By Stephen C. Clarke (as appeared in Risk Management magazine, December 2013)
As the Civil War wound toward conclusion, Union naval forces led by Rear Admiral David Farragut set their sights on the capture of Mobile Bay, Alabama, in an effort to cut off Confederate troops from their last water-based supply route. While most people have never heard of the Battle of Mobile Bay, many are familiar with the words attributed to Admiral Farragut at the start of the engagement: “Damn the torpedoes, full speed ahead.”
The modern interpretation of that phrase is to proceed without concern for risk, but Admiral Farragut’s planning shows that he entered the battle fully informed of the dangers he faced, developed a strategy to mitigate and minimize damage to his armada, and, through strong leadership and perseverance, was able to take control of Mobile Bay while losing only one ship.
Farragut’s planning, strategy, and leadership in the Battle of Mobile Bay offers lessons for risk managers fighting the Battle of Emerging Risk. How can these lessons be applied to emerging risks? Simple. For comparison purposes, consider climate change to be our Mobile Bay.
Through advance scouting, Farragut knew that the entrance to Mobile Bay was mined (hence the “torpedoes,” then the term for underwater mines) with the intention of forcing incoming vessels to sail close to shore-based gun batteries. He arranged his vessels so that ironclads faced the shore upon entry and shielded the wooden vessels from the artillery barrage that would be unleashed. His order for “full speed ahead” came at a critical time when one of the vessels strayed toward the torpedoes, but Farragut’s steadfast resolve and knowledge of the field of battle allowed him to adjust tactics confidently and order his force to advance to ultimate victory.
The last several years have seen dramatic weather events that may portend a stormy future, according to many climatologists. Newspaper headlines routinely deliver sobering news: Severe tornadoes devastate America’s heartland; historic floods inundate Thailand; widespread heat waves and droughts affect agriculture and disrupt trade; superstorms lash major urban centers, causing billions of dollars in damage and disrupting commerce for months — the list goes on. When we operated in a more local economy, we could get by only worrying about our local environment. The globalization of business now requires astute risk managers to consider not only local conditions but weather risks around the world.
Threats to the supply chain — both upstream and downstream — can directly impact an organization’s ability to deliver products. In Thailand, flooding disrupted the computer chip industry to the point where it affected everything from smartphones to automobiles. Superstorm Sandy paralyzed a large portion of the Atlantic seaboard for weeks, including the greater New York metropolitan area. Fuel shortages resulted in the imposition of gasoline rationing for the first time since the Arab oil embargoes of the 1970s, and blackouts plagued the region for an extended period. Even now, one year after Sandy, many individuals and organizations are still working to recover.
Another concern is rising ocean levels. Climate scientists estimate sea levels may climb between two and six feet by the end of the 21st century. That affects not only the population of coastal regions but the broader business infrastructure as well. From ports, rails, roads, tunnels, and bridges to major cities — they all are situated in areas identified as being at risk.
Government response presents yet another “torpedo” in the emerging risk of climate change. We’ve seen efforts to curb greenhouse gas emissions, whether from power plants or industry. The concept of carbon penalties is gaining traction worldwide as the hammer to force a move to a cleaner environment.
We may also see action on a smaller, more personal scale. Few people remember the American Clean Energy and Security Act of 2009 (ACES). The bill passed the House but didn’t make it out of the Senate. ACES would have not only established an emissions trading plan similar to the one that exists in Europe but also would have gone much further. It required building owners to increase the efficiency of their buildings, dictated efficiency standards for appliances and equipment, pushed for electric vehicles, and required utility providers to look to alternative, renewable energy sources for an increasing percentage of output.
Had ACES made it to the President’s desk and become law, the economic impact on business would have been far-reaching. Risk managers must decide whether future legislative efforts like ACES are possible and determine how best to begin incorporating those potential requirements into their long-term plans. If such mandates are inevitable in the future, businesses may want to consider compliance under their own terms and timeline rather than an enforced deadline.
Taking Advantage of Risk
While the risks from climate change are scary, a close examination shows how we can also realize rewards. Alternative energies — solar and wind, primarily — offer many possible benefits. Solar panels are covering the rooftops of many commercial buildings — including warehouses, malls, and factories — and the grounds of many suburban office campuses. Not only can solar panels help reduce energy costs, but to the extent that excess electricity can be sold back into the grid, they can become a source of income. A warehouse that is closed on a summer Sunday will still be bathed in sunshine during the day, and that energy can be routed to the grid and used to offset utility expenses. Net metering, which deducts any energy outflow from metered energy inflow, can even result in returning more power to the grid than is used.
Many customers are becoming more selective about companies they do business with. For that reason, a local car dealer might, for example, feature its new LEED-certified, energy-efficient showroom in its advertising.
Along with the products sold, a manufacturer may publicize the fact that its plant is zero-emissions and zero-landfill. If one business acts to reduce its carbon footprint while competitors do not, that can provide a competitive advantage, as some consumers may favor making purchases from an environmentally responsible company.
With increasing attention paid not only to a company but also to the businesses that supply its component parts, all companies must know what environmental efforts their suppliers are making. A company may be able to tout energy efficiency at its location, but if suppliers are polluting the environment, the supplied company’s reputation can suffer just as much as if it had done the polluting itself.
In today’s ultra-competitive business environment, organizations must operate as efficiently as possible and gain any available advantage. In some cases, that might cause a business to look to suppliers located halfway around the world for more price flexibility. In other cases, that could lead a company to consolidate certain operations to gain either efficiencies in economy of scale or convenience on oversight. But in evaluating those decisions, an organization must take a long view and know what risks lie just below the surface.
How will you approach the emerging issues facing your organization? What kind of risk management admiral will you be? Next time you are faced with a Mobile Bay, consider Admiral Farragut’s actions. If this history lesson teaches one thing, it should be to look beneath the surface for torpedoes, scour the shoreline for unknown obstacles, and develop a plan to maximize your chance of achieving — or exceeding — your objectives while minimizing exposure to risk. We can all learn from the words and actions of the admiral and face our risk head-on as long as we are armed with the intelligence and knowledge necessary to minimize risk and exploit opportunity.
Stephen C. Clarke, CPCU, is the assistant vice president of ISO’s Government Relations Division. ISO is a member of the Verisk Insurance Solutions group at Verisk Analytics.