Pandemic in Retrospect: How Will Risk Management Be Judged?

Friday, October 30, 2020

By David X Martin


Risk is the absence of information. There is risk in absolutely everything we do because we can't possibly know all there is to know. This is especially true in a pandemic.

In a COVID-19 world, we would expect a company's risk managers to survey the landscape in a variety of ways, then create appropriate responses based on the risks they face. To assess or “litigate” their performance, we would ask a series of questions.

Business Judgment

Good judgment is the result of considering the consequences of decisions, thinking before acting and/or speaking, and using the right tools to make good decisions in a variety of situations.

David X Martin headshot
“Errors of omission are unforgivable,” David X Martin writes.

For instance, in determining whether executives and boards exercised good judgment in their policy or operating choices, we would ask: Did they consider the risks involved? Were they advised by internal or external health and risk experts? Did the organization take advantage of all available opportunities to mitigate risk? Were the company's risk contingency plans adequate?

Materiality and Cost Burden

What does it mean for a risk to be material and unforeseen?

Accountants define materiality concerns by the significance of an item to users of a registrant's financial statements. In other words, a matter is considered "material" if there is a substantial likelihood that a reasonable person would consider it important.

When risk managers speak of errors, they consider both errors of commission and errors of omission. With errors of commission, you considered the issue and then made the wrong decision. In errors of omission, issues are not even considered. In the world of risk management, errors of omission are unforgivable.

Questions to consider in this context: Were COVID-related implications truly unforeseen risks throughout the pandemic? At what point in time would these risks have been considered foreseeable? Was the impact on a given company disproportionate to that experienced by the industry/competitors? Where applicable, which party to an arrangement had greater risk tolerance or better financial ability to absorb losses caused by COVID-19?

Economic Uncertainty

At certain times during the pandemic, economic circumstances become more unpredictable. Companies need to manage the potential impact of further business deterioration with their ability to meet financial covenants. In addition, companies bound by contractual commitments may need to switch suppliers, inputs, or vendors based on shortages or other special circumstances.

Questions to consider: When making business decisions involving changes in operations or counterparties, did senior management appropriately weigh relevant risks? Did companies appropriately anticipate and manage counterparty risks associated with the crisis' effect on other companies? What relevant contractual covenants govern how the parties responded to unforeseen risks? Were corporations, including asset managers, appropriately reevaluating investments based on evolving risks?

Potential Conflicting Obligations

Some companies that are most critically affected will need to make choices concerning closing or limiting specific business operations, deciding which creditors to pay and which contracts to honor, and even collaborating with competitors to stay afloat. In addition, new government regulations may generate unintended consequences with respect to choices companies make.

Key risk management questions: Were the conflicting obligations - and consequences of various choices - thoughtfully evaluated from a risk perspective? Did the company or fiduciary have a process to develop and evaluate viable alternatives with less risk to achieve the same objectives? Did the actions place the impact of the materialization of the risk on the parties that were understood to be bearing the risk?

Security and Privacy

Security: With devices and data accessed at home instead of the workplace, the attack surface that a company needs to manage is greatly increased. The organization's policies and procedures regarding security will be put to the test.

Privacy: Given the importance of quickly identifying employees exhibiting COVID-19 symptoms, companies are collecting personal data that has not been previously collected.

Key risk management questions: Did companies have adequate policies and procedures in place to mitigate risks related to data security and unauthorized access? Did businesses appreciate the security issues involved and take the appropriate actions to ensure that data was properly used and safeguarded? Were organizations mindful of collecting information about employees or clients, such as travel itineraries and health information? Did they properly balance concerns about employee confidentiality with concerns about employee safety?

Valuation and Volatility

Insurance and reinsurance companies, especially related to business interruption and deals falling through, may be facing scenarios far outside ex-ante expectations.

In the asset management space, marks on certain securities are impacted in market turmoil as volatility increases, spreads widen, and liquidity dries up. When valuing other firms or projects, companies will need to appropriately account for new risk factors.

More generally, there is substantial uncertainty in future business performance in many industries in light of COVID-19.

Key risk management questions: Did asset managers use valuation models and methodologies that appropriately incorporated key risk factors? Did asset managers have backup plans in case third-party price providers were unable to deliver reasonable valuations? Did valuation or actuarial models consider the right risk factors and model them in reasonable/accepted ways? As applicable, were sound risk management procedures for the oversight of risk management in place as circumstances evolved? Were they appropriately followed?

Bankruptcy and Valuation

Chapter 11 bankruptcies are increasing in the wake of COVID-19. Filers span many industries, including: retail, travel, energy, fitness, gaming, auto supplies, dining and food services, hotel chains, and cruise lines.

Enterprise or asset valuation can be impacted by when (and whether) a company should enter Chapter 11, eligibility for debtor-in-possession financing, and the feasibility of a reorganization plan. Concerns with valuations as raised above, and accurately gauging the risk of potential future valuation declines, bear on the best-interest test of creditors.

Key risk management questions: Is a distressed company's value appropriately discounted based on outstanding risks? How will evolving risks impact potential reorganization plans?

Finally, after the pandemic, what will be remembered are the judgment calls made and the outcomes achieved. No one will give management credit for good intentions - only final outcomes.

The best possible outcome is the result of a thoughtful, disciplined, orderly process that includes collective wisdom and a powerful, laser-focused intention to getting it right. Many will not get it right. Let the litigation commence!


David X Martin (DXM@DavidXMartin) is an adviser to business leaders and provides expert witness testimony on cybersecurity and risk management. His 40?year career includes senior positions, including chief risk officer, at PwC, Citibank and AllianceBernstein. His numerous articles, books, speaking engagements and board of director experience can be viewed through his website. His last article for GARP Risk Intelligence was No Mere Abstraction: When COVID-19 Literally Hits Home.


We are a not-for-profit organization and the leading globally recognized membership association for risk managers.

weChat QR code.
red QR code.

BylawsCode of ConductPrivacy NoticeTerms of Use © 2024 Global Association of Risk Professionals