Tom Ridge: Dive Deep to Anticipate Enterprise Risks

At the AICPA’s national CFO Conference in May, Tom Ridge, former Pennsylvania governor and secretary of Homeland Security, spoke to CPA financial executives about risk management in the current economic environment. Ridge is CEO of Ridge Global, a Washington-based consulting firm that specializes in risk and crisis management. He also sits on the boards of Exelon Corp., The Hershey Co. and Vonage. Ridge answered the following questions from JofA Senior Editor Matthew G. Lamoreaux:

JofA: What advice would you give business leaders to prioritize multiple threats?

Ridge: Two thoughts. [As a leader] you have outlined visible and tangible challenges and threats to the operation of any corporation. And within that context those risks have to be prioritized, which means that there has to be some internal process where those risks are evaluated and contingency plans developed on a risk-by-risk basis. You plan your course of action, but if something goes wrong, what are the alternatives? What’s Plan B and C? So within that list you’ve got to prioritize and create contingencies.

But I think in this environment, you probably have to do a deeper dive. In law enforcement as we looked at the risk of terrorism, we used to “red cell” risks. In other words, create a scenario outside the risk that we are anticipating now with [risks] that are not so visible but, given what has either occurred in the past or the uncertainties of the present, we should also anticipate.

So I think in this environment, [in addition to] prioritizing existing risks and existing threats to your corporate profitability, your customer base, your brand, it’s probably not a bad idea to bring in some of your folks to help red cell what might be underneath the surface, what you really haven’t spent too much time thinking about and probably should.

JofA: How has corporate governance changed as a result of the current financial crisis?

Ridge: I think there’s no greater challenge in corporate governance—in a good or bad economy—than being a member of the audit committee.

I think there’s probably far more scrutiny and far more concern at the board level in terms of the availability of credit. Now even if you have a good fiscal track record as a corporation, I still think your credit options have been narrowed. Cost of capital has gone up. That obviously goes to the bottom line. It has dramatically changed the equation, and so you go from just the audit committee worrying about the financial aspects [of the business] to the overall concern by all [board] members about the impact on the broader enterprise in the future.

JofA: One of the challenges that both governments and businesses face in times of crisis is how much information should be disclosed publicly about risks as well as opportunities and strategy. Can you share some guiding principles regarding the disclosure of corporate information in these areas?

Ridge: There’s not too much you can keep a secret. And if you’re dealing internallywith some real challenges to your structure or your organization that affect the bottom line, that could affect the brand, I think you have to seriously think about not only trying to deal with it internally but anticipating [that] it will become known.

You’ve got to call offense. I think you’ve got to be out dealing with it upfront because at the end of the day it may have legal or financial implications, and I think you’re a lot better off pre-emptively dealing with a major internal problem like that than having it disclosed and responding to it.

JofA: How does an organization go about assessing the impact of potential reputational risk?

Ridge: You’ve got to do everything you can to mitigate the impact of a bad story. And there you’re managing the risk. There you’re being branded. There you’re out explaining it.

I know the lawyers will tell you to be careful about accepting public responsibility. That’s an internal decision you’ll have to make because of the litigation atmosphere within which we live and taking immediate remedial action. When things go bad, while there will be that first assault, public relations assault and commentary, people also will respect the fact that you’re open about it, that you are dealing with it in a public way. If there’s very specific remedial action you can take and have taken, it goes a long way toward reestablishing yourself in the marketplace. The damage doesn’t have to be permanent if you deal with it in the right way. If you don’t deal with it the right way, I think the bottom line is permanently affected.

JofA: How should businesses go about prioritizing environmental sustainability and carbon footprint initiatives in this current economic climate?

Ridge: At the end of the day, you’re going to have to deal with what the government requires you to do. It’s one thing to do it if the government compels you to do it. You don’t get credit for those things. But if you’ve got the resources to either initiate or continue promoting green, ecologically friendly initiatives within your business, I think you need to try to do it because I think the consumer is becoming much more sensitive to that and, if you do it the right way, I think it’s a way to burnish and shine a spotlight on your brand.

JofA: Are excessive new environmental regulations a significant emerging risk?

Ridge: First of all, we don’t celebrate good news in this country, and the fact of the matter is that many businesses over the past several years have spent millions nationally and internationally, maybe billions of dollars, moving toward more environmentally sensitive [practices]. And that’s not been celebrated, and yet I’ve seen it, and it can be documented. So the concern I have is not about the imposition of probably higher standards across the board because it’s pretty clear that’s the direction this administration is going. But hopefully they will be sensitive to the impact—because there’s a cost to it. It’s an investment in terms of a greener future, but an expense that the consumer will ultimately pay in the cost of the product. And I am hope ful that the administration and Congress are mindful of the need to make some changes but more thoughtful in their approach as they think about more environmental regs.

JofA: What do you see as the greatest risks and opportunities for the U.S. domestic energy industry as a whole?

Ridge: I am a strong supporter of conservation practices—solar, tidal, bio-efficient fuels and electric cars—but you’re still nibbling at the edges unless you build nuclear power plants and take advantage of the enormous deposits of coal and the technology we have. Where you can have wind, have wind. Where you can have solar, have solar. But at the end of the day, if you want to reduce the carbon footprint, you have to build 30–40 nuclear plants—like China’s doing, like they’re doing in the Middle East, like they’re doing in India. France gets 75%, I think, of its power from nuclear. It’s inconceivable to me that we’re not building more nuclear plants if we want to reduce carbon emissions and reduce the cost of electricity.

AICPA RESOURCES

JofA articles

• “Rising Expectations,” April 08, page 44
• “Eight Habits of Highly Effective Audit Committees,” Sept. 07, page 46

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• Enterprise Risk Management—Integrated Framework (2004) (Paperback #990015; PDF #990015PDF)

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• Managing Opportunities and Risks
• Integrating Social and Political Risk into Business Decision Making

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