actions, StrategyDriven suggests organization leaders:

  • Assess the new and heightened liabilities and administrative costs associated with their financial industry work against the rewards resulting from this work, particularly if they are service providers to the financial services industry; making adjustments to their businesses as appropriate.
  • Consider how the new executive compensation provisions will impact the organization’s ability to attract and retain top executive talent.
  • Evaluate the need to adjust the compensation structure of the entire executive team and potentially that of all employees in order to maintain overall equity and balance given the new executive compensation rules.

Final Thoughts…

While the purpose of this editorial was to focus on the non-financial sector institutions included in the so-called ‘financial reform’ act we would be remiss for not identifying the unconscionable absence of Fannie Mae and Freddie Mac from this legislation. These two institutions played such a significant role in the financial collapse of 2008 that it is unreasonable to think Washington politicians wouldn’t conclude that some change in the regulation of these mortgage giants was needed. The fact that payday lenders and debt collectors are included in the Dodd-Frank Act and Fannie and Freddie excluded from meaningful regulatory change (Fannie and Freddie received two minor mentions in the 1,500 page Dodd-Frank Act)7 suggests Congress and the President are either not serious about preventing a future financial system meltdown or had their interests better served by the omission. Either way, the American public lost in this deal – $135 billion in outstanding debt to the American taxpayer as of this editorial’s publication.8

In the coming editions of the StrategyDriven Editorial Perspective, we’ll look at the potential impacts of several provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act including:

  • impacts of ‘too large to fail’ provisions on market risk
  • proportionately larger burden of the new law on small companies

As always, we’ll provide our thoughts on how business leaders can best prepare for the implementation of the financial reform law and weather the storm in the long-term. We also hope you’ll share your thoughts, lessons learned, and recommended resources with us and the StrategyDriven audience.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!

Sources

  1. “Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Enacted into Law on July 21, 2010,” Davis Polk & Wardwell LLP, July 21, 2010 (http://www.davispolk.com/files/Publication/efb94428-9911-4472-b5dd-006e9c6185bb/Presentation/PublicationAttachment/efd835f6-2014-4a48-832d-00aa2a4e3fdd/070910_Financial_Reform_Summary.pdf)
  2. “Racial quotas as financial services reform?,” Horace Cooper, The Washington Times, July 15, 2010 (http://www.washingtontimes.com/blog/watercooler/2010/jul/15/racial-quotas-financial-services-reform/)
  3. “Dodd-Frank Financial Reform: New “Systemic Risks” for the BPO Industry,” Bierce & Kenerson, P.C., Outsourcing Law, July 30, 2010 (http://www.outsourcing-law.com/2010/07/dodd-frank-new-risks-for-bpo/)
  4. “Dodd-Frank Wall Street Reform and Consumer Protection Act – Scope of Coverage of the Bureau of Consumer Financial Protection,” Kilpatrick Stockton LLP, August 6, 2010 (http://www.kilpatrickstockton.com/en/Knowledge%20Center/Alerts%20and%20Podcasts/Legal%20Alerts/2010/08/Dodd%20Frank%20Wall%20Street%20Reform%20and%20Consumer%20Protection%20Act%20Scope%20of%20Coverage.aspx)
  5. ibid
  6. “Some Dodd-Frank Executive Compensation Action Items,” Jeremy L. Goldstein, Wachtell, Lipton, Rosen & Katz, The Harvard Law School Forum on Corporate Governance and Financial Regulation, August 12, 2010 (http://blogs.law.harvard.edu/corpgov/2010/08/12/some-dodd-frank-executive-compensation-action-items/)
  7. “Housing Policy’s Third Rail,” Gretchen Morgenson, The New York Times, August 7, 2010 (http://www.nytimes.com/2010/08/08/business/08gret.html?_r=1)
  8. “Bailout Recipients,” ProPublica, August 22, 2010 (http://bailout.propublica.org/list/index)

StrategyDriven Editorial Perspective – Expanding Uncertainty in the U.S. Financial Sector, part 2

Common sense suggests that individuals and organizations would only seek to borrow or be lent money that they could with reasonable assurance repay. In the wake of the housing market crash of 2008, we learned that financial institutions frequently provided mortgage loans to those they knew could not afford to repay them. Common sense certainly did not prevail and, in this case, contributed to the devastating economic conditions we now face.

Armed with this knowledge and experience, reasonable people would seek to avoid creating conditions that could lead the recurrence of such reckless lending and place at risk our entire financial system and economy. Indeed, only a little common sense is required. It would appear, though, that common sense is in short supply in Washington D.C.

Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act sign into law on July 21, 2010 by President Obama directs Federal regulators to allocate credit by race and gender rather than on a systematic evaluation of risk and financial soundness.1,2,3 Race and gender are simply not financial qualifiers. Thus, this dubious approach to lending will either result in the loan applications of qualified non-covered individuals being rejected or the extension of funds to covered individuals who cannot afford to repay the loans. The credit market will subsequently become too tight, stifling economic growth or too loose, creating a similar set of circumstances that caused the financial meltdown this legislation is intended to prevent.

StrategyDriven Recommended Practices

The significant marketplace uncertainty created by the Dodd-Frank Wall Street Reform and Consumer Protection Act will not end anytime soon. It is clear that the law itself will create conditions that threaten the future stability of the U.S. financial markets. In addition to our previously recommended actions, StrategyDriven suggests organization leaders:

  • Monitor the market for indications of continued, extensive sub-prime lending and the use of other potentially new financial vehicles that provide individuals and companies with funds they cannot afford to repay.
  • Critically assess your organization’s financial standing and the risk involved with projects and ongoing operations; limiting borrowing to that which is reasonably prudent.
  • Be mindful of your organization’s portfolio of liabilities – lines of credits from suppliers, loans from financial institutions, bonds issued to stakeholders – when evaluating your company’s financial standing and the prudency of expanding is overall liabilities.
  • Honestly evaluate your customer’s ability to repay loans or lines of credit so to not place them and your company in a position of excessive financial risk.
  • Provide employees with financial advisory services benefits so to help them understand how to borrow responsibly.

Final Thoughts…

We cannot leave this topic without first addressing the issues of discrimination the Dodd-Frank Wall Street Reform and Consumer Protection Act creates. In a letter to Senate leaders, several members of the United States Commission on Civil Rights cite their belief that “the likelihood [this act] will in fact promote discrimination is overwhelming.” 4 And we at agree. Directing the establishment and reinforcement of quotas based on race and gender runs counter to our nation’s founding principle that all people are created equal. It puts in place a system by which people are judged based on their race and gender rather than on their capabilities, achievements, and the quality of their character.


“It would be unadvised to attempt to set up any one race above another, or one religion above another, or prescribe any on account of race, color or creed.” 5
 
Frederick Douglass
Our Composite Nationality
delivered December 7, 1869
Boston, Massachusetts


StrategyDriven believes only those societies and businesses embracing diversity and inclusion will realize great success. It is our assertion that all leaders should support the behaviors, systems, and policies that promote greater diversity and inclusion within society and its member organizations. In our opinion, quotas do not serve to promote diversity and inclusion but rather serve to create discrimination and divisiveness. It is simply not humanly possible to divine a quota that ensures all individuals will be treated equally according to his or her abilities, achievements, and character. Quotas therefore establish conditions where individuals from either the covered or non-covered class are not afforded equal opportunities which itself is discriminatory and engenders a resentment within those so discriminated that promotes a divisive environment. Thus, we believe Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act will serve to further divide our nation and our business community rather than ensure the fair inclusion of all individuals in the financial markets as was intended.

Again, StrategyDriven strongly believes in the power and strength of a diverse and inclusive marketplace and is committed to furthering its promotion. We hope you’ll take time to read our many Diversity and Inclusion articles to better understand what it means to be a truly diverse and inclusive business and promote such practices within your organization.

In the coming editions of the StrategyDriven Editorial Perspective, we’ll look at the potential impacts of several provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act including:

  • extension of government control beyond direct players in the financial market
  • impacts of ‘too large to fail’ provisions on market risk
  • proportionately larger burden of the new law on small companies

As always, we’ll provide our thoughts on how business leaders can best prepare for the implementation of the financial reform law and weather the storm in the long-term. We also hope you’ll share your thoughts, lessons learned, and recommended resources with us and the StrategyDriven audience.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!

Sources

  1. “Politicizing the Fed: Congress seeks more control over the 12 regional banks,” The Wall Street Journal, June 14, 2010 (http://online.wsj.com/article/SB10001424052748704575304575297130299281828.html)
  2. “Racial quotas as financial services reform?,” Horace Cooper, The Washington Times, July 15, 2010 (http://www.washingtontimes.com/blog/watercooler/2010/jul/15/racial-quotas-financial-services-reform/)
  3. “Race, Sex, and the Dodd-Frank Financial Regulation Bill,” Roger Clegg, The Federalist Society, July 12, 2010 (http://www.fed-soc.org/publications/pubid.1912/pub_detail.asp)
  4. “U.S. Commission on Civil Rights demands changes to Democrats’ financial reform bill,” Caroline May, The Daily Caller, July 14, 2010 (http://dailycaller.com/2010/07/14/u-s-commission-on-civil-rights-demands-changes-to-democrats-financial-reform-bill/)
  5. “Our Composite Nationality,” Frederick Douglass, TeachingAmericanHistory.org, December 7, 1869 (http://teachingamericanhistory.org/library/index.asp?document=2464)

StrategyDriven Editorial Perspective – Taking Decisive Action

History is replete with crisis so much so that their occurrence can be counted upon with some certainty. Crisis themselves create uncertainty but it is the response or lack of response to a crisis that creates the unnecessary uncertainty that often ripples through the marketplace, government agencies, and society.


”A crisis is a terrible thing to waste.”

Rahm Emanuel
Chief of Staff to President Barack Obama


As suggested by Rahm Emanuel, those individuals and organizations responding well to a crisis garner acclaim. Likewise, those who do not respond decisively are scorned.

Poor crisis management by British Petroleum (BP) and the U.S. government in response to the Deepwater Horizon oil spill in the Gulf of Mexico is evident by the ongoing nature of this catastrophe and the devastation it has caused the people and property of the Gulf States. Examining this crisis reveals several inadequacies in the disaster response:

  • Delay in executing the initial event response – 9 days (time until Obama Administration acknowledges the “spill [is] of national significance”)1
  • Failure to apply all appropriate resources to the event response – ongoing refusal of the Obama Administration to lift the Jones Act restrictions and allow international skimming ships to aid in the oil spill clean-up2, 3
  • Delay in defining and executing on obvious goals – 12 days to begin drilling a relief well to stop the oil spill4
  • Faulted decision-making process – inaccurate assessment of the spill conditions, namely the late recognition of the significance/volume of oil leaking5, 6
  • Lack of leadership and coordination – initial and ongoing confusion between BP and U.S. government authorities as to which organization was in charge of the event response efforts7

Some would argue that not every event can be anticipated and that the Deepwater Horizon accident was one such incident. We would not argue that point. It is unreasonable to expect that every situation and circumstance be fully anticipated and planned for not to mention that such an effort would be cost prohibited. However, when unanticipated circumstances arise leaders must be prepared to act decisively based on their and their organization’s values and beliefs and a set of core emergency response principles. Some of these include:

Values and Beliefs

  • protecting of human life
  • protecting the environment
  • protecting property
  • acting ethically and with integrity
  • minimizing the impact of the event on all parties involved and effected

Core Emergency Response Principles

  • recognizing that an emergency condition exists
  • identifying the leader and the roles and responsibilities for all participants or groups of participants
  • accurately defining the problem in both quantitative and qualitative terms including potential future challenges based on other probable and impactful events
  • identifying all resources (personnel, materials, and equipment) available to support the event response effort
  • defining the desired outcomes consistent with the organization’s core values and goals
  • identifying the several options that will enable achievement of the desired outcomes; including risks (short and long term), costs, and benefits
  • prioritizing options and selecting the optimal solution
  • communicating and executing the chosen solution including contingency measures should the primary approach be ineffective
  • continuously monitoring and adjusting the chosen approach as necessary

The response to the terrorist attack on the World Trade Center on September 11, 2001 and the Tylenol Crisis in 1982 serve as positive examples of values-based emergency responses following core response principles in the absence of pre-defined procedures. The decisive actions by Rudy Giuliani, the then mayor of New York City and the Johnson & Johnson executive team instilled confidence, minimized follow-on consequences, and expedited restoration from their respective event.

StrategyDriven Recommended Practices

For the past several weeks, we have discussed methods for identifying and preparing responses to probable events. The following recommended actions will help ensure leaders are prepared to response to unanticipated events in a manner that minimizes adverse consequences.

Unanticipated Event Response

  1. Clearly define organizational values understood and embodied by all organization members – An organization’s values serve as beacon against which all actions should be aligned and evaluated. Having a clearly defined set of documented organizational values provides responding executives and managers with a quantifiable basis against which to identify and evaluate response actions.
  2. Establish a commitment to adhering to the organization’s values over cost – Defined values are of little value unless organizational executives, managers, supervisors, and employees are willing to act on them even if doing so incurs additional cost. Gaining such commitment requires ongoing reinforcement to the principle of values over cost by all executives and managers during normal operations and event response periods.
  3. Define and train on a decision making and unanticipated event response processes – Individuals understanding and committed to the organization’s values may still not be capable of translating these into the needed timely response actions without decision-making and event response training. Such training should be periodically provided to all individuals at all levels of the organization.

Final Thought…

Decisive leaders are not impulsive. Quite the contrary, impulsive acts often diminish emergency response effectiveness. Decisive actions are timely, well thought out and consistent with the individual and organization’s values and beliefs. These actions follow the core emergency response principles. Their logic and structure are easily recognized, understood, and accepted by those implementing them, the public, and other interested stakeholders.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!

Sources

  1. “Timeline of Gulf oil spill, government response,” The Associated Press, The Boston Globe, May 8, 2010 (http://www.boston.com/news/nation/washington/articles/2010/05/08/timeline_of_gulf_oil_spill_government_response/?page=1)
  2. “U.S. not accepting foreign help on oil spill,” Josh Rogin, Foreign Policy, May 6, 2010 (http://thecable.foreignpolicy.com/posts/2010/05/06/us_not_accepting_foreign_help_on_oil_spill)
  3. “Jones Act Slowing Oil Spill Cleanup?” Brian Wilson, Fox News, June 10, 2010 (http://liveshots.blogs.foxnews.com/2010/06/10/jones-act-slowing-oil-spill-cleanup/)
  4. “Spill relief well draws scrutiny, fears,” Greg Bluestein and Jason Dearen, Associated Press, June 13, 2010 (http://www.msnbc.msn.com/id/37674027/ns/disaster_in_the_gulf)
  5. “Timeline of Gulf oil spill, government response,” The Associated Press, The Boston Globe, May 8, 2010 (http://www.boston.com/news/nation/washington/articles/2010/05/08/timeline_of_gulf_oil_spill_government_response/?page=1)
  6. “Size of Oil Spill Underestimated, Scientists Say,” Justin Gillis, The New York Times, May 13, 2010 (http://www.nytimes.com/2010/05/14/us/14oil.html)
  7. “Gulf Cleanup of BP Oil Foiled by Leadership Confusion (Update1),” Jim Efstathiou Jr., Bloomberg Businessweek, June 10, 2010 (http://www.businessweek.com/news/2010-06-10/gulf-cleanup-of-bp-oil-foiled-by-leadership-confusion-update1-.html)

StrategyDriven Editorial Perspective – Creating Event Certainty, part 3 of 3

No event response plan is even worth the paper it is written on if not promptly and properly executed. And while an estimated 20,000 to 40,000 barrels (840,000 to 1,680,000 gallons) of oil gush into the Gulf of Mexico per day1, more questions arise about the appropriateness of British Petroleum (BP) and the U.S. government’s response to the crisis.


“A good plan violently executed right now is far better than a perfect plan executed next week.”

George S. Patton (1885 – 1945)
General, United States Army


 
Appropriateness of Action

After persistent questioning by the U.S. State Department Press Corp, it came to light in early May that while at least thirteen countries have offered to assist in the Gulf of Mexico cleanup the U.S. government is not accepting most of this support. The countries named by the U.S. State Department as offering support include: Canada, Croatia, France, Germany, Ireland, Mexico, the Netherlands, Norway, Romania, Republic of Korea, Spain, Sweden, and the United Kingdom. The U.S. State Department notice characterized the assistance as being offers that “include experts in various aspects of oil spill impacts, research and technical expertise, booms, chemical oil dispersants, oil pumps, skimmers, and wildlife treatment.” However, this notice also stated, “While there is no need right now that the U.S. cannot meet, the U.S. Coast Guard is assessing these offers of assistance to see if there will be something which we will need in the near future.”2

Over a month later, Fox News reported that the U.S. government has accepted some foreign assistance including:

  • Canada’s offer of 3,000 meters of containment boom
  • Three sets of COSEZ sweeping arms from the Dutch
  • Mexico’s offer of two skimmers and 4,200 meters of boom
  • Norway’s offer of 8 skimming systems

More important is what is not in use, namely the world’s best oil skimming ships from Belgium, the Netherlands, and Norway because of their non-compliance with the Jones Act, a 1920’s protectionist law aimed at benefiting labor unions. While the George W. Bush Administration waived the Jones Act requirements in order to accept foreign assistance following the Hurricane Katrina Disaster, the Obama Administration has indicated no such intentions in dealing with the BP Oil Spill Crisis.3

Failure of the Obama Administration to waive the Jones Act requirements and welcome Belgian, Dutch, and Norwegian oil skimmers to defend the shores of the United States is inexcusable. Compounding this issue is the lack of command leadership being exercised by both President Obama and Coast Guard Admiral Thad Allen. Admiral Allen is quoted as saying, “if it gets to the point where a Jones Act waiver is required, we’re willing to do that too. Nobody has come to me with a request for a Jones Act waiver.” As the Incident Commander, Admiral Allen is solely responsible to make the decision on whether or not to make a waiver request. He is responsible to exercise command judgment, not wait on a subordinate or outsider to provide him with his opinion or direction. With the oil leak ongoing, an estimated 39,525,000+ gallons of oil leaked4, 840,000 to 1,680,000 gallons more oil entering the Gulf daily, failing oil booms5, a marginally effective BP well cap6, and only 320,000 gallons of oil skimmed7 add up to the common sense solution that President Obama and Admiral Allen need to act now to waive the Jones Act and invite our global allies to assist with the Gulf Oil Spill recovery effort.

As with almost all events, these inappropriate actions only serve to intensify the severity of damage being done to the people, businesses, and environment of the Gulf States.

Timeliness of Action

Timely actions mitigate events and prevent the promulgation of adverse effects. In countries such as the Netherlands, oil companies are given 12 hours to appropriately respond to an oil leak before the government takes over and the oil company presented ‘the bill.’ This, however, is not the case in the United States where BP’s response has, in several cases, been inexcusably slow8 with no or delayed government intervention.

From the beginning, BP and the U.S government were slow to respond to the oil spill in the Gulf of Mexico. It was 12 days before the relief well, cited by many experts as the key to stopping the leak, was started.9 And once one well capping method is deemed unsuccessful, it is several days before the next method is tried.10 Clearly, BP nor the U.S. government appears to have been fully prepared to implement their oil spill response plans and once implemented are doing so far too slowly.

StrategyDriven Recommended Practices

Risk response relies as much upon the proper and timely execution of the mitigation plan as it does development of the plan itself. All too often, executives and managers become penny wise and pound foolish; focusing too much on the cost of the event’s mitigation rather than on mitigating the event itself. Those falling prey to this temptation typically find their organization’s mitigation timeline extended and their costs soaring.

Whether responding to an isolated incident such as the unexpected resignation of a key resource or a global impacting event like the BP Oil Spill, StrategyDriven recommends executives and managers consider the following event response principles:

Event Response

  1. Promptly execute the in place risk mitigation, transference, and avoidance mechanisms. The in place plan, conceived by the most experienced minds in a stress-free environment, cannot help alleviate the event’s negative impacts if not implemented – timely execution is critical to curtailing the damage. While executing the plan, allow flexibility to address unique circumstances.
  2. Always be looking ahead… assume failure and prepare to perform the next several response actions in parallel. Transitioning from one phase of a plan to another takes precious time. Assuming that current efforts will fail and prestaging the personnel, procedures, materials, components, tools, and equipment to executive several subsequent phases eliminates this wait time thereby accelerating the event response efforts which in-turn help reduce the overall negative impact incurred.
  3. Accept outside assistance as appropriate. Some outside assistance may be truly unnecessary, inappropriate, and distracting. However, legitimate offers of assistance from knowledgeable and experienced persons should be accepted so to shorten the response and recovery time frame and/or mitigate negative outcomes.
  4. Communicate constructively and proactively with the press, public, and stakeholders. People fear the unknown; and during times of crisis, the unknown creates vast unnecessary uncertainty. Remaining as transparent as possible by openly communicating known event conditions and mitigating actions as clearly and accurately as possible helps reduce the unknown and generates good will.
  5. Constructively assist in the incident recovery – even if the event is not your direct responsibility. As responsible members of the broader local and global community, we should reasonably assist others in the mitigation of significant events if we possess the talent, knowledge, methods, and/or equipment to do so.
  6. Seek legal counsel. We live in a litigious society. Whether the event is or is not your organization’s responsibility, it is often prudent to seek legal counsel to ensure your and your company’s rights are protected.

Final Thoughts…

For four weeks, we have commented on the failures of British Petroleum and the U.S. government in responding to the Gulf Oil Spill. Based on this example, we have recommended several actions be taken by leaders to ready their organization and better respond to significant events should they occur.

Johnson & Johnson’s handling of The Tylenol Crisis of 1982 stands as an example of effective crisis management. For a brief review of that event and Johnson & Johnson’s response, we suggest reading: The Tylenol Crisis, 1982 by Effective Crisis Management.11

StrategyDriven wishes to thank the people and companies of Canada, Croatia, France, Germany, Ireland, Mexico, the Netherlands, Norway, Romania, Republic of Korea, Spain, Sweden, and the United Kingdom for their offers of assistance in the BP Oil Spill recovery effort. We also extend our appreciation to the men and women of the U.S. Coast Guard and the Gulf States for their effort to contain the spill and protect our country from its harmful impacts.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!

Sources

  1. “BP Oil Leak Rate Called 8 Times Worse Than Earlier Estimate,” David Muir and Bradley Blackburn, ABC News, June 10, 2010 (http://abcnews.go.com/WN/Media/bp-oil-spill-federal-panel-flow-rate-worse/story?id=10881441)
  2. “U.S. not accepting foreign help on oil spill,” Josh Rogin, Foreign Policy, May 6, 2010 (http://thecable.foreignpolicy.com/posts/2010/05/06/us_not_accepting_foreign_help_on_oil_spill)
  3. “Jones Act Slowing Oil Spill Cleanup?” Brian Wilson, Fox News, June 10, 2010 (http://liveshots.blogs.foxnews.com/2010/06/10/jones-act-slowing-oil-spill-cleanup/)
  4. “How Much Oil Has Leaked Into the Gulf of Mexico?” Chris Amico, PBS, May 9, 2010 (http://www.pbs.org/newshour/rundown/2010/05/how-much-oil-has-spilled-in-the-gulf-of-mexico.html)
  5. “Containment boom effort comes up short in BP oil spill,” Peter Grier, The Christian Science Monitor, June 11, 2010 (http://www.csmonitor.com/USA/2010/0611/Containment-boom-effort-comes-up-short-in-BP-oil-spill)
  6. “BP Oil Spill Cap helps slow Gulf oil spill: Will it work?” Cheryl Phillips, Examiner, June 6, 2010 (http://www.examiner.com/x-22397-Providence-Business-Headlines-Examiner~y2010m6d6-BP-Oil-Spill-Cap-helps-slow-Gulf-oil-spill)
  7. “Containment boom effort comes up short in BP oil spill,” Peter Grier, The Christian Science Monitor, June 11, 2010 (http://www.csmonitor.com/USA/2010/0611/Containment-boom-effort-comes-up-short-in-BP-oil-spill)
  8. “Steffy: U.S. and BP slow to accept Dutch expertise,” Loren Steffy, Houston Chronicle, June 8, 2010 (http://www.chron.com/disp/story.mpl/business/steffy/7043272.html)
  9. “Spill relief well draws scrutiny, fears,” Greg Bluestein and Jason Dearen, Associated Press, June 13, 2010 (http://www.msnbc.msn.com/id/37674027/ns/disaster_in_the_gulf)
  10. “’Top kill’ fails to stop Gulf oil leak, new plan readied,” The Economic Times, May 30, 2010 (http://economictimes.indiatimes.com/articleshow/5990458.cms)
  11. “The Tylenol Crisis, 1982,” Effective Crisis Management, 2002 (http://iml.jou.ufl.edu/projects/Fall02/Susi/tylenol.htm)

StrategyDriven Editorial Perspective – Creating Event Certainty, part 2 of 3

Oil from the ill-fated British Petroleum (BP) leased Horizon Deepwater rig continues to gush into the Gulf of Mexico – the massive oil slick already contaminating the coastline of several Gulf States, injuring wildlife, and threatening to evolve into an unprecedented ecological disaster. In the over forty days since the leak first began, both BP and U.S. government agencies have been ineffective at mitigating the effects of this accident. Recent reports, however, suggest this didn’t need to be the case; that the U.S. government should have been better prepared to handle such an accident if it had truly learned from readiness exercises conducted over the past eight years.

Investigations by The Center for Public Integrity and ABC News revealed the U.S. government conducted oil response drills in 2002, 2004, 2007, and 2010. These drills revealed several concerns regarding the United States’ preparedness to handle such an accident including inexperience, poor communications, and conflicting roles.1 The investigation also showed these vulnerabilities went uncorrected; resulting in diminished effectiveness of the government’s response when the actual accident occurred.2, 3

Large scale exercises involving multiple government agencies are often incredibly expensive and highly disruptive – though not as expensive as the events they seek to prevent or mitigate. Not acting to eliminate deficiencies identified during these learning events is simply irresponsible. Unfortunately, the impact of this negligent behavior is only now being recognized – far too late to for those irreparably harmed by the BP oil leak.

StrategyDriven Recommended Practices

Self assessments and other activities identifying emergency response vulnerabilities are nearly worthless unless organization leaders act to resolve deficiencies and improve subsequent performance. Without this corrective action, unnecessary uncertainty knowingly persists.

Whether developing the response to a newly identified risk or an opportunity to improve existing response plans, organization leadership should consider implementation of the following actions to ensure their organization is ready to appropriately respond when an adverse event occurs:

Contingency Planning and Response Readiness

  1. Prioritize and act on assessment findings. Companies don’t have the unlimited resources needed to pursue every opportunity and preventative measure. However, actions to mitigate or prevent shortfalls that represent significant risk to the organization should be funded, acted upon, and monitored for ongoing success.
  2. Put in place those mechanisms that will help your organization mitigate, transfer, and avoid risk realization. Every company should have a portfolio of contingency plans to deal with adverse circumstances and marketplace opportunities. Also consider adding contingency plans to deal with the adverse impacts brought on by another company’s actions if the significance of those impacts warrants such action.
  3. Prestage personnel, procedures, materials, and tools to respond to events as they occur. To be effective, a response must be timely. Prestaging personnel, procedures, and materials enables an organization to mobilize quickly when an undesired event occurs.
  4. Conduct follow-up maintenance and inventory checks of prestaged procedures and materials. Regulations and policies become change and methodologies become outdated necessitating the periodic review and updating of prestaged procedures. Likewise, materials spoil (exceed their expiration date) and tools need periodic servicing to maintain their effectiveness. And all of these items are at risk of being misplaced, lost, or stolen which demands periodic inventories be taken and replacements made as needed.
  5. Practice, practice, practice. Practice provides experience which drives response readiness. Additionally, changes to procedures and new personnel create the need for refresher and initial training.

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Sources

  1. “Training Exercises Showed Gaps in Government Preparedness Before BP Oil Spill – Inexperience, Poor Communications, Conflicting Roles Cited,” John Solomon and Aaron Mehta, The Center for Public Integrity, May 11, 2010 (http://www.publicintegrity.org/articles/entry/2079/)
  2. “Before the Gulf Oil Spill, U.S. Training Exercises Revealed Preparation Gaps,” Matthew Richmond, Fair Warning, May 17, 2010 (http://www.fairwarning.org/2010/05/before-the-gulf-oil-spill-u-s-training-exercises-revealed-preparation-gaps/)
  3. “Coast Guard officials told of potential oil spill response problems years ago,” Ben Raines, Alabama Live, May 21, 2010 (http://blog.al.com/live/2010/05/coast_guard_officials_have_kno.html)