RISK CORNER: Terror strikes and the role of a CFO

The globally threatening environment demands improved physical security and this poses pertinent questions about CFO's role in preventing and mitigating the risk of terror.

The recent attacks in Paris which led to the killing of over 125 people were brutal on many counts - the most critical of which has been targeting of locations frequented by locals, instead of popular icons of French power and prestige.The motive apparently has been to instill fear and panic amongst the public while drilling deep the notion that in a country that takes a stand against the Islamic militancy, no person is safe, irrespective of their opinions or beliefs. As many as 89 people were killed at the Bataclan Theater, 19 people were gunned down at the La Belle Equipe restaurant, 15 at Le Carillon - a popular bar, another 5 killed at the Cafe Bonne Biere, and at least 1 was killed in the explosion outside a French Stadium. It is being estimated that the cost of the Paris attacks may surpass a billion dollars. 

Enhanced Security concerns in India  

Analysts have referred to the striking similarity between the attacks in Paris and those that took place in Mumbai on 26 November, 2008. Resemblance in the two assaults range from modus operandi to the nature of targeted victims. Both the attacks also hit several businesses directly. In Mumbai, besides the humungous cost of restoring the damaged structures of Hotel Taj, Hotel Oberoi and Nariman House, exorbitant expenditures for businesses also arose out of increased anti-terrorist measures and a drop, albeit a temporary one in tourist activity and foreign investment.
 
The recent stand of India against global terrorism and increasing reports of recruitment drives by the terrorist group, ISIS in parts of Kashmir along with creation of sleeper cells across the country has raised ecurity concerns.

Impact of Mumbai terror attacks on business operations

In the event of a terror attack, the most instant and significant impact falls on travel, tourism and hospitality sectors which are massively affected by a country’s security situation. 
Post 26/11, several hotels reported a drop in business. According to a study by the India Today Group, as an instant after-effect of the attacks, hotel ITC witnessed a drop in the occupancy rate by more than 50% while 25-30% was the average decline in occupancy across major Indian cities. This is partly because weeks following the attacks witnessed a wave of booking cancellations for major conferences and high profile visits.  
 
Over the next three months, the In-bound tourism of the country declined by around 35-40%. Aviation and Travel portals also took a strong hit. There were reports of several tour operators including prominent ones like TravelGuru having borne cancellations crossing over 25% in Mumbai which lasted for about six months. The hit was more severe due to the fact that the attacks took place in the month of November which is usually the peak season owing to  festivities in India.
 
The attacks also affected the part of our service industry which makes use of open spaces , like the malls, multiplexes, hypermarkets and restaurants. As per a report released by HSBC post the terror strikes, the brand Pantaloon witnessed a decline in footfall of over 4.2% on the weekend following the attacks vis a vis the previous weekend. Another sector to take a hit was that of multiplexes. The report by India Today Group further stated a 15-20% drop in the occupancy rates of the popular multiplex- Fun Cinemas, in the weeks following the attacks. Consequently, retail outlets in Fun Cinemas were also down on business by around 25%. Other multiplexes also showed a declining trend in occupancy rates.
 
As a knee jerk reaction, almost common across all businesses was panic with respect to their security preparations. 

Risk businesses face in the event of a terrorist attack

In general, the likelihood of direct terrorist attacks on business / industrial units is low with terrorists primarily targeting government icons like Parliament house, embassies etc. or public places and economic hubs like market places, iconic hotels or religious sites. However, business units do face a high risk of indirect impact of terrorism induced chaos, public paranoia and consequent negative impact on supply chains, transport networks and availability of manpower.
 
Companies need to have in place apt operational measures to address the impact on operations and consequently business continuity, in the likelihood of an attack. The greater risk in this context is faced by business conglomerates / industrial units, in the form of radicalisation of workforce integral to the company / factory, which has the potential for a substantial reputational damage. This calls for ample understanding of one’s risk exposure and adequate coverage of the same, especially with the globalizing trend leading to terror risks in one country spilling over to businesses in the other by way of affecting travel, overseas operations, employment programs, and resulting political disturbances (with countries joining alliances risking retribution by terror forces, case in point being the recent attacks in Paris) 

Role of a CFO? 

Security risks like terror threats and related measures not only have a negative impact on return on investment but also have implications of loss of capital. The current demand of improved physical security in a globally threatful environment poses pertinent questions about the role of a CFO in preventing and mitigating the risk of a terror attack - 
 
A. How involved should CFOs be in tackling enhanced security concerns following the deteriorating global terror scenario? 
 
B. What should their role be in deciding the cost to secure vital installations, spending on security of operations and people working in perilous areas and decisions about buying terror insurance? 
 
C. How can they predict the cost of implementing a business continuity plan should an attack were to take place? The latter would call for revenue stress tests to identify the most vulnerable business operations / projects and predict the impact of a temporary breakdown / revenue collapse.   
 
With an intensified threat perception globally coupled with a rising clamor for CFOs to be at the centre stage, the domain of a CFO’s responsibilities in ensuring security and sustenance of business operations in the likelihood of a terror strike would be useful to think about and plan for.  

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