Enterprise Risk Management (Preview)

6 Part 1 – Concepts and Methods Human Health Challenges Urbanization and globalization create significant risks of communicable diseases. Chief among communicable diseases are highly contagious influenza and corona-type viruses that spread rapidly. New viruses that infect humans can result in severe health issues and deaths in large segments of the population. If a virus is new or has mutated to a new state, there is a lack of immunity among populations. A lack of immunity combined with a rapid spread results in a catastrophic situation called a pandemic, which is an epidemic that occurs over a wide area or worldwide. Pandemics cross international borders, affect a large number of people, and result in severe illnesses and deaths. Examples of pandemics include the Spanish flu (1918-1920), the Asian flu (1957-1958), the Hong Kong flu (1968–1969), and the Swine flu (H1N1, 2009-2010). Other viruses that spread over wide areas but were contained more successfully include the Severe Acute Respiratory Syndrome (SARS, 2002-2004), the Zika virus (2015), the Dengue fever (2016) and the highly contagious and very lethal Ebola virus that surfaced in West African countries such as Sierra Leone and Liberia (2014), as well as Congo (2018). Pandemics have severe implications on people, organizations, governments and the economy. In order to stop the spread of communicable diseases, governments and health authorities typically impose quarantines and restrictions on the gathering individuals and on the movement of people and goods across borders. Governments may also mandate lockdowns such as the closure of offices, production plants and retail stores in affected areas. They also impose social distancing rules, and may require individuals to wear protective masks in public places. Organizations experience significant challenges when confronted with such restrictions, especially those that require employees to work on site for carrying out business activities, or those that require customers to visit stores or sales representatives for making purchases. The organizations best able to cope with pandemic restrictions are the ones able to let employees work from home, and the ones able to adapt their working environment in accordance with the restrictions and recommendations of governments and health authorities. Organizations that have a strong financial position, namely a lot of cash and working capital, are also in a much better position to survive pandemics. In addition, organizations that have advanced capabilities for selling and delivering goods and services online or remotely are in a better position than organizations that only have traditional distribution channels such as in-store sales. The Covid-19 pandemic that started at the end 2019 is having a severe impact on human health and economic activity (Box 1.1). Individuals, organizations and governments around the world were ill prepared for this pandemic, despite years of warnings by health experts. At the time of completing this text, it was impossible to predict how long this pandemic will last, how it will be resolved, and what its long term implications are going to be. Organizational Complexity Organizations look for ways to grow revenues and reduce costs. In doing so, they may implement solutions that increase risks by creating additional layers of complexity. For example, some organizations use franchising to license others to sell their products. The buyer of a franchise is a separate entity bound by agreement with the seller. The organization selling franchises has the ability to grow market share and may thwart competition more effectively. However, the seller does not maintain full control of the franchised operations, and risks or disputes may arise. Other solutions that help reduce costs but create additional layers of complexity and dependency include supply chain arrangements, production outsourcing and joint ventures. These complexities increase when vendors or business partners are located in countries with different languages, cultures, currencies, regulations, etc.