by Michael Arbow, MBA
Partner, RSD Solutions Inc.
Last week, areas on the Eastern U.S. seaboard and parts of central and eastern Canada experienced a rare earthquake which emanated from Mineral, Virginia. Damage was minimal. As measured by the traditional Richter magnitude scale, the quake was recorded as 5.8. The Richter scale has been the bench mark for measuring earthquakes since 1935 but the 1997 work of Rachel Davidson advocates use of an Earthquake Disaster Risk Index. Ms. Davidson believes that what is more important isn’t the magnitude of the quake but rather the damage. Case in point: Haiti recorded a magnitude 7.0 earthquake which led to the loss of 230,000 lives while Japan’s recent 9.0 led to 16,000 deaths (an earthquake 1000 times stronger). Haiti’s high death toll is attributed to poor construction and rescue operations. So how does this map onto enterprise risk management?
First, traditional benchmarks or test of risk exposure may have outlived their usefulness. Second and more importantly when looking at risk, one may wish to take a more granular look at the impact of an economic quake in each department or product rather than the company as a whole. At a high level (Richter scale) the economic quake maybe neutralized but at a more granular level products and/or divisions maybe wiped out. Identifying and realizing this can focus corporate resources to areas in need so to better mitigate their risk.
For more about Stanford's Rachel Davidson’s work click on the link: http://tinyurl.com/4ymv83u
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