Risk Management Test 3 1 Topic 8 Overview of risk a Categories of risk at an organizational level i Business risk experiencing a loss and not a profit 1 Deviations in profitability 2 What affects Business Risk a b Can be caused by many things prices regulation competition etc Very broad category many will define as risk caused by operational hazard financial or strategic risks ii Operational risk 1 Potential loses from internal sources 2 3 What effects operational risks Focus of BP case and Analytics readings a b c d Manufacturing processes Fraud Mismanagement Employee mistakes iii Hazard risk pure risk loss or no loss ex Car is there or not there 1 Stuff that is insureable iv Financial risk 1 Potential variation due to financial causes a Ex Losses due to exchange rate investment losses credit risks liquidity risks etc v Strategic risk 1 2 Potential losses variation from poor business decisions Many decisions fall under strategy if any of them are wrong faulty strategic risk I often lump reputational risk under strategic risk but is often a separate classification 3 4 What effects strategic risks Product mix a Supplier choice b c Financing options vi Other risks 1 2 3 Legal risks Liability risks IT risks b BP putting profits before safety i Case study 1 BP around 2 safety issues in 2005 2006 ii Overriding themes of Case Corporate Strategy Public Relations Corporate Culture Workplace Safety preventing employee injuries Process Management want process to be safe 1 2 3 4 5 iii What happened 1 March 25 2005 Explosion at Texas City refinery a 15 dead b 170 injured c 1700 lawsuits d Was safety first i OSHA 1 2 21 3M fine by OSHA 300 willful violations of OSHA rules ii US Chemical Safety Hazard Investigation Board CSB BP endangered workers to cut costs 1 23 accidents in 30 years 2 8 severe incidents in 10 years leading up to explosion 3 Lack of safety leadership 4 5 Inadequate resources for safety 6 Independent panel to review safety iii BP response 1 2 We may not have broken laws but broke our values Baker report ex vice president not finished until Jan 2007 2 March 2006 Oil Spill at Prudhue Bay Alaska Alaskan North Slope a Leak discovered in Prudhoe Bay Alaska i ii iii iv i ii iii b Corroded pipe c Was safety first Largest US oilfield Alaska North Slope 267K gallons largest spill in this oilfield Comparison Exxon Valdez approx 30M gallons Comparison Deepwater Horizon 210M gallons BP response shut down oil fields 8 drop in US oil production when they shut it down 16 of 22 miles of pipe needed to be replaced i Pipeline and Hazardous Materials Safety Administration 1 2 3 Ineffective leak detection system Pipeline had several defects internal corrosion BP used a different inspection system UT technology vs pipeline inspection gauges PIG 3 Jan 2007 CEO Browne Resigns a b c d Browne will step down as CEO in July 2007 4 days before Baker report released Widely recognized as one of Great Britain s top businessmen Financial Legacy M A rebranding 5X increase in profits and market cap 2 5X increase in share price 4 The Baker Report a January 16 2007 i ii iii iv v vi vii viii ix Critical of BP s approach to process safety Failed to give process safety the same emphasis as other initiatives including environmental and other safety initiatives Should have paid more attention to previous incidents chemical releases fires Refineries did not get the same importance as exploration Decentralized management and entrepreneurial culture delegated substantial discretion to plant managers without outlining expectations regarding process safety responsibility or accountability Communication lacking Contract vs union workforce problems Instances of lack of operating discipline toleration of serious deviations from safe operating practices and complacency Not restricted to BP b 10 recommendations i Process safety leadership top down ii iii iv v vi vii viii ix i Process safety management system Process safety knowledge and expertise Process safety culture Clearly define expectations and accountability for process safety Support for line management Leading and lagging performance measures for process safety Process safety auditing Board monitoring Industry Leader 1 Process safety focuses on the prevention of fires and leaks in hazardous production processes Different from OSHA which focuses on personnel safety 5 The follow up a b c d e Integrity was questioned One year worst refinery accident worst oil spill Bloated profits Bad pipelines Failed to communicate what was important Cost safety or environment i f Did org structure allow it to do what is g 2010 i Toxic gas release at Texas City refinery that lasts 40 days sold in 2013 Deepwater Horizon Oil Spill Cause cost cutting ii iii iv BP Background 1 Merger of British Petroleum AMOCO a Top 5 Global Oil Co 2 British Petroleum a Over 100 years old 3 Browne became CEO in 1995 Rebranding a i ii iii iv Environmentally friendly oil company BIG DEAL AT THE TIME Health Safety Environmental HSE performance Growth through M A Green Company Climate Change talk in 2002 b Alternative Fuels i Solar c Public Relations Perspective i ii iii Increase in brand value Many lauded BP s approach Some critics d Corporate Strategy Perspective i ii iii iv Growth through M A Do more with less Cost cutting Cost conscious 1 2 Green washing How can an oil company be green e What effect does Corporate Strategy have on Corporate Culture c How Data Analytics can help i Bid Data 1 We create so much data today how can organizations use it a Data mining b c Buying trends Targeted marketing swans ii Most risk management for tomorrow 3 Article is presented as a Q A d Strategy risk and the global financial crisis 1 Strategic Risk a 2 Mitigate risky business practices employee fraud operational risk black 1 Use past data to predict future risks 2 Risk landscape is changing so fast that historic data is no longer a good predictor a Business risk operational risk black swans and behavioral analytics Strategy should make companies more competitive alert to their circumstances and resilient Mistakes in strategy however can be severe strategic risk Was strategy thrown aside with the mortgage crises and resulting financial markets meltdown Did companies forgo long term strategy for quick profits 2 Background on financial crisis Another one of those readings where you should be going to fill in your gaps in knowledge i ii iii iv v 3 Did strategy cause crisis How does our mortgage system work What is Fannie
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