Call for Opinions about TEPCO etc.: How to Prevent Future Disasters? Did Governance and Corporate Culture Play a Role?

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Comments

  1. The Fukushima disaster is fascinating because it showcases all of the weaknesses in the Japanese government system.  

    As I understand it, there were warnings about safety at this plant prior to the quake in the form of complaints to the company, to the courts and to regulators.  Warnings ignored on all fronts–court cases thrown out, company management too complacent, and beaurocrats who felt that that fact finding, if procedurally correct and accurate is correct even if the science is wrong.  And, of course, somebody decided to have a power grid on Kansai that is not compatible with the Kanto system.  Who should we blame for that?  

    Personally, I think that a watchdog system is necessary, in the form of citizens groups who have the power to monitor nuclear power facilities and have access to the court system to challenge mismanagement.  The trouble with that, is that the courts in Japan, despite their strong constitutional mandate, are too passive.  

    I also see a failure on the technology side.  Japan (like the US and like every other country in the world that I am aware of) chose nuclear power technology that has military applications and did so, knowing that the problem this technology can have meltdowns.  

    Other technology that does not have military applications and is not prone to meltdowns, was ignored and not commercialized.  I am referring to Thorium reactors. 

    For information about thorium technology, read this:

    http://www.wired.com/magazine/2009/12/ff_new_nukes/

    If the crisis had happened with a Thorium reactor, the situation would still be bad, but there would have been no meltdown, and there would be no spent rods to dispose of.  

    Since I believe nuclear power is the only viable option to meet Japan's power needs, I think Japan should be looking into this technology. 

  2. Japan in Focus: Why Risk Management Matters

    On March 11, Japan was hit by a 9.0 magnitude earthquake and later bombarded by a 45 foot tall tsunami.  The disaster caused billions of dollars worth of damage to residential and commercial property and also damaged a nuclear reactor that was operated by the Tokyo Electric Power Company, Inc. (TSE: 9501) [TEPCO], sending dangerous levels of radiation out into the atmosphere.  On May 20, 2011 TEPCO reported a $15 billion net loss to account for the disaster at its Fukushima nuclear plant, the greatest loss ever reported in Japan by a non-financial company.  The tragedy highlights the fact that major corporations have a responsibility to engage in rigorous risk management.  TEPCO, after all, couldn't have predicted that the tsunami would hit, but it could have been better prepared for such an event to take place.  In recent years outside experts had warned that TEPCO's nuclear facility was dangerously at risk of being damaged by even a mid-sized tsunami.  Unfortunately, maybe in part because of the absence of independent board members and risk experts at the company's top level, TEPCO never implemented strong risk control measures.  In the wake of the Japan crisis, and especially in light of the devastating losses TEPCO is now dealing with, investors will want to make sure that many of the companies they invest in have adequate risk management policies in place.

     According to risk expert Steven Minsky, "risk management isn't about trying to predict the future, it's about being prepared in the right places where it matters most."     

    With Fukushima, it looks like there was a serious failure in the risk analysis, design, and approval process.  The facility's designers knew that Japan is located on multiple fault lines and is subject to major earthquakes and that the building was at risk of being hit by a tsunami.  The company nonetheless chose to build a nuclear reactor directly on the coastline and to site all of their backup generators in a location that they should have known would be placed at risk if the area were hit by a 20 foot tall tsunami.   In addition, the company chose to build its cooling facility at a lower elevation than its reactor, a decision that has played a significant role in the current disaster.   

    In December, 2010 Japan's Nuclear Energy Safety Organization, a government commission, published a report explaining that "a tsunami 15 meters or higher would have almost a 100 percent chance of damaging the reactor core."

     Needless to say, the 14 meter tall tsunami that hit Japan on March 11 caused devastating damage to TEPCO's nuclear facility.  Speaking after the radiation leak became a global news story, John Ritch, the director general of the World Nuclear Association, noted that "the tragedy is that it was a preventable accident."

    Even though the company experienced several low-level nuclear accidents in recent years TEPCO has never appointed a board-level committee to oversee enterprise risk management, and because of the limited presence of independent directors on its board, suffered from a lack of alternate perspectives in its board room.  There were not sufficient numbers of strong independent voices on the board who may have been more inclined to call the company's risk exposure into question.  Only two of the company's 20 board members are independent.  Furthermore, the company's non-board level Risk Management Committee is wholly composed of executives.     

    TEPCO never implemented internationally recognized best practices when it comes to corporate governance and board accountability.  The company did not implement the type of checks and balances that can protect shareholder value and help reduce risk exposure to "Black Swan" events. 

    The disaster shows the potential risks associated with the management style many Japanese companies employ – where power is centralized within management and the voice of outside experts are almost entirely absent.  Overall, less than 4% of Japan's largest publicly traded companies have majority independent boards.    

    GMI research reveals that 95% of the world's energy companies do not have a separate risk management board committee.  Clearly TEPCO is not the only high risk company that does not yet have a separate board-level Risk Management Committee.  Still, the nuclear disaster in Japan illustrates that board accountability and risk management matter.  With an eye on TEPCO's $15 billion dollar tsunami write-down, other energy companies would do well to implement the best possible risk management policies and make sure that they have independent directors on their boards who are capable of critiquing and questioning management decisions.
     

    Uploaded from GovernanceMetrics Newsletter   (http://www.gmiratings.com)

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