Author Archives: Morgan O'Rourke

About Morgan O'Rourke

Morgan O’Rourke is editor in chief of Risk Management magazine and director of publications for the Risk & Insurance Management Society (RIMS).
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High Taxation Tops the List of Biggest Business Risks

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High taxation is the number one risk faced by North American businesses, according to a new survey from Lloyd’s of London.

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Lloyd’s Risk Index 2013, which was also published in 2009 and 2011, surveyed more than 500 C-suite and board-level executives to determine the threats that they were most concerned with. High taxation, which only came in 13th in 2011, took the top spot. Lloyd’s Chief Executive Richard Ward pointed to the increased debate around economic issues and the perception of how corporations pay their taxes as one reason for the increase in concern:

The public scrutiny given to corporate taxation has become increasingly intense over the last two years, with governments and the taxpayer alike demanding greater transparency and changes to legislation. Since 2011, this pressure has clearly been felt by respondents, who now rank the risk of high taxation as their highest overall risk, up from number 13 in 2011. In the U.S., the priority scores given to this risk are particularly high.

After high taxation, the rest of the top five risks cited were:

  • loss of customer/cancelled orders
  • cyber risk
  • price of material inputs
  • excessively strict regulation

Of these, only the loss of customers was a top 5 risk in 2011:

The survey findings seems to indicate that large companies are more prepared for these risks than their smaller counterparts. But since the balance sheets of smaller companies are more vulnerable, they especially need to find ways to address these issues. Overall however, Ward warned against taking a short-term outlook and said it will take “expert risk management” to insulate companies from these threats.

“With business tax in the spotlight and rising up the political agenda, executives are understandably concerned. Yet the danger is that an emphasis on near-term, operational issues comes at the expense of significant, strategic decisions that have previously exercised business leaders.

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With the timetable for global economic recovery likely to be much longer than we hoped, a focus on long-term sustainability and effective risk management should be a priority for boards across the world.

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Paula Deen and the Impact of Reputation Risks

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Further illustrating how important reputation can be to a business enterprise, Paula Deen’s rapidly crumbling empire took another hit this week when Ballantine Books announced that it was cancelling the publication of the celebrity chef’s latest cookbook, Paula Deen’s New Testament: 250 Favorite Recipes, All Lightened Up, which was scheduled to be released in October as the first in a five-book deal signed last year. Even more surprising, was that, based on pre-orders alone, the book was already Amazon’s number-one best seller (Interestingly enough, the book was replaced at the top spot by another Paula Deen cookbook, Paula Deen’s Southern Cooking Bible.)

The book cancellation brought the total of business deals killed by Deen’s admission that she had used racial slurs in the past to 12. According to the Consumerist, the tally includes:

  1. Food Network
  2. Target
  3. Sears
  4. Kmart
  5. Walmart
  6. Smithfield Foods
  7. Caesar’s Entertainment
  8. Home Depot
  9. Novo Nordisk
  10. Walgreen’s
  11. JCPenney
  12. Ballantine

QVC has also decided to “take a pause” in its relationship with Deen, but stopped short of saying that it would permanently sever ties. According to a letter from QVC CEO Mike George:

“Paula won’t be appearing on any upcoming broadcasts and we will phase out her product assortment on our online sales channels over the next few months…Some of you may wonder whether this is a “forever” decision – whether we are simply ending our association with Paula. We don’t think that’s how relationships work. People deserve second chances. And we always strive to do the right thing.”

Deen’s misstep could come with a hefty pricetag. Deen earned a reported $17 million in 2012, according to Forbes, making her the fourth-highest paid celebrity chef after only Gordon Ramsay, Rachael Ray and Wolfgang Puck. But the possible losses don’t end there. Burt Flickinger III, president of retail consultancy Strategic Resource Group told the Associated Press that Deen’s annual revenue from her endorsement business generates about $100 million a year. He estimated that the controversy has cost her at least half of that so far and that she could lose up to 80% by next year as other suppliers cancel their agreements as well.

Last year, in the pages of Risk Management, Ted Tafaro and Frank Zuccarello wrote about the big business of celebrity chefs and how companies needed some sort of contingency plan in place in case one of these chefs were to be laid up with an injury and couldn’t perform. What the article didn’t cover, however, was that a damaged reputation can be just as catastrophic for the business. The Deen controversy serves as a sobering reminder of how important it is to have a plan to deal with these reputation risks as well.

Gerald Baron at Crisisblogger offered some helpful advice on what those involved in “reputation wrecks” can do to mitigate the damage. In the end, as Baron writes, it’s about character. “Those responsible for [organizational] reputation have to take very seriously the character and integrity of those who represent and make decisions for the organization.”

The Cost of Food Fraud or “Does This Vodka Taste Like Bleach to You?”

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In the May issue of Risk Management, Emily Holbrook reported on the prevalence of food fraud in restaurants and supermarkets around the world. Characterized by counterfeit or purposely mislabeled foods used by unscrupulous producers looking to make a quick buck, food fraud manifests itself in many ways. Sometimes its as unsettling as pig rectum in place of calamari or horse meat for hamburger, while other times its farm-raised fish sold as “fresh-caught.” Regardless of the nature of the deception, customers are put at risk. Not only are they conned into buying more expensive items, but they can also be exposed to pathogens or toxins that they would have no reason to expect in their food.

The New York Times recently reported about instances of fake vodka laced with bleach to lighten its color or olive oil contaminated with engine oil to extend the supply and increase profits. It turns out that food fraud is more widespread than most people realize. 

“Around the world, food fraud is an epidemic — in every single country where food is produced or grown, food fraud is occurring,” said Mitchell Weinberg, president and chief executive of Inscatech, a company that advises on food security. “Just about every single ingredient that has even a moderate economic value is potentially vulnerable to fraud.”

The Times article goes on to cite a report by the United States Grocery Manufacturers Association, which puts the cost of adulteration and counterfeiting of global food and consumer products at $10 billion to $15 billion a year. The study further indicates that a single adulteration incident could cost a company anywhere from 2% to 15% of a company’s annual revenue. To use a bad pun, this is not small potatoes. Even the bleached vodka scheme was estimated to have cost the British government $2.3 million in lost tax revenue.

So given how pervasive and lucrative food fraud has become, companies will need to be more diligent to protect their bottom line and their reputations and to protect public safety, governments will need to fight back as well, either through regulation or prosecution. When there’s this much money at stake, the problem will only get worse. Hopefully it won’t take a widespread illness from food contamination to make it better.

Crowdsourcing Asteroid Detection

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Back in February, space rocks made headlines in dramatic fashion when Russian motorists filmed a meteorite exploding over Chelyabinsk. Coincidentally, this came on the same day that a larger asteroid came within a mere 17,000 miles from the Earth, becoming the closest asteroid ever observed. This activity got the attention of government officials who began to look into ways to eliminate these threats from space.

This is, of course, easier said than done. While 95% of near-Earth objects one kilometer in diameter or more – the kind that could end civilization if they collided with the planet – have been detected and determined to not pose a threat any time soon, they same cannot be said for the smaller city-killers. There are simply too many of them. According to NASA officials, it will take much more time and money to get a similar handle on every space threat in our celestial neighborhood. And in the meantime, who knows what could be headed our way.

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So as a result, NASA and the White House have decided to bring in reinforcements by asking the public to help in the search. The project will be part of the Obama Administration’s “Grand Challenges” in which the government enlists public/private partnerships, sometimes with financial incentives, to help reach certain ambitious goals. Other Grand Challenges include projects that center around research into the human brain, solar energy and electric vehicles. The asteroid project will also complement NASA’s Asteroid Redirect Mission, which intends to redirect an asteroid into a stable lunar orbit so that astronauts can visit and study it.

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The idea to basically crowdsource asteroid detection is reminiscent of the programs like the X Prize, which have offered financial incentives to the public to do things like create private spacecraft or a fuel-efficient car that gets 100 miles per gallon. The fact that some of these challenges have been successful despite their initially daunting premises could bode well for our future in the cosmos.

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After all, we’ve all seen the movies and I’m pretty sure we all will agree that the apocalypse is better left on screen.