CAPITAL CORP. SYDNEY

73 Ocean Street, New South Wales 2000, SYDNEY

Contact Person: Callum S Ansell
E: callum.aus@capital.com
P: (02) 8252 5319

WILD KEY CAPITAL

22 Guild Street, NW8 2UP,
LONDON

Contact Person: Matilda O Dunn
E: matilda.uk@capital.com
P: 070 8652 7276

LECHMERE CAPITAL

Genslerstraße 9, Berlin Schöneberg 10829, BERLIN

Contact Person: Thorsten S Kohl
E: thorsten.bl@capital.com
P: 030 62 91 92

The Law of Unintended Consequences

Risk Management

Have you experienced the devastation of a natural disaster? Perhaps you were affected by a hurricane or a wildfire and forced to evacuate. Or you could have been one of the Texas residents affected by the 2021 snowstorm. No matter which event you experienced, each one of these instances have something to teach us about risk management. 

The Texas snowstorms of 2021 are a perfect example of how leaders were ill-prepared to effectively manage risk. The state’s power grid system was woefully underprepared to sustain the amount of electricity it needed to keep all of its residents safe. Conditions became unlivable, and whether it had been two days of snow or ten, the outcome would have been the same because of a sheer lack of planning and oversight from elected and public utility officials alike. In hindsight, it would appear there was little planning or foresight to scale the electric and public utility systems to the huge growth of Texas’ population. This lack of proper planning and scaling resulted in disaster for many people. To be blunt, the leaders of Texas just blew it. Instead of focusing on things that could go wrong in extreme weather events, they were busy trying to save money in the short run, hoping that something extreme albeit knowable would not happen under their watch.

In this instance, leaders chose not to consider “tail risk”. Tail risk comes from extreme or unlikely events, and must be considered in planning because of the cost associated with these extreme events. This is challenging to plan for on a budget, but ultimately necessary. Leaders who avoid planning for the worst are simply not prepared at all. While people say we should save money instead of planning for things that only happen once a century, the answer is no: we need to prepare for the law of unintended consequences. 

Like every instance where the laws of unintended consequence come into play, there are secondary and tertiary impacts from this lack of planning. While the local public utility leaders put hospitals and other places on grids that never went off during the storms: unfortunately, the same thought process was not applied to putting water utilities on those same grids. People need water. The water in some parts of Texas became contaminated and people were directed to boil their water before drinking. This is something we’ve read about in history books or seen in third-world countries, but not in the second most populated state in the US. We ought to have more sophisticated systems in place. This is something In hindsight, it seems obvious, but there was a lack of planning to make sure this didn’t happen. Some studies even indicate that the lack of preparedness and planning for the Texas snowstorm had an economic impact of over $130B. It isn’t as if we have never had power outages. They just weren’t the same severity or 

Magnitude.

People want to talk about helping the environment, global warming, and sustainability. But this is about more than reducing your carbon footprint. It is about being able to operate in the normal course of our daily lives and continuing to operate our businesses. We need to figure out how to plan and prepare to create a sustainable way of operating in the US.

The Difference Between Being Reactive and Being Proactive

We as a society have been trained for immediate gratification at the lowest cost – and this always comes at a price. Almost 70% of Texans served by the Electric Reliability Council of Texas (aptly named) lost power during this year’s winter storm. In hindsight, we need to ask ourselves – did we really think this was a good thing for us personally or for our economy as a whole? Were the savings really worth shutting down the state of Texas for the better part of a week and taking months, not days or weeks, to recover? As I write this article, there are still construction projects that haven’t come out of the ground because of the delays in the building cycle because of the storm. As our climate continues to change, leaders in this state must be more thoughtful about how it allocates its resources, not just for people who live in Texas, but for businesses that operate in Texas as well. 

While we can be grateful for every effort taken, we should not be grateful to the ERCOT board for patting themselves on the back for barely saving the grid, just four minutes and twenty seven seconds away from a state-wide blackout. The behavioral pattern of being reactive rather than proactive could have cost millions more in destruction of property or worse, human lives. 

Our health, our economy, our businesses, and our lives are on, and have been on, the line for some time. And we’ve always had the power to prevent this, and we still have enough control to prevent it from happening again. This is an important lesson for business leaders as well. 

Risk management is the process of “identifying, accessing, and controlling threats to your organization.” Most commonly, we’ll think about cybersecurity, credit risk, and market risk. While deferring the updating or maintenance of systems saves money on the front end, it will undoubtedly cost you in the long run. And what does this teach your employees? They can tell the difference between being cheap and sticking to a company budget. Being short-sighted in planning and cutting corners is not going to get you anywhere, and it certainly isn’t going to make your employees want to stick with you for the long haul. We must, as leaders, set an example and begin to take proactive measures to manage risk, economic or otherwise. 

You Get What You Pay For

When a company prioritizes cheap over sustainable, the results can be catastrophic. If we look at the example of the Texas snowstorms once more, what was unprecedented was not the storm itself, as Texas can get significant amounts of snow once every decade, but how unprepared those in charge were. They did not exercise sound risk management because they weren’t thinking through what could happen on their watch, both intended or unintended, and in the process of trying to save money in the short run, they ended up spending vastly more money in the long run. Those are self-serving options with a closed grid, and left millions without heat, electricity, and water for days, some weeks. 

Many people think of  a “disaster” in terms of a natural disaster or economic downturn, but in business, this word encompasses much more – events in one’s personal life, a dip in the stock market, or even your top employee being offered a job at a different company with a better salary and benefits. As a business leader, or really any type of leader, you need to ask yourself how you can best serve your customers. Don’t impede this by being ill-prepared or cutting costs. 

The Law of Unintended Consequences 

The law of unintended consequences comes into play as a result of lack of preparedness. It never occurred to some local public water utilities to make sure the water pumps were part of a grid that never shut off, like hospitals and military bases, until many residents were left without running water during the snowstorm. This simple thoughtlessness soon turned into a catastrophe. 

Evaluate the systems you have in place and ask yourself if they would hold up to a variety of crises. The reality of the situation is, bad things happen, whether you mean for them to or not. And usually, leaders don’t mean for bad things to happen. But apathy and a lack of planning almost promises you that they will. 

If 2020 taught us anything, it was to expect the unexpected. It is time for us to move from a state of apathy to proactive planning in every area of life and business. While we cannot accurately predict everything that is going to happen, but we do have a sense for the inherent risk that is surrounding us 

Bad things may happen, and people make mistakes, but these do not have to become catastrophic. All of this is preventable with a little more foresight and a lot less shortsightedness. 

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