2020: Year of the black swan
2020: Year of the black swan
Black swan events – those out-of-the-blue, large-scale occurrences that might only be rationalised with hindsight – can cause massive destruction. What distinguishes black swans from other disasters or crises is their unpredictability, substantial scale and the shock factor that accompanies them.
Whether it be events such as the two World Wars, the rise of the Internet or the September 11 attacks in 2001, companies need to respond swiftly and effectively. They also have to deal with the impact of being blindsided by an inconceivable event of staggering proportions.
Sadly, the current pandemic has put most companies across the globe to the test. “The impact of Covid-19 is unprecedented,” says Andrea Guffanti of the consultants and insurance brokerage firm Aon. “Most countries were not ready to deal with an event of this magnitude and most businesses could not have anticipated the social and economic upheaval that the pandemic has inflicted.”
He adds: “In 2019’s Aon Global Risk Management Survey, the number one risk – according to risk managers globally – was seen to be the risk of an economic slowdown to their business, closely followed by damage to reputation/brand, and accelerated rates of change in market factors. Pandemic risk rated a lowly 60th place. Now that risk perception will have changed.”
Will risk appetite weather the Covid-19 pandemic?
Lindiwe Magobholi, a member of the Institute of Risk Management South Africa, states that risk managers develop scenarios in order to set risk appetites to safeguard businesses from any known event.
“The most difficult questions any risk professional faces when managing risk appetite is:
• What will cause that situation?
• Why would it happen?
• Why should we worry about an ‘imaginary’ situation?
• Why should we do anything about it?”
She says that it is difficult to make these stress scenarios stick, because “business as usual” assumes that the sun will rise in the east and set in the west, and that all will be fine at the end of the day.
“By nature, people are optimistic – rightly so. But it is our job as risk managers to be pessimistic and think of the ‘out of the ordinary’ or ‘black swan’ or ‘outliers’ situations and manage the business against these risks whilst harnessing the opportunities therein. The objective is to ask:
• Does the business have an appetite for these risks?
• Can it treat or tolerate it?
• Is the business well capitalised to survive a crisis?”
Sadly, there aren’t many events in history – such as Covid-19 – against which businesses can stress-test risk appetites and it has therefore been mainly academic in nature until now.
“As we were enjoying the new year, Covid-19 had started to wreak havoc in other parts of the world, and I wonder if we as risk professionals were already paying attention to the pandemic and what conversations we were having in our emerging risks discussion with oversight committees,” Magobholi says.
“Did we imagine this would ever reach our shores? Certainly, the Covid-19 wave did hit the shores of South Africa and President Ramaphosa declared a nationwide halt on all economic activities. As professionals, we had to act on our feet while hiding in our homes with our children in fear of our lives. As the proverb goes, ‘the rest is history’.”
She adds that no one could have foreseen the pandemic’s impact and, consequently, it was evident that the one month of “no trade” was catastrophic for most organisations, especially those that had less than one month’s reserves.
“It begs the questions:
• How did we set our risk appetites in the first place?
• What benchmarks did we use?
• Are our policies addressing the critical or survival issues for our organisations?
• Are we having critical discussions at the roundtables?
• Are we really risk managing the business?”
In her view, after Covid-19, it became clear that “our risk management discussions should ease up because a practical stress (even stretched) scenario has manifested, and accordingly we should have treatment strategies for our businesses and reserves”.
No going back
As the Aon report “Decision Making in Complex & Volatile Times: Keys to Managing Covid-19” notes: “For many business leaders Covid-19 will be the most disruptive, world-changing event in living memory.”
“One thing is clear from this pandemic,” says Guffanti. “There will be no going back to how the world was before Covid-19. For example, we’re seeing fundamental changes in consumer behaviour that are likely to continue long after the global health emergency ends.”
He says that businesses will have to adapt to meet the changed demand from their buyers, but will also have to take a fresh look at how they organise themselves, how their workforce operates, and at their critical vulnerabilities, such as the supply chains that have been found wanting during this crisis.
“Dealing effectively with this disruption and ongoing uncertainty means that decision-making has become more important than ever for business leaders,” he says. “But it must be decision-making firmly rooted in genuine insight, knowledge and a structured response framework that will, as Aon’s report says, ‘guide decision-making and shore up vulnerabilities while identifying opportunities to make the organisation more agile and resilient for the future’.”
A framework approach
One approach is to use Aon’s Black Swan Decision Framework, which can help leaders process the information they receive and make the decisions in a crisis that are required.
“Containing several components – such as the need for first steps, like the creation of a crisis team, to the undertaking of regular situation assessments, and the development of a problem-solving approach – this framework also contains some key advice around the critical nature of clear, concise and transparent communication to meet the needs of an organisation’s stakeholders, from employees to clients, suppliers and the regulator,” Guffanti points out. “As a leader, communication is more important now than ever.”
React and respond, recover and reshape
Guffanti notes that with the Black Swan Decision Framework in place, businesses can implement a Crisis Management Model to provide leaders with the structure and flexibility they need in order to respond effectively.
“This includes three distinct timeframes: react and respond; recover; and reshape. The reshape stage, in particular, reflects the need for leaders to get their businesses ready for a different future than they may have been expecting pre-pandemic.”
The final element drawn from Aon’s Decision Making in Complex & Volatile Times report are considerations around business-impact actions and priorities.
“This stage looks at the five key areas of: protecting people and assets; protecting the balance sheet; maintaining or increasing revenue; managing costs; and revisiting business strategy,” says Guffanti. “By focusing on the insights and data from each of these areas, leaders and their teams will ultimately be in a much better position to make the right decisions.”
Moving back towards growth
“It’s that ability to get the decision-making right that will be critical both now and in the longer term,” Guffanti emphasises. “Leadership, communication and action are vital, and these frameworks will help give organisations and businesses the best chance of both getting through the immediate crisis and moving beyond the pandemic by protecting their people, assets and balance sheets – and ultimately thinking about how they can grow the business once again.”