Mike Bernard, Director of Capital Planning and Finance for Union Pacific, met with the CRMER Risk Management Fellows on the afternoon of Tuesday, March 22nd. Bernard started the conversation by briefly talking about a movie, “Unstoppable”. The story in the movie was based on a real railroad accident that resulted in significant loss. Since the beginning of established business, the possibility of failure has always been an inherent risk for companies. Union Pacific takes into account many factors in their Enterprise Risk Management (ERM). Union Pacific has built a thorough system to identify, assess, analyze and manage risks. Potential events or situations that might threaten the success and longevity of the business are considered as risks, such as terrorism, cyber-attacks, cheap crude oil prices, debt crisis and climate change.
Enterprise Risk Management (ERM) is defined as a consistent and structured process across the whole business for identifying, assessing, deciding, and responding on threats and opportunities that affect the achievement of its objectives. ERM is affected by people at every level in the organization; it is applied in a strategy setting and top-down approach that aligns risk appetite and strategy. Two key factors of ERM are gross impact and likelihood of occurrence.
Reputation has been considered a major factor of Union Pacific’s structure. Bernard commented that “it takes years and years to build reputation, but only takes five minutes to destroy it.” This leads to the discussion of the levels and significance of risks because the ranking of enterprise risks changes over time. Some top historical ERMs include safety, security, service reliability, regulation and politics, economic and financial factors. With the change in environment, top current ERMs contain terrorism, significant economic shift, federal statutory risk, international political risk, rail safety, severe weather impact and customer or commercial risk.
Many recent failures include the European and U.S. debt crises, city of Detroit, Kodak, BP deep water horizon explosion and many others. Mr. Bernard challenged us to think about whether or not all risks are bad. We learned that risks can be opportunities to succeed and that avoiding risks is avoiding the chance to succeed. Bernard mentioned that the intelligent pursuit of rewarded risk forms the foundation of any successful business enterprise. Oil price is a great example as the oil industry boomed last year and then oil price crashed this year. Union Pacific is the largest consumer of diesel in the world so the oil price fluctuations plays an important role in Union Pacific’s ERM portfolio.
Risk assessment of enterprise risks contain both quantitative and qualitative factors. Financial, reputational, speed of onset and frequency can all be noted as high, medium or low to assist the ERM decision making. Bernard brought up the example of two different hurricanes that landed in Houston. The first time caused Union Pacific’s activity in Houston shut down for 13 days, and the second time only for 3 days because they were well-prepared to prevent destruction from extreme weather. Bernard emphasized the importance of accurate monitoring systems and suggested to prepare early for risks.
Bernard mentioned some ERM lessons learned through experience. I think one of his most memorable comments is to expect the unexpected and plan for it. We always make assumptions and some of them are usually incorrect; Bernard asked us to challenge even our most basic assumptions. We took away from his lessons that extreme events happen more often than we think and we should always remain agile.
Some of the risk management Student Fellows asked Bernard questions and he enlightened us with great conversation. He discussed the ongoing analysis and implementation of an automatic stop system preventing trains from unexpected events. Bernard explained the advice of making front line operators aware of the risks and risk management through education, simulation and real world experience.
Learning the perspective of an industry-experienced and leading professional like Mike Bernard on enterprise risk management opened our eyes. The workshop brought more fresh ideas and confidence to risk management Student Fellows to pursue a career in risk management. Diverse factors of ERM trained us to think about business in a more integrated and global environment with economic, financial, climate, safety, politics and many other elements. After attending this guest speaker event Fellows will be striving to apply Bernard’s lesson of “challenging even our most basic assumptions.”
Mike Bernard speaking with CRMER Student Fellows