Destructive storm offers constructive lessons

Images of lower Manhattan plunged into darkness after superstorm Sandy swept through New York and New Jersey were a dramatic illustration of the connection between climate change, energy security and business continuity. The question for business schools is how to equip future leaders to manage in a world where success will increasingly depend on understanding these links.

Leaving aside disasters such as Sandy, energy and climate change are becoming pressing issues for business managers. As governments seek to lower the carbon intensity of energy systems, climate change policies are also likely to have an impact on the bottom line.

Added to this are the costs incurred by business not only from the destruction arising from severe weather events but also – as Sandy illustrated – the cost of disruption to the power supply.

“There are implications for where you locate significant new plant and how you build those plants to be fit for future purpose,” says David Grayson, director of the Doughty Centre for Corporate Responsibility at Cranfield School of Management in the UK.

Sandy has also raised questions about energy security and how business managers should build it into strategic decision making, with some arguing that companies need to take greater responsibility for producing energy as well as consuming it.

“In the past 50 to 70 years, it’s been about big distant solutions,” says David Elms, academic director of Warwick Business School’s Global Energy MBA.

“But in terms of adaptation and how businesses look after themselves, the question is to what extent you have a more distributed path to energy supply so you aren’t quite so vulnerable.”

Shifting trends in an uncertain world

For those in the energy industry, climate-related disasters are among a number of rapidly shifting trends that have implications for operations and strategy.

Warwick Business School’s energy-focused MBA programme is designed primarily for executives working in the energy industry. “We wanted to help the energy industry develop future leaders,” says David Elms, the programme’s academic director.

However, the course also attracts executives in energy-focused areas of other industries, such as financial services professionals, regulators, consultants, and engineering and construction executives.

Prof Elms argues that energy professionals must not only consider the opportunities of a changing industry but also need to be able to work in a more uncertain world.

“There’s still a strong need to understand the management disciplines of the traditional MBA so you can run a company in a more effective manner,” he says.

“But if you take the foundations you get from the typical MBA, you’re ready to answer some challenging questions – and having a group from across different parts of the energy sector means we have a group who want to try and unpick those tough challenges.”

In terms of Sandy-related losses, the numbers make for stark reading. In New York state, the cost of rebuilding and prevention could reach almost $42bn, according to Governor Andrew Cuomo. For New York City, Michael Bloomberg, the mayor, has put a $19bn price tag on the damage inflicted by the storm.

Issues raised by Sandy will soon be appearing in business school course content. “I’m teaching a course on risk analysis and environmental management in the spring and I’ll definitely be incorporating lessons from Sandy,” says Howard Kunreuther, a professor at the Wharton School of the University of Pennsylvania and co-director of Wharton’s Risk Management and Decision Processes Centre.

For one school, the storm had a direct impact. Located in New Jersey, Rutgers Business School had to cancel its classes for a week.

Unsurprisingly, Rutgers is also incorporating lessons from Sandy into course content. Arash Azadegan, assistant professor of supply chain and marketing sciences, says he will talk about Sandy in the MBA course on uncertainty and risk in the supply chain he is preparing for next term.

“Uncertainty and its rising importance in the global supply chain is getting more attention,” says Prof Azadegan. “But what Sandy showed us is that what happens after a disruption is also critical.”

For some academics, the storm demonstrated that business is not yet taking sufficient protective measures in advance of potential climate-related disasters. “The real lessons that come out of Sandy are on the risk perception side,” says Prof Kunreuther. “There’s a tendency to be highly myopic and take steps that bring short-term returns.”

Wharton, which focuses on risk management as part of its MBA, has already produced research on the status of US flood insurance based on an analysis of the relationship between insurance coverage and the devastation created by Sandy’s storm surge.

When it comes to MBA courses and electives, issues such as energy and climate risk have been moving up the agenda recently. At Cambridge university’s Judge Business School, for example, electives include a concentration on energy and environment. At Dartmouth College’s Tuck School, an elective, business and climate change, includes content on the implications of energy-related legislation, such as carbon taxes and renewable energy mandates.

There is evidence that schools are beginning to put issues of environmental responsibility and climate change into the heart of the MBA rather than leaving them as optional electives.

But the challenge facing schools is that the issues raised by Sandy could be taught through a number of management education topics, from finance and strategy to climate risk, energy management and environmental sustainability.

“All the disciplines come in, in one form or another,” says Prof Kunreuther. “You can talk about sustainability or the environment and you have financial questions, management questions, decision-making questions and public policy questions.”

Some attempts have been made in academia to link these different fields. At MIT, the Engineering Systems Division was established to tackle complex engineering systems problems by incorporating thinking on engineering, management and social sciences.

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However, in general schools find it difficult to work across disciplines. This is understandable given the nature of academia, says Yossi Sheffi, professor and director of the MIT Centre for Transportation and Logistics.

“Every university is a bunch of silos,” he says. “Because to have tenure in a top-tier university, you have to be a world expert in something narrow and well defined.”

Pressures of time and workload add to this. Prof Grayson says: “When everyone is overloaded, trying to create that space for collective, serious conversations about the changing environment for business is one of the biggest challenges facing business schools.”

One way schools can address this is by creating standalone initiatives that can tap into the expertise of faculty from different disciplines.

“It’s much easier if you have some small, concrete projects that you can build out from,” adds Prof Grayson.

Opportunities for doing this include developing multidisciplinary case studies that require multidisciplinary input. And given the complex range of issues highlighted by the storm, Sandy provides business schools with just such an opportunity.