Risky Business

In the opening scene of the movie, Risky Business, the camera is tight on the face of a very young Tom Cruise. He is wearing almost-black sunglasses that obscure his eyes, and cigarette smoke drifts past the dark lenses. In a monotone, Cruise says, ‘The dream is always the same . . .’

The movie then flashes into Cruise’s dream, which being a Hollywood product, is all about sex and adolescent anxiety. Much as I’d like to dwell on sex and adolescent anxiety, they aren’t the point of this column. Risk is the point. And that phrase: ‘The dream is always the same . . .’

The folks in corporate America have been talking about beefing up risk assessment for a long time. See – the dream is always the same. I personally have been reading and writing about it for at least 15 years, and yet I keep seeing stories in the business press that express considerable urgency surrounding risk assessment. Fifteen years ago there were insistent media stories about integrating technology into business operations, about operating at ‘internet speed,’ about ‘business process re-engineering’ and a host of other issues that were urgent, timely and, let’s be honest, the fad du jour. You don’t see a whole lot of stories about these things anymore because their time has come and gone. You still see stories about productivity and cost-efficiency because those are constants of doing business. They’ll never go away.

Risk assessment is still a major topic. I’m not sure if that’s because many businesses – despite the mega-tonnage of verbiage dropped on the subject – haven’t implemented thorough risk management programs or because risk, like productivity, is always with us. It doesn’t matter: Risk assessment is still a front-and-center, urgent issue. How urgent? Well, there’s even an acronym for it: ERM – Enterprise Risk Management. And you know an issue is really and truly serious when there’s an acronym for it.

I have the impression that many corporations are dealing with some kinds of risk quite well. The physical security risks to plant and personnel are handled much better than they were pre-9/11. Technology security is a continuing challenge as many organizations find themselves in an ongoing war with hackers who enjoy busting into corporate networks, but the risk is generally well known and confronted. Many corporations are dealing well with the risk of catastrophe (terrorism, hurricanes or something more local like a fire in a plant) much better as well.

Everyone seems to have come to the realization that it’s not enough to have a paid-up insurance policy. Comprehensive emergency plans that deal with issues for injured or displaced employees, with the public relations fallout, and with investor relations are a must. Some companies even do drills or simulations to make sure that – in the event of a crisis – everyone knows his or her role and is ready to perform it.

Another well-known form of risk management takes a much more comforting name: succession planning. McDonald’s showed everyone how it should be done when the company had to deal with the sudden death of its CEO several years ago. Michael Eisner’s Disney, on the other hand, fumbled the ball so badly with the hiring and firing of hoped-for successor Michael Ovitz that it created a crisis for shareholders as the company paid $140 million to rectify the mistake and then spent a long time in the Delaware courts dealing with the aftermath.

But most of the above is covering well-covered ground. If your organization isn’t preparing for these kinds of issues, your dream is always the same: It’s a nightmare.

David Smith, the president of the Society of Corporate Secretaries and Governance Professionals (and my boss), mentioned to me the other day that he thinks there’s a new, challenge growing in risk management: individual investors.

Most IR effort is aimed at dealing with the broker community, the hedge funds, advisory firms like ISS and Glass Lewis, and institutional investors like CalPers. But Smith thinks that the individual investors – the moms and pops who’ve been holding stock as a way to put their kids through college or as retirement funds – are about to get off the sidelines and become a major force in the investor arena. For years, these folks invested the way their financial advisors recommended. At the annual meetings of shareholders, they rarely voted. If they didn’t like the way a company’s management or board was behaving they ‘voted’ by selling their stock. Why is that changing?

It’s changing for the same reason that the movie An Inconvenient Truth, which despite its Oscar win is hardly a cinematic triumph, is garnering so much popularity. Here’s a movie that’s basically a video of Al Gore doing his slide show on the environment – and it’s a hit! If you agree with me that it isn’t brilliant film making, what do you think is the cause of its success? It’s resonating with Joe and Jane Average. Turns out that the environment is important to ‘regular’ people, not just tree-huggers.

When Joe and Jane take their concern for the environment and apply it to their investment portfolio, watch out! If they begin lining up with the big institutional investors who often push ‘social issue’ proxy proposals, things could get extremely interesting when it’s time to count the votes. It’s one thing when tree-huggers are pushing the energy companies to ‘clean up their act,’ it’s another when that 10 percent or more of your shareholders who are individual investors agree with them.

And it doesn’t stop at the obvious issues like pollution or manufacturing energy-efficient cars. Joe and Jane can define social issues very broadly. Just look at our national political debates where personal-health and pocketbook issues are placed under the banner of social issues. What about food and beverage producers having to deal with health concerns over the ingredients in their products? Imagine that 10 percent of your investors want you to get rid of all trans fats – now. Or imagine that you’re a pharmaceutical company, and that 10 percent of your investors want lower prices so they can afford cholesterol medications for their aging parents. What if Joe and Jane demand (in a proxy proposal) lower prices on Viagra or Cialis so they can deal with sex and middle-aged anxiety? Do you want to be stuck between the shareholder rock and the hard place of sexual dysfunction?

The dream is new. . . Pretty soon corporate America had better include Joe and Jane Investors’ social issues in its risk assessment.