Enterprise Risk Management Paper – Team C
Casey Beighley, Deelip B. Joshi, Jose Carmelle Dieudonne, and Ian Hosein
April 1st, 2013
Enterprise Risk Management Paper
Enterprise risk management (ERM), an integrated corporate-wide process is instrumental in a company’s success or failure to meet their goals and objective (Wheelen & Hunger, 2010). It is a rigorous process that assesses and addresses the risk such as environmental, that a company can encounter and threaten, in achieving the company’s strategic goals and objectives (Harb, 2008). Environmental protection agency (EPA), are the government body that monitors and regulates businesses for environmental regulation and imposes strict penalty for its violation. This team paper discusses Alumina, the company cited in the business regulation simulation (UOPX, 2013), the nature of its tort and its implication, the alternative for resolution, and how it will affect both Alumina and Kelly Bates, the accuser. Finally the team will discuss how Harb’s seven steps process can help to mitigate future risks.
Main Players in the Simulation
Alumina Inc. a four billion dollar aluminum maker is a USA-based company that operates in eight countries around the world, and whose operation in the state of Erehwon, on the fringes of Lake Dira is under the jurisdiction of region 6 of EPA (UOPX, 2013). Alumina’s management includes Roger Lloyd, the company’s chairman, Chris Blake, the Chief Operating Officer (or second in command), Diane Richards, Public Relations, and Arthur Todd, Legal Counsel (UOPX, 2013). Barring one incident of EPA violation five years ago, Alumina’s environmental record has been clean. Erehwon Reporter, is the local daily, and Kelly Bates is a 38-year-old single mom whose 10-year old daughter suffers from leukemia (UOPX, 2013).
Nature of the Tort and its Implication
Companies need to be aware of both federal and state laws that affects the business where it operates, and need to address issues that violates such laws, including environmental safety. Tort is a wrongful act that causes injury or harm to others, and for which civil action to seek compensation for the wrong done is permitted by the law (Cheeseman, 2010). In this simulation, the nature of the tort is an EPA compliance issue, and how the company handles this situation will determine their public image, and their presence in the business world. Five years ago, Alumina had an EPA violation for the PAH concentration of the environmental discharge that exceeded the stated limit, which has since been rectified (UOPX, 2013)
The nature of the tort that Alumina is currently dealing with is the accusation in Erehwon Reporter by Kelly Bates, who accuses Alumina of repeatedly discharging carcinogenic effluent into Lake Dira, and the consumption of its contaminated water by her daughter to be the direct cause of her daughter’s leukemia (UOPX, 2013). Both, the Erehwon Reporter and Kelly Bates want the EPA to release the environmental audit report of Alumina under the Freedom of Information Act (FOIA), and to add insult to injury is the threat by Kelly’s for a-million dollar personal injury lawsuit against Alumina (UOPX, 2013). Any of the accusation, if proven true can be a public relation nightmare for Alumina, and have a financial impact on their bottom line.
Alternatives for Resolution and its Effect
To address the first issue, if Alumina pressurizes Erehwon to retract its story without facts and data, it would be detrimental to the company. The clearest approach left is to ignore the Erehwon report, and to conduct its own investigation to ensure that there is no new violation (UOPX, 2013). The second approach is fruitful in getting the actual PAH value, which is lower than the prescribed 5 milligram per liter levels, supporting their claim of not violating any EPA laws.
To address the second issue, there are three alternatives that Alumina can take: allow partial release of the environmental audit report, object to the release on confidentiality grounds, or have no objection to the release of data (UOPX, 2013). The best solution that Alumina can take in not jeopardizing its competitive position in the global market is to allow partial release of the environmental audit report (UOPX, 2013). Taking this approach, can show the community that they have nothing to hide, and keep the reaction of the community mild.
The third and key issue of the possible million dollar lawsuit can have an huge financial impact if taken to court. The best course available is to find a resolution to their dispute by one of the alternatives dispute resolution (ADR) methods. ADR has become a widespread possibility permitting people to resolve dispute, separate from the court in a compliant method. Arbitration, mediation, and negotiation, are some examples of ADR.
How would the potential resolutions affect the parties?
The potential resolution affects the parties by providing a mutual agreement. Its impact is not only limited to cutting costs, proceedings times, or just financial savings. Using ADR is more than that: it is the access of justice, and protection of rights. It helps avoid the stress of court proceedings, which are the source of estrangement. It awards both party self-rules at a practical level. The decision is enacted in arbitration, and not settled. Both parties just learn to accept the decision as final and binding (Viforiti, 2008).
Negotiation allows the parties to resolve the disagreement by both parties striving for the best options for each other that concludes in an arrangement and can be done privately. “What is most true about negotiating is that the parties aren’t always able to communicate their positions effectively” (Berman, 1995). It is the “process of submission and consideration of offers, until [an] acceptable offer is made and accepted” (Hoogenboom & Dale, 2005). Mediation, according to that same author is where “a neutral eases the communication between both parties and, the neutral or the mediator does not decide the issues or even enforce a result. This process empowers both of them to comprehend, and reach a mutually agreeable resolution to their dispute” (Hoogenboom & Dale, 2005). Mediation might be suitable when both parties want to keep their relationship somewhat intact, but it will not work without corporation or compromise.
In arbitration, the neutral(s) renders a verdict based on evidence submitted to them by the parties to the dispute. It is somewhat a traditional legal trial, with witnesses and evidence, and everyone is following the same rule (Hoogenboom & Dale, 2005). When the parties want to settle the dispute with less conventionalism, time, and expense of a trial, arbitration is the best choice. It might not be suitable, if both parties want to maintain control over their dispute. Alumina wants to maintain its honor and effectiveness and does not want a long drawn legal battle. Knowing that they have the backing of scientific facts of not violating EPA regulation, and wanting a neutral person to settle the dispute with Kelly, arbitration is the way to go for them. They will use the court system only as an outright last possibility.
Seven Steps Process
Harb’s article about the seven steps process links the ERM, the first line of defense and internal audit (IA), the second line of defense (Harb, 2008). Using the seven-step process described in Harb’s article, the risk management process can solve current and future business risks. This process begins with “Management Commitment that include strong governance structure and commitment, and the role of IA” (Harb, 2008, slides 4-7), meaning that everyone needs to make it their duty and responsibility to commit to solving the problem. Everyone owns up to their own mistakes starting with the top people. The second step is to have a clear communication that outlines the partnership among senior management, line management, risk management, compliance, internal audit, and external audit, and to include and communicate the IA responsibilities (involvement in issue escalation process) in the ERM framework (Harb, 2008).
The third step involves making clear risk management policies, plan strategy, toolkit, technology, streamline processes, supporting policies, plans, procedures (controls) and strategies (Harb, 2008). The IA could then review these, and make sure that they are aligned, and that the ERM framework is working. This means making policies for future incidents with the PAH concentration, and should it arise in future, how they will handle it. The fourth step includes “Investing in People” (Tony Harb, 2008, slides 4-7). This means training people from the start to avoid such violations. This would continue throughout employment with “on-the-job-training” (Tony Harb, 2008, slides 4-7). IA can be involved in training risk review profile, and feedback as well as audit of training processes.
The fifth step defines everyone’s roles and responsibilities. Everyone should know what they are to do should another incident occur. This step also includes well documented plans and policies (Tony Harb, 2008). IA can align the key activities to minimize duplication, and reduce the time factor when the IA and ERM have an interdependence of activities, as well as review the recognized methodology. The sixth step involves the risk management process and practicing. IA can ensure that the risks are correctly evaluated, as well as support and facilitate risk workshops. In order for Alumina Inc. to get things right, they will need to practice their new risk management process, and assess its effectiveness. The last step in the risk management process is involving the process in everything they do on the job. This includes monitoring and reviewing the processes periodically to ensure that things are working correctly, commitment to continuous improvement, having an effective IA, self assessment, and a compliance process in place. They need to have a regular audit report and independent testing by IA to ensure that the ERM systems and processes are working correctly. They will need to use the process all the time, not just once.
Looking forward, Alumina Inc. can use the seven-step process involving risk management to solve future problems should they occur. They can have policies and procedures in place to follow, and if everyone from the top management to the lower level employees adheres to these policies, the company will not be in total chaos. Should another incident occur with past violations, they can still follow the policies and procedures, and handle the situation appropriately.
All businesses, be it small or big need to abide by the rules and regulation set forth by the local state and federal jurisdiction in which they operate. EPA monitors and regulates environmental safety, and violations have very stiff penalties. Alumina can deal with future business risks by having ERM in place, and using Harb’s seven step process to allow them to act in a timely manner. Finally, for dispute resolution, ADR can help without a lengthy court battle.
Berman, G. S. (1995). FACILITATED NEGOTIATION. An Effective ADR Technique. Dispute Resolution Journal, 50(2), 18-29.
Harb. T (2008).7 Essential Elements of ERM and the Role of Internal Audit [PowerPoint slides]. Retrieved from http://www.inconsult.com.au/Articles/Essential%20elements%20of%20ERM%20and%20role%20of%20%20Internal%20Audit.pdf
Hoogenboom, J., & Dale, W. (2005). Dispute Resolution Strategy and Decision Analysis. AACE International Transactions, 15.1-15.9.
UOPX (2013) University of Phoenix LAW/531 classroom materials: Simulation: Business Regulation Simulation. Retrieved from https://ecampus.phoenix.edu/secure/aapd/vendors/tata/sims/legal/legal_simulation1.html
Viforiti, V. (2008). ACCESS TO JUSTICE, ADR, PERSPECTIVES. (English). Anuario De Justicia Alternativa, (9), 119-131.
Wheelen, T. L., & Hunger, J. D. (2010). Concepts in strategic management and business policy (12th ed.). Upper Saddle River, NJ: Pearson Education.