Corporate Real Estate Strategy

Earthquakes and Enterprise Survival February 2, 2010

A number of blogs have posted a news report that an earthquake was “overdue” in Port-au-Prince – and oh, by the way, a quake should be expected in many American cities not typically associated with earthquakes: St. Louis, Seattle, Charleston, Memphis, Salt Lake City, and Boston. A FEMA report from 2001 cites additional high earthquake-risk cities (beyond the well-known ones in California): Albuquerque, Anchorage, Atlanta, Honolulu, Las Vegas, New York/Newark, Philadelphia, Portland, Provo, Reno, and Tacoma.

New York, an earthquake risk? Who new?

It makes me wonder how much business continuity planning has been done by companies dependent on at-risk locations. And more generally, to what extent vulnerability to earthquakes plays a part in company stock valuations. If it is very little, as I imagine is the case, it seems like there is a lot of room for arbitrage by the Black Swan artists. Going short on stocks of companies vulnerable to earthquakes would likely eventually pay off. Better yet, there seems to be scope for some negotiable instruments to be invented that allow investors to invest on both sides of whether an earthquake hits or not.

While facilitating such bets might seem immoral to some, in fact, such an instruments would allow a company faced with earthquake risk to hedge against this risk by buying a position that profits if an earthquake hits. Then, in the event of an earthquake, they would be able to offset their business-continuity costs (or is it incontinuity costs?) with the profit gained from the instrument.

Over the last decade, companies have become more aware of the risks posed by natural calamities, and as a result business continuity planning has arisen as a discipline. From my observations, though, those doing business-continuity planning have only been able to chip away at the edges of catastrophic risks. They’re able to do things like make sure they have redundancy in their own facilities, have multiple supply chains, and enable employees to work from home. These things are valuable, but don’t deal with the real problem of a major catastrophe in a large city which is that the surrounding area – physical and social – becomes broken, non-supportive, dysfunctional. Government services aren’t available; transportation and communication systems are broken; civil disturbances erupt; people focus on survival and stop working; residents eventually leave town.

For a company located in a hazardous zone – whether it be from earthquakes, hurricanes, flooding, etc – no amount of advanced corporate planning can overcome these challenges (except perhaps planning focused on relocation to a more benign environment). A company in the midst of a major catastrophe is stuck with negative consequences. They’re unavoidable. Business anywhere-near-as-usual, in fact, cannot continue. So, business-continuity planners have got to start thinking in different terms. Their ultimate goal needs to be, not business continuity, but rather “enterprise survival”. They need to ask questions like “how much revenue will be lost if there’s a quake and how can we make it up?” They need to think outside the box of their own organization and facilities and those of their suppliers. They need to find a way to mitigate the damages they will suffer because of what goes on outside these boxes. They need to go beyond IT engineering and civil engineering and focus on risk management and financial engineering. They need to look at concepts like markets in catastrophe-based negotiable instruments and large-scale insurance cooperatives.

This admittedly draconian view of natural catastrophes will not sit well with some, but only those who have been able to ignore the harsh reality of what has been on our TV screens: New Orleans, Chengdu, Port-au-Prince. Sure, the likelihood that your company will be hit by a calamity is low, but the consequences could be severe.