This document discusses various examples of risks and lessons learned from failures to properly account for and manage risks. It describes risks that led to the BP oil spill, fracking accidents, ignition issues at GM that caused deaths, and emissions cheating at VW. It argues that conventional accounting focuses only on profits and ignores external risks. A new approach called True Value Accounting is needed that incorporates risks and their potential long-term costs and impacts. Proper risk management requires quantifying the scale of risks, likelihood of events, sufficient insurance pools, and periodic payments into those pools.

1. File: TVA-p3-RISK-examples-lessons-151022.odp Peter Burgess (c) All rights reserved
RISK
EXAMPLES … LESSONS LEARNED
TRUE VALUE ACCOUNTING

2. CONTEXT
This slideset is a Work-in-Progress
and will be updated from time to time.
It is part of a series that aims to
describe the extremely complex
socio-enviro-economic system that
we live in, and how better metrics will
make this system work better.
TRUE VALUE ACCOUNTING

3. The BP oil spill …
TRUE VALUE ACCOUNTING

4. In the months and years before the BP oil spill in the Gulf of
Mexico, the corporate story was that deep water drilling was
safe and no accident like this could happen.
An accident of this magnitude should not have happened.
Good engineering makes a catastrophic event like this
extremely unlikely. The reality, however, is that the corporate
business model has profit at its center, and there is always
pressure to reduce costs, do things more quickly and make
more profit.
This increases risk … and in some cases this is the result.
The cost to BP for taking risks has proved to be in the range of
$20 billion. This is big, even for a company the size of BP.
TRUE VALUE ACCOUNTING

5. The Risk of Fracking …
TRUE VALUE ACCOUNTING

6. The risks associated with fracking should not be exaggerated,
nor should they be ignored.
Like many engineering processes, fracking can be done safely
with no negative consequences. Fracking can also be done in
a sloppy manner and result in very damaging impacts that can
be very expensive.
Many companies working in the fracking segment of the oil
and gas industry are small companies with very limited
financial resources.
If any of these companies has an 'event', they do not have
either the financial resources nor adequate insurance cover to
pay for the damage done. Society at large then has to pay!
TRUE VALUE ACCOUNTING

7. The GM ignition switch …
TRUE VALUE ACCOUNTING

8. A modest cost saving of around $400,000 at GM many years
ago cost GM some $1.3 billion in the first quarter of 2014.
The big lesson from this is that reputation really matters.
Clearly safety is important, and saving a few pennies in the car
cost that results in safety being compromised is not good
strategy.
Though the 'real' cost associated with the death of 13 people
may be in the range of $50 million, a cost to GM of around
$1.3 billion is an order of magnitude bigger.
This is about the value of reputation. Reputation takes a long
time to build. It is lost very quickly.
TRUE VALUE ACCOUNTING

9. VW diesel emissions …
TRUE VALUE ACCOUNTING

10. Soon after the gaming of emission tests by VW on its diesel
models became public, the projected cash cost to the
company were estimated to be in the range of $30 to $50
billion dollars.
In addition, the value of the companies stock instantly
decreased by some 30% … a capital value drop of $20 billion.
It should be noted, however, that in highway use, while the VW
diesel powered cars have NxO and SxO emissions much
higher than the regulations allow, the CO2 emissions are still
significantly lower than similar gas (petrol) powered cars.
TRUE VALUE ACCOUNTING

11. Climate Change Risk
TRUE VALUE ACCOUNTING

12. Eminent scientists who have studied climate for years are
concerned about the changes that are in progress. It must be
anticipated that there will be big changes, but it is less clear
exactly what these changes will be.
Changes in the weather patterns will likely result in significant
disruption in many areas of the global economy … including
essential food chains.
Sea level change will put at risk many low lying coastal areas
around the world. Many areas will have to be abandoned.
Huge new shoreline infrastructure will have to be built.
At some point in the next hundred years hundreds of trillions of
dollars will have to be spent!
TRUE VALUE ACCOUNTING

13. Antibiotics in Meat …
TRUE VALUE ACCOUNTING

14. The discovery of antibiotics was a game changer for human
health. Now, antibiotic resistance is emerging. There are
indications that more and more deadly bacteria are showing
resistance to antibiotics in the human health setting.
Antibiotics are now being used on a massive scale in the food
chain, meaning that antibiotics are finding their way into almost
everything we eat, with potentially dangerous consequences.
If widespread resistance to antibiotics becomes the norm, the
cost in terms of human health will be huge. A quick calculation
suggests that this might be in the range of some hundreds of
trillions of dollars … a big number by any standards.
That is hundreds of trillions of dollars!
TRUE VALUE ACCOUNTING

15. Tobacco …
TRUE VALUE ACCOUNTING

16. The tobacco industry is a classic case of profits driving the
business with nothing else mattering very much.
Scientists linked tobacco to cancer and other ailments a very
long time ago. The tobacco industry did everything in its power
to discredit these findings and continued to sell its products for
maximum profit.
Some countries are constraining the practices of the tobacco
companies, but the imperative for profit still dominates.
Tobacco companies continue their practices of aggressive
advertising especially in developing countries, and in the
process increase their profits while doing lifelong harm to the
health of their customers.
TRUE VALUE ACCOUNTING

17. Unemployment …
TRUE VALUE ACCOUNTING

18. There are risks arising from unemployment, underemployment
and underpaid employment. None of the widely used business
and economic performance metrics take this risk into account
at all … but it is substantial should not be ignored.
With prevailing business models and conventional accounting,
decisions that result in more profit are good, no matter what
the consequences for society at large.
At some point, high unemployment, underemployment and
underpaid employment will result in social instability. This may
be catastrophic.
It has happened in the past and could happen again.
TRUE VALUE ACCOUNTING

19. What needs to change …
TRUE VALUE ACCOUNTING

20. The idea that risk can be discounted to a present value in
much the same way as future profit flows are discounted
should be discarded. A risk has these elements:
(1) If an event happens, what is the cost to make things right;
(2) What is the likelihood of the event happening, and in what
time frame;
(3) Who is responsible for creating and mitigating the risk;
(4) Who is responsible for paying to make things right, and
where does the funding for this come from.
TRUE VALUE ACCOUNTING

21. The risks associated with any activity should accrue to the
owners of the activity in the same way as the benefits from the
activity. They should not be born society at large.
Where the cost of making good after a risk event is going to be
very large, then the risk pool must also be very large.
Periodic contribution to the risk pool may be quite small if the
frequency of a risk event is low.
The size and liquidity of the risk pool must be big enough to
handle the make good costs if the event happens.
Is this the way that modern risk management and insurance
operates?
TRUE VALUE ACCOUNTING

22. Conventional accounting has a singular focus on the profit
performance of the organization and ignores everything
outside the reporting boundary (the externaities).
Risk is not well handled in conventional accounting and the
related reporting is inadequate. Accounting rules that ignore
reality and the essential principles of accounting are enabling
reporting that ignores the impacts of risk.
To a significant extent the problem of risk has been handled by
use of legal strategies that shifts risk outside the reporting
envelope while doing little to diminish risk.
THIS IS A TRAIN-WRECK WAITING TO HAPPEN
TRUE VALUE ACCOUNTING

23. True Value Accounting brings externalities into account,
including risk wherever it arises. Maximizing for profit alone
almost always results in increased risk.
A true valuation of the future requires that the long term future
is not heavily discounted and significantly changes the profit
performance calculus. Opportunities and risks in the future
should be taken into account in the present valuation of 'state'.
TRUE VALUE ACCOUNTING

24. In order for reporting to be complete, there must be a clear
expression of the scale of the risk in any activity, an expression
of the likely frequency of an event, the size of the insurance
pool required and the size of the insurance pool available.
There must be reporting of the amount of the periodic
payments required to maintain the insurance pool, and the
amount of the periodic payments actually being made.
TRUE VALUE ACCOUNTING

25. What is the right structure for the insurance industry? How
should it be capitalized. Should it have a conventional for profit
structure or should it be a 'mutual' model?
A well structured insurance industry need not be financed by
investors, but funded by the risk takers who will be responsible
for making good after and event.
The public at large should be protected against risks being
created by enterprise and should not be responsible for
funding the make good costs of events that have been caused
by others. Does modern law do this?
TRUE VALUE ACCOUNTING

26. REMINDER
This slideset is A WORK-IN-PROGRESS. It will be
upgraded periodically. It is part of a series of more than
100 slidesets. Navigation to these is available here:
FEEDBACK is welcome. Please email to Peter Burgess …
peterbnyc@gmail.com … with a catchy phrase in the
subject line so that it gets attention, and please identify
the specific slideset(s) involved.
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?vv1=N1-Slidesets-p3
TRUE VALUE ACCOUNTING

27. The ideas in this slideset would
benefit from more specific expertise
in risk management and insurance.
If you have such expertise and would
like to help place contact me.
TRUE VALUE ACCOUNTING

28. THANK YOU
Some links and contact information:
Email Peter Burgess … peterbnyc@gmail.com
Peter Burgess LinkedIn profile
https://www.linkedin.com/in/peterburgess1
Link to TrueValueMetrics.org website
http://www.truevaluemetrics.org/
Link to navigation to other resources:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?vv1=list0100-MainNav#1
TRUE VALUE ACCOUNTING