Category Archives: Business

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Flint Water Investigation Leads to Felony Charges for Mich. State Employees

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A driving effort to save the state money was said to be the reasoning behind the Flint, Michigan water crisis, which has been tied to lead poisoning in children, among other issues. On Tuesday the state announced felony charges against former state emergency managers, Darnell Earley and Gerald Ambrose, accused of false pretenses and conspiracy to commit false pretenses. The two were said to have been focused on balance sheets rather than the welfare of citizens when they made the decision in 2014 to switch the city’s water supply from treated water in Lake Huron to water from the Flint River.

A state investigation, which began in January, had led to charges against eight state officials and an employee of the Flint water facility.

According to the New York Times:

Charges of false pretenses, conspiracy to commit false pretenses, misconduct in office and willful neglect of duty lodged against the former managers were lauded by Flint leaders, some of whom said they had feared that blame for the city’s contaminated water might ultimately be pinned only on low-level workers.

The claims also reopened a longstanding debate in Michigan over the state’s emergency management provision, reviving questions about whether the system removes power and control over local issues from those residents who come under state oversight.

For years, governors here have appointed emergency managers as a way to efficiently cut debts and restore financial stability in the most troubled cities. But residents of some majority-black Michigan cities, including Flint, argue that the intense state-assigned oversight disenfranchises voters, shifts control from mostly Democratic cities to the state’s Republican-held capital and risks favoring financial discipline over public health.

After the decision was made to use water from the Flint River, Flint residents had began to notice a peculiar odor, color and taste in the water that flowed from their taps. Some reported skin rashes, hair loss and other physical problems. But they did not know why. Water from the Flint River was used by Flint residents for 18 months, but because it was not treated to reduce corrosion, lead from old plumbing leached into the water. Testing revealed dangerous levels of lead.

Residents soon discovered they had been lied to. Public officials had known about the lead but kept quiet. As a result, between 6,000 and 12,000 children were exposed to the contaminated water, which will likely have serious consequences for their health.

Meanwhile, efforts to fix the problem are underway. State officials switched back to the original water source in October. Michigan Gov. Rick Snyder has estimated that replacing the more than 15,000 lead service lines in Flint would take $60 million and up to 15 years.

Key Steps to a Robust Risk Management Program

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Our business environment is constantly changing—technologies improve, regulations are modified, competition increases, and demand evolves. Effective risk management grants an ability to adapt to these changes.

Recent headline events, including the Volkswagen emissions deception, the Wells Fargo scandal, and the penalty paid by Dwolla to the Consumer Financial Protection Bureau (CFPB), illuminate powerful motivators for strong risk management programs. Key to a robust program is preventing stressful, and possibly catastrophic, surprises.

When Plains All American Pipeline failed to detect corrosion in its pipeline, for example, the result was a 3,000-barrel oil spill and millions of dollars in fines. The corrosion had run under the radar because the company did not delegate sufficient inspection resources and did not maintain proper procedures and systems for preventing problems from escalating into emergencies. Risk management best practices, however, could have standardized these procedures throughout the organization and prevented the disaster from occurring.

Complying with regulators like the SEC and CFPB
Dwolla, a small, private e-commerce and online payment company, was found by the CFPB to be guilty of risk management negligence for inadequate data security practices. The catch is that Dwolla did not suffer a data breach and none of its customers were compromised.
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The CFPB fined Dwolla $100,000 as part of its increased focus on companies’ existing prevention strategies. Regulators are no longer simply pursuing organizations that have suffered risk management incidents; organizations need to take proactive approaches rather than simply hope to get by.

Improving productivity and encouraging innovation
An independent, peer-reviewed report, “The Valuation Implications of Enterprise Risk Management Maturity,” published in The Journal of Risk and Insurance, proved that organizations with mature ERM programs (as defined by the RIMS Risk Maturity Model) can achieve a 25% firm valuation premium over those without. Risk management does not have to be a burdensome addition to daily responsibilities—and if it is executed properly, it won’t. It simplifies daily operations by increasing transparency and allowing more resources to be devoted to value-add activities, like product development and customer services.

Checklist for evaluating your risk management efforts

A better question than “does my organization perform risk management?” is “how effectively does my organization identify and mitigate risks?” The following checklist outlines characteristics common to effective risk management programs. Your organization should prioritize development in these areas.

  1. Effective risk management governance

Boards, through their risk oversight role, are accountable for a risk’s material impact, whether the cause is at the executive level or on the front lines. The SEC considers “not knowing about a material risk” negligence, which carries the same penalties as fraud.

  • The board must monitor the effectiveness of the organization’s risk management process, ensuring it reaches all levels and business areas.

  • Internal auditors must independently confirm the board is informed on all material risks.
  • All material risks must be disclosed to shareholders, along with evidence that they are effectively mitigated.
  1. Performance management and goal management
  • Divide corporate objectives into business-unit contributions.
  • Identify business processes contributing to a goal within each business unit.
  • Cascade goals to all front-line managers within contributing processes.

  • Aggregate goal assessments and determine links between contributing business processes.
  1. Consistent risk identification and prioritization

Risk assessments must address more than high-level concerns. Effective assessments drill into risk events, uncovering the root cause, or problem “driving” the risk. Repeatable risk assessments are based on common numerical scales and scoring criteria across departments.

  1. Actionable risk tolerances

Risk appetite is a high-level statement that serves as a guide for strategic decisions. In order to be actionable, it should be accompanied by its quantitative cousin, risk tolerance. Risk tolerance is an effective monitoring technique for key performance goals and risk metrics.

  1. Centralized risk monitoring and control activities

Risk managers need to do more than design processes to identify risks and appropriate responses. A critical third component—monitoring—is the verification of a control’s effectiveness over the risk. A few key things to keep in mind to make monitoring effective:

  • Adjust risk assessments over time (spend less time on risks with decreasing indexes).
  • Reduce testing by identifying areas that can share controls (increase organizational efficiency).
  • Link risks and activities to determine which processes need to be monitored (prioritize activities/initiatives).
  • Monitor business metrics (discover concerning trends before they affect the organization).
  1. Forward-looking risk and goal reporting and communication

In order to continue funding their organizations’ risk management programs, boards need evidence that those programs are working. Risk managers should ask two basic questions before reporting to the board:

  • How might identified risks affect the board’s strategic objectives and key concerns?
  • Which metrics or trends most validate the program’s effectiveness?

These items are just a starting point for an analysis of your organization’s program. For a more in-depth blueprint and “state of ERM” report, take the RIMS Risk Maturity Model (RMM), a free best-practice assessment tool that scores risk management programs and generates an immediate report of your organization’s risk maturity.

Plan Now for the Political and Risk Landscape Ahead

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With a new president in office in 2017, there are sure to be changes ahead for businesses in the United States. Yet of risk professionals surveyed, fewer than half are actively preparing. Organizations are expected to see impact in areas including regulation and enforcement strategies, a new national trade policy, and a potential rollback of Affordable Care Act (ACA) provisions, according to Marsh.

Speakers on Marsh’s webcast, The New Reality of Risk, noted that the new administration appears to favor deregulation across several industries including financial services, although a complete repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act is unlikely, said Arthur Long, a partner at Gibson, Dunn & Crutcher LLP. The Trump administration is also expected to reduce regulation in the energy industry and others.

Areas to watch, according to the webcast:

  • Regulation and Taxes
    Less regulation and lower taxes are the most significant changes that are expected next year, both of which are expected to benefit businesses, said Michael Poulos, president of Marsh Risk Consulting. A stronger dollar could also help larger companies with extensive operations overseas, while others could benefit from changes in credit and monetary policies.
  • Trade Policy
    Changes in trade policy — including a move away from free-trade agreements — could alter the trade credit market, said Michael Kornblau, Marsh’s US Trade Credit Practice leader. These changes could lead to balance-sheet pressures — including reductions in sales and working capital — on companies with more than half of their revenues outside of the US.
  • Health Care
    Meanwhile, the future of the ACA (commonly referred to as Obamacare) remains uncertain for health care organizations and employers, said Mark Karlson, Marsh’s US HealthCare Practice leader, as transition officials have made sometimes conflicting statements about whether they will pursue repeal, replacement, or amendment of the existing law. If any changes are made to the law, it may be some time before they take effect.
  • Cyber Risk
    The election also highlighted cyber risks for businesses, including the potential threat of hackers and the need to encrypt corporate emails, said Tom Fuhrman, Cybersecurity Consulting and Advisory Services Practice leader at Marsh Risk Consulting. Generally, cyber regulations are expected to focus more on ensuring effective risk management for businesses rather than the existence of specific controls.

Although uncertainty remains about many specific policy changes to be made under the new administration, businesses should be thinking about the potential effects of new policies on their operations. Among other steps, businesses should:

  • Stay up-to-date on policy and regulatory proposals from transition and administration officials and develop a post-election game plan that includes actions and strategies that can be taken in preparation for regulatory changes.
  • Assess how reliant they are on global economic models that could become further strained.
  • Plan to reassess their risk more frequently than they have in recent years, according to Marsh.
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2016’s Worst U.S. ‘Judicial Hellholes’

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This year’s Judicial Hellholes report, published by the American Tort Reform Association, identifies nine “hellholes” in light of changes in the U.S. state court system, the types of cases being seen and the courts’ balance between defendants and plaintiffs.

The top nine judicial hellholes are:
j-hellholesAnd if that isn’t enough, the report also includes a “Watch List,” calling attention to eight additional jurisdictions “that bear watching due to their histories of abusive litigation or troubling developments.” Those are:
jh-watchlistBut the news isn’t all bad. The report examines “Points of Light,” which are examples of “fair and balanced judicial decisions that adhere to the rule of law and respect the policy-making authority of the legislative and executive branches.” Highlights include positive court rulings from 11 states.

These courts made it easier to dismiss groundless claims, tougher to bring junk science into court, gave juries a more accurate understanding of how injuries occurred in auto accident cases, and reduced the potential for inflated damage awards. Courts also confirmed that a state attorney general can dismiss meritless cases brought on behalf of the state, but can’t hand the state’s law enforcement power to private contingency fee lawyers.

The report also points out that there are a staggering number of new laws on the books for companies to keep track of. In fact, since 2010, there was an average of 827 new laws annually in California alone.

From 2010 through 2015, lawmakers in Sacramento managed to tack onto the books an annual average of more than 800 new laws. In 2016, they added another 893, at least some of which (see SB 859, SB 1063, SB 1130, SB 1150 and SB 1241) were designed primarily to foment still more litigation and related costs that for many years have helped drive businesses, along with their jobs and tax revenues, into the arms of less litigious states across the country and around the globe.
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