Covid-19 and ERM: 6 steps for building Resilience


“Don’t believe the numbers blindly” – that was the ominous advice delivered during a special online session and discussion held on 20th May on Covid-19: Effects from an ERM perspective. The numbers as they are announced may be correct but as risk professionals, CROs have to be aware that not enough people may have been tested – giving rise to a false sense of security when the levels of infection look low. Singapore appears to be grappling with a much higher number of infections and experiencing a harder time possibly because it has been able to test, and hence detect, more positive cases. In addition, death rates may not be accurate because of under-reporting; vulnerable communities such as those with pre-existing medical conditions and the elderly may have fallen victim to the virus but may not have been properly diagnosed or classified as such – particularly during the early stages of the pandemic.

The Covid-19 pandemic is essentially a human tragedy, the scale of which has never been experienced before. It has local, regional and global implications that are simultaneously alarming and confusing. Alarming because of the obvious disruption to international trade, commerce, business, finance and supply chains; confusing because some economic sectors are doing well, and the stock market, inexplicably, has shown gains. But there are reasons for this, and the situation needs to be managed properly or it may potentially result in worse consequences than the Asian Financial Crisis of the late 1990s.

“There may still be a blow-up, albeit a controlled one,” cautioned presenter Ramesh Pillai, Chairman, IERP®.

Banks have already done analyses of borrowers, he continued, and found that the negative impact has been very wide-ranging. This means that despite the fiscal measures taken by the government, the financial situation is likely to get worse. Explaining why the stock market appeared to be doing well, he said that this should not be taken as an indicator of a strong economy. “The decline in earnings caused by the virus/lockdown has not yet been reflected in earnings reports and may not yet have been fully factored in by the market yet,” he pointed out. “There is still a lot of uncertainty in the market. We need to watch it closely and stay agile.” On top of pandemic-related problems, there are political problems related to the US and China, China’s presence in the South China Sea, and the fluctuation of oil prices, that further complicates matters globally.

One question on many minds is why, despite the extent and sophistication of contingency and disaster plans, no one foresaw a pandemic and its devastating effects. Predictions fell short because people did not understand what pandemics meant and, hence, completely underestimated them. This further contributed in a failure to appreciate further impacts on, for example, supply chains. “People also wanted to be positive,” remarked Ramesh. “They didn’t want to be harbingers of doom.” However, the pandemic and subsequent measures taken by the government to contain it, are leading to a situation similar to the one experienced during the Asian Financial Crisis, with the stock market projections ranging between 800 (under a meltdown scenario) and 1450 by the end of 2020. The wide range of projections here reflecting the significant uncertainty existing in the business environment today.

In view of the havoc wreaked on businesses by the pandemic, the central bank has cut rates to help the economy. Ramesh advised participants at the session to revisit their organisations’ risk appetites and tolerances; to go back to basics and be cautious; and not overexpose themselves. Despite frightening numbers of infections and deaths, the US and almost all European countries are already starting to reopen, with many people going back to work. This may cause another spike in infections, and a resurgence of the virus, which is what has happened in China.

On the GDP front, it is estimated that China will return to pre-virus levels only by the fourth quarter of 2020 at the earliest, as will the US based on very optimistic forecasts. The Eurozone and the rest of the world, however, may see recovery only early next year although this, similarly may be an optimistic prediction because world recovery has generally been muted, and China is recovering more slowly than anticipated. The US and Europe have seen a decline of 30%-40% in GDP, and there have been huge spikes in business closures, with unemployment increasing by the day. Most countries may take more than two years to recover. Ramesh cautioned that different scenarios are linked to different depths of any potential problem.

“Worst-case scenarios are seeing recovery only at the end of 2021 for China, and 2023 for the US and the Eurozone,” he said. “The world generally may start to see recovery by the third quarter of 2022.”

Scenario planning has therefore taken on new meaning, and analysis is critical. He advised making a projection of when the business expects things to start improving, and plan accordingly. This should be done taking into consideration the depth of the disruption, its length and the shape of the recovery, factoring in the possibility of spikes in infections or the resurgence of the virus. Remarking that in a scenario where a resurgence of the virus was experienced that resulted in muted recovery, it could take up to two years for businesses to rebound to pre-pandemic levels. Businesses should try and determine how far demand for their products or services will be reduced as the pandemic continues.

“People, generally, do not buy in a pandemic,” he said. “There is no spending in restaurants, no going to the gym. Life will not be the same for a long time. There is no extensive air travel. Pilots have lost their jobs, planes have been grounded, and airlines have gone out of business.” But even in these tragic circumstances, air travel, particularly domestic flights, will recover although they may not be as frequent. International air travel will take longer because of quarantine rules and the fear of infection from confined spaces as social distancing cannot be effectively applied.

While every economic sector has been hit, the pharmaceutical sector has seen an upsurge in investments; companies are pouring in money, in the race to find a cure or vaccine for Covid-19. Ramesh pointed out that not all companies in affected industries have been affected to the same extent, and advised that organisations should craft strategies that can drive the business for the next two years as the effects of economic intervention now will affect operations later. Because of the moratorium on loans, the effect on the economy cannot be clearly seen, and the situation is an artificial reflection of reality. What may be helpful in determining recovery is the measurement of sentiment.

People will start spending when they feel a little more confident, so it may be useful to measure sentiment as an indication of economic recovery. While demand for air travel has plummeted, the economy has seen the rise of online or remote working. This is likely to gain traction and continue even after lockdown has been lifted, and will probably decrease the necessity for physical offices. But right now, the challenges are many and those who are especially concerned with managing risk will find that focussing on five main areas – Resolve, Resilience, Return, Reform, and Reimagine – will go a long way towards managing their multiple issues.

Risk managers have to help their organisations resolve the most immediate pandemic-related issues facing the firm, such as a work force that is infected with the virus; how those infected should be treated, and the physical requirements that have to be followed. They also have to work on the firm’s resilience in the face of a disruption of this magnitude, in terms of near-term cash management challenges and operational requirements, taking into account economic factors, and the knock-on effects of the lockdown on staff and the supply chain. When things begin to return to normal, they have to start putting in place detailed plans of how to move back to, and beyond, pre-pandemic levels.

Ramesh suggested six steps for building Resilience:
• Identify and prioritise key risks
• Develop tailored scenarios
• Conduct stress-testing of financials
• Establish a portfolio of interventions
• Set up a Cash Management Dashboard
• Build a Resilience Dashboard

“We don’t know what to expect in the “New Normal” when businesses resume,” he said. “What is needed is a reimagining of new ways of doing things.” In tandem with this, the firm should get itself ready for reforms because the regulators are likely to loosen regulations to help businesses restart – but this may mean resetting or recalibrating some of the processes and procedures that have been the norm for operations until now, and perhaps even retraining or reskilling for the staff involved. Companies have to take a long hard look at their resources, and ask themselves, “Will we be able to weather the storm if there is another Lockdown?”

When drawing up their portfolio of interventions, they have to take into consideration what resources they have at their disposal, and what outcomes can be expected. “This allows the company to stay agile,” Ramesh said. “Thinking things through also helps anticipating and dealing with situations in advance, and the process of preparation instils confidence.” He advised firms to prioritise how they used cash in situations like these, and urged them to develop reputations as trustworthy organisations when it came to meeting financial commitments, particularly to increase goodwill/political capital for the firm in difficult times.

Besides ensuring staff welfare during trying times, employers should also follow the prescribed Standard Operating Procedures when readying their premises and processes prior to the resumption of business, to maintain the health and safety of employees. Ramesh acknowledged however that uncertainty still exists and can prove to be destructive regardless of the extent of preparation and mitigative measures put in place. “Hope for the best, but prepare for the worst,” he said, adding that some sectors will recover faster than others, although this is difficult to predict. “The pandemic has accelerated digitisation efforts of many firms,” he added. “Some companies have been able to accomplish two years’ worth of digitisation in two months!”

He also cautioned that the return-to-work scenario will be affected by public health concerns, and will depend on how many factors come together that support a safe return to the work place. Firms should therefore decide who should return to work, in what way, and when this return should be made, taking into consideration what will happen if the business reopens, and there is a resurgence of the virus. This strengthens the case for digitisation. If it becomes necessary to resume lockdown, employees who have been working remotely will not have a problem doing so again. Firms could also instruct only certain sectors of their work force to resume operations, depending on what is safe and essential.

Working from home can be more productive provided it is carefully thought through. As situations attain more clarity, organisations may find it more effective to have one team working on site, and another team working off site which can switch when necessary. This will not be difficult to do as both teams will have had on-site and off-site experience; switchover will be seamless. Ramesh cautioned however, that although working remotely has benefits, it comes with disadvantages as well, and may not suit everyone. He remarked that even Silicon Valley, with its avant-garde attitude to work, subscribes to structured hours, with only 8%-10% of its work force working remotely.

With so many issues to analyse and arrangements to be made even before coming to grips with new, post-pandemic conditions, firms would be well advised to put in place what Ramesh referred to as a “Plan Ahead Team.” Its job will be to work out what is needed, when it is needed and how the firm will operationalise what is needed. This Team will also be responsible for planning future strategies, including new systems and processes, in preparation for future scenarios. It is important that this Team captures the full scope of the current uncertainties as the situation continues to unfold so that future scenarios can be effectively stress-tested and actions can be developed from a firm base.

Most businesses are considering a stage-based return of their work force because this probably offers the greatest agility and protection under current circumstances. This takes into account the vulnerable populations within the work force such as those who may have more interaction with a wider range of customers; site-critical workers whose presence is necessary to operate machinery or systems etc; and those workers who need to travel long distances in the course of their work, or to get to their work sites. Returning to work will have to be timed accurately, and aligned with the prevailing conditions at the work site.

Businesses will have to put effort into reimagining new ways of reaching consumers, and managing their supply chains. Changes in customer loyalty and how they spend has occurred since the pandemic, and this in turn affects the supply chain and how it now has to reorient itself to customer demand. In the New Normal, organisational agility may well be the key to sustainability. The more agile a firm, the more responsive it is and the faster it makes decisions. But not all organisations may be able to manage this; a single management team will not be able to effectively address the issues arising from the 5 Rs. What the New Normal needs is multiple teams concentrating on managing multiple issues in the wake of the pandemic.

Even under normal circumstances, companies tend to make decisions based on inadequate information, and solutions to their problems are not optimally designed. This is compounded by inadequate delivery and execution failure. Teams therefore should concentrate on delivering solutions and executing them properly; decide what is required by operations; plan scenarios; and strategise for the future. “Start by getting a realistic view of your position and craft a general direction of travel,” advised Ramesh, adding that at this stage, “general” was the best an organisation could do, in view of continuing significant uncertainty.

He warned that the after-effects of Covid-19 will be so long-lasting, with each one feeding off another, that uncertainty will persist and probably extend over a protracted period. “The world has never experienced so many difficulties on so many fronts, simultaneously,” he remarked. “The Plan Ahead Team will deliver strategic crisis action plans to guide and accelerate decision-making, and has to be constantly forward-looking. You need to confront uncertainty head-on, and because you are in a rapidly-moving position, you need to make fast decisions.” How will those on the PAT manage this? By being realistic, and establishing where you currently stand.

Firstly, develop scenarios for multiple versions of what the organisation sees as its future, and establish a broad direction of travel to get there. Determine actions and strategies that are robust across these scenarios, and set trigger points that indicate to the organisation when it is the right time to act. The organisation’s survival will depend on its speed in managing issues and disruption; developing this speed will make it agile. But it does need support to achieve this, and the support must come from the Board. “If the Board does not see the need for this, then nothing will happen,” stressed Ramesh.

“Directors need to be educated; they need to be able to ask the right questions.”

Reiterating that not all companies in their respective industries were affected equally badly, he said that quick recovery nevertheless required more thought. While it was not possible to know everything, it was imperative that companies be able to act fast on what they did know – so they had to always be on the alert. This in turn could affect their organisational planning, which may now have to be done quarterly because of the extent of the uncertainty in the environment. Constant evaluation of action will be necessary, and being agile will include having teams that can be scaled up or down, as needed. It is likely that the current situation will not be stable for another six to nine months.

“The real effects will be seen only in about nine months’ time or early next year,” Ramesh said. “We need to get ahead of the next stage of the crisis, and for this, there is a lot we can learn from past crises.” Another factor which tends to get “lost” when disruption hits is Leadership. Chaotic conditions will definitely cause uncertainty but the presence of accountable leaders with good judgement is always a stabilising factor. Adequate, effective response has been difficult because the scale of the outbreak and its unpredictability is unprecedented; having to deal with the aspect of human suffering that comes with it, is taking its toll.

The world is facing a systemic crisis, and everybody will experience it because globalisation has made the world one ecosystem. If one part of the supply chain fails, others will be impacted; all companies are facing the same uncertainty – the only difference is how they respond to it. Agility is key but organisations need to cultivate mindsets and behaviours that can carry the company through the crisis. A top-down response will not work. Leaders may be able to better mobilise by setting clear priorities for their organisations, and empowering their staff to discover and implement solutions. However, they should also distribute authority, share discussions and communicate openly.

How else should leadership be exhibited, at a time when everything appears to be spiralling out of control? Always bear in mind that Covid-19 is a humanitarian crisis; everything else is related to this. Those in leadership positions should show deliberate calm and bounded optimism. Deliberations should be expedited calmly, and the fact that mistakes will inevitably be made, be accepted. But organisations should learn quickly from their mistakes and make corrections without overreacting or causing paralysis. Above all, crisis response leaders must be able to unify their teams, make decisions amid uncertainty, assess, anticipate, and act.

They should also be observant and take soundings from different perspectives when making decisions. Decisiveness is critical, and being seen thus increases the confidence of the team. Communication cannot be overemphasised; use it openly to maintain transparency and provide updates – which also increases confidence. The world is facing difficult times but there is an upside to the pandemic. It can be seen as preparation for greater challenges to come. In pushing us to our limits now, it is in effect building our resilience for future events, and preparing us for the unknown that lies ahead.

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