The SeaWorld disaster: Lessons in corporate risks
"Harmful acts of nature (e.g., droughts, floods, and plagues) often cause periods of great economic hardship," explains billionaire investor Ray Dalio. While evident for individuals and small businesses, environmental risks can destroy earnings for enterprise companies, too. For example, a critical warehouse avoids the tornado but becomes severely understaffed.
Today, almost every company relies on a constant supply of electricity. A thunderstorm, hurricane, wildfire, earthquake, or flooding can result in that supply being disrupted. How long can a plant operate on a generator? How long does it take for office workers to cease being productive without the internet? What is the plan if critical servers go down for days?
Most people base risk on what they experienced in their lifetimes [Dalio 2021]. Therefore, those who live in a naturally protected area are less likely to plan for environmental disruptions. The problem is that as business becomes more global, the exposure to impacts becomes exponentially larger. It is not what is occurring at the corporate headquarters that is most important, but the storms forming far away that often have the most significant impact.
The Blackfish effect
SeaWorld, a theme park with live marine animals, went public in 2013. A few years before, a filmmaker named Gabriela Cowperthwaite took her children to SeaWorld San Diego regularly. In 2010, Cowperthwaite read about an orca at the Orlando SeaWorld killing its trainer, Dawn Brancheau. As a result, Cowperthwaite began investigating the park she was once a fan of [Rice 2019].
As SeaWorld' SeaWorld' ’s IPO was underway, Cowperthwaite's $70,000 documentary titled Blackfish was released on Netflix. It depicted the horrific process of taking orcas from the wild. Celebrities like Olivia Wilde posted it on Twitter, making the movie a viral sensation. This led to animal rights groups initializing online petitions and generating political pressure. As a result, sponsors of the park began to leave.
Federal regulators and California lawmakers launched an investigation into the safety procedures of the park [Rice 2019]. This perfect storm forced the company's stock to fall rapidly, going from $38.92 to $15.77 in less than a year. The entire result of the Blackfish movie illustrates the causal nature of risk and is dubbed "The Blackfish Effect."
Political actions and hurricanes
Today, a company's competitive edge comes from managing the risks from global political actors [Rice 2019]. This is separate from government risk, as political risk deals more with public opinion. It is generated by petitions, calls to local leaders, and visits to the capital by angry, concerned, or influential individuals. A cell phone video from a supplier in another country or an unwarranted employee blog post hitting social media can lead to political pressure and disaster for the unprepared organization.
Like a hurricane forming offshore, political actions are predictable. For example, the SeaWorld disaster started with a trainer being killed by an orca in 2010. It was not until three years later that the causal effect of that event triggered their downfall. At that time, SeaWorld had ample opportunity to mitigate the hurricane of public backlash that was forming. However, they were unaware of the disaster just over the horizon.
Perception and psychology
Many perceived risks today did not exist a decade ago [Wagner 2016]. The top 5 global risks by the World Economic Forum (WEF) are interstate conflict, unemployment, extreme weather, water crises, and cyber attacks. None of these are in the control of a single organization. Instead, the likelihood of such events is connected to how well multiple governments, organizations, and companies work together.
Unemployment affects many corporations' revenue. While the risk is evident for those selling luxury consumer goods, it spills over into B2B companies as well. For example, an enterprise software company may have a hard time selling its product to companies in the midst of downsizing when spending is tight.
Extreme weather is a more manageable risk to prepare for. Counterfactual or what-if analysis makes it easy to plan for multiple environmental scenarios. Interstate conflict is more complicated. However, four steps occur in fights between countries before military involvement [Dalio 2021]. These include economic restrictions, technology restrictions, geopolitical negotiations, and financial sanctions. The causal nature of these indicators makes it possible to predict the likelihood of military conflict.
The war to come
When states are at odds, the first action is usually a tariff or economic restriction. This economic weapon is designed to cause pain within the rival's economy. Next is the withholding of critical technologies or resources. For example, particular software minerals or gas may be withheld from being exported to another country. The most famous example is the withholding of Helium by the United States and the Hindenburg disaster of 1937. An event that occurred almost two years before the start of World War II.
When conflicts over territory arise, either land, resources, or the right to build technology, these are first determined by negotiations on the world stage. It involves the exertion of power of one state over another. After that, it can be cutting off a state's money or credit by punishing institutions that provide it. However, when existential threats occur against a state, a threat to something essential for their survival, then an all-out military war is likely [Dalio 2021].
The Boy Scout motto is to be prepared. A new scout learns the value of packing for cold, rainy, and hot conditions during their first few camping trips. They also understand the importance of having ample food and water for the planned activities. Then, despite the advice of older scouts, new recruits often arrive for a big hike overloaded with gear and painfully make their way across miles of wilderness.
"We are a reflection of everybody else's business, especially the high-value economy in the world," explains FedEx CEO Raj Subramaniam after a poor earnings call in 2022. Since that time, the WEF has warned that we are currently threatened by social unrest, geopolitical confrontation, and even nuclear warfare [World Economic Forum 2023]. This highlights the need for organizations to prepare for all levels of plausible risk. Those that do will see a competitive advantage.
Subramaniam's statement about being in the same economy as everyone else is genuine. But, he fails to convey the need to take advantage of the current perils in a manner that brings about opportunity. For example, when one invests, they are giving a lump sum payment now for additional buying power in the future [Dalio 2021]. The act of being prepared for a disaster is the same—an investment into being able to operate when others cannot.
The Dutch invented capitalism in the 1600s [Dalio 2021]. In this system, savers can transfer their buying power to entrepreneurs who put it to the most productive use. As a result, the improved allocation of resources stimulates the economy, and new buying power is created. However, the system is not perfect. Risks such as debt and speculation can erode the wealth created, as in the case of Tulip Mania, which occurred in the 1630s—the first speculative bubble in history.
At its peak, tulips sold for amounts equal to the value of a mansion of the day [Hayes 2022]. Tulips first appeared in Holland a century earlier as part of the spice trade. As they were so different from European flowers, the plant was considered a luxury. In the 1600s, cultivators perfected the growing process of this fragile plant, creating a new market. As demand grew, so did the price. In response, a futures market was created, and with it, speculation.
The world works the same today as it did in the 1600s. There is opportunity and risk. The looming threat often provides opportunities for those who dare to discover it. In contrast, those that ignore risk need bailouts, debt restructuring, and other less-than-ideal help from governing authorities to remain in business.
Rice, C. (2019) Political Risk: How Businesses and Organizations Can Anticipate Global Insecurity. Twelve
Dalio, R. (2021) Principles for Dealing with The Changing World Order. Avid Reader Press
Hayes, A. (2022) Tulipmania: About the Dutch Tulip Bulb Market Bubble. Investopedia. https://www.investopedia.com/terms/d/dutch_tulip_bulb_market_bubble.asp
Hur, K. (2022) FedEx CEO says he expects the economy to enter a ‘worldwide recession’. CNBC. https://www.cnbc.com/2022/09/15/fedex-ceo-says-he-expects-the-economy-to-enter-a-worldwide-recession.html
Wagner, D. (2016) Global Risk Agility and Decision Making: Organizational Resilience in the Era of Man-Made Risk. Palgrave MacMillan
World Economic Forum. (2023) Global Risks Report 2023. https://www.weforum.org/publications/global-risks-report-2023/digest