[MUSIC] So welcome back to Strategy and Sustainability, this is session two, and this is the second session of session two on catastrophic risks. And this is the first, and potentially the most important of the five strategic issues that I want to cover in this session. So on catastrophic risks, the issue is that business has a really hard time even quantifying or dealing with really bad things. Graciela Chichilnisky is a Columbia University, she's a fantastic professor, she's been very deeply involved in many of these issues of sustainability, especially in the political sphere. And she writes how difficult it is for business people to even to get the math in their heads. And if we think about what we're teaching here at the MBA, you take the net present value of an event which is not very likely, which is going to happen very, very far in the future, that's going to be a very low number. And if you try to make business decisions based upon the possibility of catastrophic risks, you probably will not do very much. You might take steps to manage or to mitigate such risks, but it's not terribly important compared to doing things and making things happen and opening new markets and products and services, yeah. So the issue is to really look at what ifs. What if you release some toxic substance with devastating results? What if there's a systematic failure of systems and the backup systems which are there to do that? What if, if unexpected happens and one thing happens to another which happens which happens to another? This is the logic of a chain reaction of explosions which happened in Texas City, some years back, where many many ships exploded one after another, causing tremendous havoc in the port. What if social mores and values change over time, and what was accepted one day, no longer becomes accepted in the future? And what if there are a new scientific findings, which either introduce new projects and services which might displace others, or which prove to some degree, or at least shed some serious doubt about the safety, the efficacy or the environmental performance of things which we thought were okay in the past? One of the issues I strongly recommend is for senior management to get together once in a while, maybe not every week, but maybe every few years to really push deeply into this what if, and to try to explore what are the possible catastrophic risks which could happen, which can have devastating effects to the firm. Examples of these kinds of thing, and this is a deep water horizon rig which exploded in 2010. Now, if you follow the oil industry, when you have a rig working under the sea floor, you have a common danger, is what's called the blowout. This is what happened where the rig encountered some very very high pressure gasses on the ground, which shoot up through the drill string, causing an explosion of gas on the surface of the sea. Now to prevent the blowout, the oil industry developed something called a blowout preventer, which is an enormous device which sits on the seafloor and theoretically will shut off the well, in the case of such an event. In this case, the blowout preventer didn't work. And what happened in the accident, besides the men who were killed on the rig, was that there was no plan B. The oil industry did not have a response to what happens if a blowout preventor doesn't work. So you went from an accident scenario to a crisis scenario, as we discussed in the last session. Crisis management, nobody knows what's going to happen, nobody knows how far it's going to go. Lots of people got involved, and in this case, it was really quite serious. Eventually, they got the rig under control, and eventually, they were able to stop the oil slick, which has been spreading all across the Gulf of Mexico. The example, below that, of course, is Bhopal, Poland, 1984, which we mentioned in the last session. Union Carbide was the company, in that business, this is a joint venture of Union Carbide's. Over the next few years, they exited the pesticide business, tried to diversify the company, but at the end, Union Carbide more or less has ceased to exist as an entity, most of those assets were eventually sold to Dow Chemical. Yeah, so a risk of this proportion can really destroy a firm, or at least end a firm in its present life. The other examples are more public administration. This is the Chernobyl Nuclear Power Plant, and below that, of course, is Fukushima. But again, this idea of planning for the unplannable, for thinking through what might happen, could be very, very important, and it's something that I think is really the responsibility of senior management. [MUSIC]