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Enterprise Risk Lagging Globally, Study Finds

Despite a widening range of risks faced by organizations globally, less than 35% of companies say they have an enterprise risk management (ERM) plan in place. What’s more, 70% would not describe their oversight as mature, according to the Chartered Global Management Accountant (CGMA) report Global State of Enterprise Risk Oversight 2nd Edition.

The study found that 60% of boards of directors globally are pressuring their companies to increase involvement of senior management.
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The U.S. is lagging in some areas, with only 46% of its boards assigning risk oversight responsibilities to a committee compared to 70% globally.

One survey conclusion:

Unfortunately, many executives view risk management as mostly focused on compliance and loss prevention with little connection to strategy and value creation. As organizations evaluate their risk management processes, they may benefit from providing an honest assessment about the extent to which risk management in their organization is an important input to the strategic planning process. Given executives understand the importance of taking risks to generate returns, shouldn’t risk management be an important strategic tool by providing risk insights that inform strategy?

Other key findings of the study include:

Navigating the risk landscape infographic

Gauging the Impact of Reputational Risk

The following article is part of a continuing blog series that will explore ideas, concepts, discussions, arguments and applications associated with the field of enterprise and strategic risk management.

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In my previous article, I made the point that the public discussion of reputational risk lacks a set of common standards or definitions. This lack of consistency allows organizations to interpret or define the concept of reputational risk in very different ways. For some, reputation is beginning to be viewed as something like the “risk of risks” in the same way people are starting to discuss the concept of the “internet of things.” I questioned whether reputation or brand is actually a risk or a residual event stemming from other extenuating risk domains or actions.

Upon further reflection and discussions with academics and risk professionals who are thinking carefully about this issue, I would go further now to suggest that reputation or brand risk involves perceived or real human behaviors that are, to some extent, measured against societal, economic or moral standards. The adherence or deviation from established standards generates the basis for the risk, and the variability from the standard influences the duration of the outcome.

The bigger question is: What impact does reputational risk have on economic performance when possibly mitigated by the existence of a robust enterprise or strategic risk management methodology? Is the data available to see the “correlates” between a reputational risk event that trigger or influence operational key process indicators like EBIT, ROA, ROE and share price (public or private)?

What we do know from the Aon 2015 Global Risk Management Survey is that business leaders are concerned about reputational risk in general and the possible linkages with other hazard and operational risks within their organizations.

The respondents to the survey said that they worried that a reputational risk event would significantly impact financial performance.

reprisk1If reputation/brand risk was identified as a precipitating event, the respondents identified regulatory change, increasing competition, talent retention, cash flow/liquidity and share price volatility as “follow on” risk consequences. In effect, reputation/brand risk might constitute a “gateway” risk, where other related “follow on” risk consequences are triggered and serve to increase the overall volatility/impact of the reputation event.

Another way to view the data is to see what events could trigger a reputation event.

reprisk2In this case, the survey respondents identified nine non-correlated risks that could precipitate a reputation/brand event. Here social media plays an important role.

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The speed by which information, accurate or not, is transmitted, consumed and iterated across the nine risk categories may have a material impact on the basis and duration of the reputation/brand event. There is also an error component associated with social media.

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How many times have we witnessed an initial media report of a brand damaging event that turns out to be prematurely reported and the facts distorted, only to be corrected in a later reporting cycle?

Next up: Fat vs. thin tail distributions.

As Technology Gets Smaller, Risks Get Bigger

MicroElectronics

Microelectronics is changing the way we live, work and do business. With circuitry thousands of times smaller than a human hair, microelectronics has become the brains behind almost every business. But shrinking technology makes equipment more vulnerable to breakdowns, especially when it’s portable and fragile. To manage the risk, you need to keep up with these evolving exposures to protect your organization from loss.

Insurance is changing as well, to reflect this new technology. Think of all the equipment that relies on micro-circuitry. From building systems to communications, if it uses electricity, it likely operates with tiny transistors and microprocessors. Our claims data shows that micro-circuitry is prone to break down and is difficult to repair.

Yet, most property coverage does not cover equipment breakdowns and typical equipment breakdown insurance requires proof of physical damage. That can leave a business without coverage for repair or replacement, business interruption and data loss caused by today’s technology losses, unless the policy specifically covers microelectronics failures.

When electronics fail, the components are so small it may be difficult or impossible to see the damage. How small? Intel Corporation reports that more than 100 million of its 22 nanometer tri-gate transistors could fit onto the head of a pin; more than six million transistors would fit in the period at the end of this sentence.

With each innovation, the technology also becomes faster, more powerful and more complex. Transistors are the building blocks of integrated circuits, with billions of transistors integrated and interconnected with circuitry baked into a single microchip. Integrated circuits are used in microprocessors to run computers and programmable devices.

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What’s more, the technology is changing so rapidly, it is hard for most people to keep up. And that’s the challenge for business, industry, and their insurers. In the marketplace, new technology isn’t about theory and experimentation—equipment is an investment and a breakdown can be costly and disruptive.

The evolution of equipment with circuit board technology is causing equipment to fail differently than with previous technology. Microelectronics makes equipment more vulnerable to a breakdown, especially since it’s frequently used in the field. Increasingly, equipment damage is not detectable and sometimes not even physical.

Equipment may stop functioning for no obvious reason, with no apparent physical damage. If a wire one micron wide breaks, it’s almost undetectable. Most electronic equipment requires firmware, embedded software instructions that can become corrupted. The equipment stops working, but it’s not because of physical damage.

With the internet and cloud computing, a loss may also be virtual. Studies show the majority of U.S. businesses use the cloud; some estimates report that up to 75% or more use some type of cloud services. The loss of internet broadband service and cloud connectivity can cripple many business operations.

Gartner Incorporated, the information technology research and advisory company, estimates there will be 26 billion connected devices by 2020. Already, Wi-Fi connections and radio-frequency identification using sensors and monitors enable the remote management of everything from retail business inventories to building thermostats.

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It’s difficult to predict when the next leap will come in new technologies for microelectronics. In what seems like science fiction, some researchers aim to break through the limits of conventional electronics using silicon chips by integrating biological and nanoelectrical systems.

What will this mean for business and industry?

Some of the old concepts of property insurance, developed over a century ago, may no longer serve businesses and insurers as well. Technology is too complex. In a digital world, we live and work online. Technology connects us and provides the tools to communicate, create products and deliver services. Data is what drives a successful business.

For decades, the trigger for equipment breakdown and other property insurance has been based on loss due to physical damage that can be observed and identified. As more equipment breakdowns involve micro-circuitry, however, it’s time to take a different approach.

When purchasing equipment breakdown insurance, ask what “failures” are covered for micro-electronics. There should be no additional sublimits or deductibles—microelectronics claims should be like other equipment breakdown losses. Are cloud services covered under service interruption? Is data restoration included? When does off-premises coverage apply?

Insurers must offer new and innovative products and insurance solutions to cover today’s micro-technology for breakdowns. In a complex world, it’s as simple as that.

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Defective Sidewalk Conditions: Who is at Fault?

sidewalk2

Liability between municipalities and landowners for injuries sustained by pedestrians due to defective sidewalk conditions has been the subject of lawsuits and statutory enactments for years. In California, municipalities generally own the sidewalks adjacent to private property owners’ land, but state law provides that the landowners are responsible for maintaining the sidewalk fronting their property in a safe and usable manner. According to Streets and Highways Code 5610:

“The owners of lots or portions of lots fronting on any portion of a public street or place when that street or place is improved or if and when the area between the property line of the adjacent property and the street line is maintained as a parking or a parking strip, shall maintain any sidewalk in such condition that the sidewalk will not endanger persons or property and maintain it in a condition which will not interfere with the public convenience…”

California state law provides that a municipality may assess landowners for the cost the municipality incurs to maintain sidewalks if the landowner fails to perform his/her duty. Although state law provides that abutting landowners are responsible for sidewalk maintenance and may be assessed the cost of repairs, they may not be liable for injuries or damages to third persons who use the sidewalk, unless the municipality enacts an ordinance that addresses liability. Williams v. Foster (1989). Williams arose after the plaintiff, Dennis Williams, tripped on a raised portion of the sidewalk in the City of San Jose, and thereafter sued the City. In its defense, San Jose argued that under 5610, the owner of the property fronting the sidewalk in question was solely liable.

Rejecting this contention, the court held that Foster (landowner) owed no legal duty at all to the injured plaintiff.

In reaching the Williams decision, the court held that imposing upon abutting owners a duty of care in favor of third persons “would require clear and unambiguous language,” which according to the court, is not contained in 5610. Notably, the court went on to state that the City “could have enacted an ordinance which expressly made abutting owners liable to members of the public for failure to maintain the sidewalk, but did not.” Following the Williams decision, the City of San Jose amended its sidewalk ordinance to include language similar to that suggested by the Williams Court.

In 2001, after adopting a sidewalk liability ordinance that addressed the issues raised in Williams, San Jose was sued by Joanne Gonzalez, who alleged she was injured when she tripped and fell over a raised portion on a public sidewalk. Gonzalez also sued Charles Huang, who owned the property adjacent to the sidewalk on which she fell.  Huang was sued on the theory that he had a common law duty to the plaintiff to maintain the sidewalk in a non-dangerous condition, as well as a duty under the San Jose Municipal Code.

The City of San Jose argued that the adjacent property owner was partially liable because he had not maintained the sidewalk as required by the local ordinance. Huang filed a motion for summary judgment arguing in part that the sidewalk liability ordinance enacted by the City of San Jose was unconstitutional. The trial court agreed with Huang and granted his Motion for Summary Judgment. Both Gonzalez and the City of San Jose appealed.

The case proceeded to the Court of Appeal which in 2004 ruled in San Jose’s favor.

  (Gonzales v. City of San Jose (2004.) The primary issue before the court was whether the state law preempted the local measure. The court found that the ordinance was constitutional and was not preempted by state law.

In its holding, the Gonzales court noted that cities are empowered under the California Constitution to enact ordinances and regulations deemed necessary to protect the public health, safety, and welfare, and that the City of San Jose’s ordinance was a permissible exercise of that power. Without such an ordinance, the court noted, landowners would have no incentive to maintain adjacent sidewalks in a safe manner.

The court emphasized that the ordinance did not serve to absolve the city of liability for dangerous conditions on city-owned sidewalks when the city created the dangerous condition, knew of its existence and failed to remedy it. Since the Gonzales ruling, many municipalities have considered liability shifting ordinances. Some have enacted such ordinances while others have not, oftentimes on public policy concerns.

Note that even in jurisdictions which have enacted liability shifting ordinances, one must determine the cause of the defective sidewalk condition. In many ordinances, liability does not shift to the landowner if the landowner did not cause the defective condition to exist.

Thus, in analyzing liability in a case involving an allegedly defective sidewalk condition, a major issue will be whether the municipality has a liability shifting ordinance. If such an ordinance exists, it must be read carefully to determine its scope, as each ordinance differs from municipality to municipality.