At first glance, it seems like an eerie coincidence. Three decades ago, a board game featuring the BP (NYSE: BP) logo and brand invited players to drill for oil offshore, while avoiding spills, damaged rigs, and cleanup costs. But the game's designer wasn't psychic -- just realistic. However unexpected they may seem, occasional disasters should be no surprise to cautious investors.
Amazingly, BP seemed completely unprepared for the gusher in the Gulf. Its prevention, repair, and cleanup plans now seem woefully inadequate. Despite the obvious risks, the company didn't seem to take the real chance of disaster seriously.
BP's not the only one to succumb to this flaw. We often ignore or underestimate risks ourselves. Overconfidence and arrogance can kill investing returns or entire companies with equal ease. Smart investors plan for as many dire scenarios as possible -- and the very best companies usually do likewise.
Dealing with disasters
Airlines all have plans for when tragedy strikes. When Air France flight 447 disappeared last year, the airline swung into action immediately, using dedicated phone lines to dispense updates to relatives directly (in several languages), making trained counselors and doctors available, and updating its website's main page to dispense information and express sorrow instead of welcoming new business.
On 9/11, the headquarters of the stock market now known as Nasdaq OMX Group (Nasdaq: NDAQ) suffered major damage. But its system had redundancies built in, and it was soon operating through its centers in Connecticut and Maryland. That's a sign of good disaster preparedness, and therefore good management.
Johnson & Johnson (NYSE: JNJ) made the best of its 1980s Tylenol-tampering crisis, boosting its reputation by responding quickly and responsibly. That quick, effective response restored customers' confidence.
Good preparation and responsiveness can minimize damage, and even enhance a company's image. In contrast, BP's frequent downplaying of the severity of the spill, and its CEO's occasionally regrettable comments, only made matters worse for the company.
Quiet success
Interestingly, we never hear about many of the companies that deal best with risks, because they successfully prevent disasters from ever happening. Amazon.com (Nasdaq: AMZN) is estimated to handle about a third of all online commerce. Wal-Mart (NYSE: WMT) serves its customers more than 200 million times per day. Each company processes gobs of credit card numbers in the process, making identity theft on a massive scale an ever-present threat. Both companies make sure that their systems are as safe as possible, preventing calamity and preserving their customers' trust.
Catastrophe can't always be stopped
Company management can't put its collective head in the sand when inevitable calamities strike. It's hard to imagine that the big brains at companies such as Citigroup (NYSE: C) and Bank of America (NYSE: BAC) didn't see the financial crisis coming. They likely just didn't want the party to end, and weren't being responsible about the risks they faced. Citigroup alone took $45 billion in government assistance. Similarly, Bank of America found itself asking for Uncle Sam's help, with more than $700 billion of its mortgages at high risk of default. Both companies are looking much better these days, but their reputations have taken big hits.
When you study a company, look for signs that it's facing its risks responsibly, and that it's ready to deal with disaster. A board game where you're trying to avoid oil spills is one thing, but in the real world, real lives -- and dollars -- are at stake. Great companies are both responsible and responsive.
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