BOOK REVIEW: Michael Lewis’s The Fifth Risk
Lessons to learn from Trump as president, natural disasters and other unthinkable scenarios
The longest US government shutdown yet — 35 days — was triggered by a 72-year-old man-child, prone to temper tantrums, in the White House. And, unrepentant, he’s threatened to do it again.
Right now, Donald Trump’s presidency represents a ramped-up quotient of risk all over the world. Businesses are enmeshed in the trade wars he has instigated, entangled in the uncertainty of new geopolitical complications and exposed to unmitigated climate change which threatens agricultural inputs, and even water, within supply chains. Any perceived honeymoon — the short-lived mini-surge in US stock markets — is over, and companies must now compensate for the clear risks caused by an unprecedented, uninterested, and often openly hostile American presidency.
Michael Lewis’s new book, The Fifth Risk (Penguin Random House), is an unusual, intriguing fusion: a withering indictment of the Trump administration, a summation — with case study examples — of the excellence of selected US government departments, and a warning of the potentially devastating consequences of a government being led by people who haven’t any inclination to do what a government should do.
The book’s first 100 pages are a staggering indictment of the disdain with which Trump views government’s very existence, and by implication the broader American public. Transition — legislated to happen whenever there is a change in administration — was scorned; entire departments were shunned into nonfunctioning shells; and incompetent associates with no relevant skills have, in some cases, eventually been put in charge of key areas of government.
The US department of energy is an innocuous name for a mission-critical department overseeing the supervision of nuclear facilities, including nuclear weapons. Its services are vital in other aspects too, such as US power and utilities grids. Trump’s appointment as secretary of energy? Rick Perry, a former Texas governor, who, when campaigning in the 2011 presidential primaries, went on record as wanting to close the department. (He admitted having no idea about what the department does, a status Lewis believes is ongoing.) "There are preposterous people running the government. Trump’s belief has to be that it really doesn’t matter," writes Lewis.
There are enormous implications for the management of corporate risk. Today, business leaders understand financial market volatility, geopolitical threats, and trade war or protectionist repercussions for global supply chains. But they may still be blinkered, even blind, to the least salient but most threatening risks, those of randomness. Genuine risk management requires stretching the imagination — and not just reimagining a recent crisis, or one concocted by Hollywood, but the near unimaginable. This is where businesses’ enterprise risk management models fall short; in attempting to simplify for easier comprehension, they routinely start with a matrix plotting probability and consequence, with most attention paid to the "high probability/major consequence" quadrant. The logic can’t be faulted — but the failure of imagination may be fatal.
This is often compounded by an optimism bias, weighing predictions towards ultimately favourable outcomes: even on the brink of a dreadful event, we imagine it catalysing a fix for problems which would never have otherwise been addressed.
Lewis puts it this way in relation to Trump, and the probable expectations of reasonable Republicans: "You might have good reason to pray for a tornado, whether it comes in the shape of swirling winds, or a politician. You imagine the thing doing the damage that you would like to see done, and no more. It’s what you fail to imagine that kills you."
Lewis isn’t the first to flag the venal mismanagement of government under Trump, but his book may be one of the first to quantify it, dispassionately, and to lay bare the ramifications. "We’ve allowed Trump to come in and mistreat dedicated public servants with expert knowledge or a commitment [to public good]. We don’t even know what price we are going to pay. These people manage existential risks." His words reverberate phrases from Nassim Nicholas Taleb’s prescient and insightful book The Black Swan (2007), in which Taleb defined hugely unexpected, outlier occurrences, having an extreme impact, but which human nature retrospectively made explainable and predictable. Taleb’s Black Swan concept evidences that what we don’t know is far more relevant than what we do know: "Owing to this misunderstanding of the causal chains between policy and actions, we can easily trigger Black Swans thanks to aggressive ignorance — like a child playing with a chemistry kit."
World-class companies have strong competences in macro-strategic and financial risk considerations — those lurking around financial bourses, economic tremors and demographic shifts. They are closely observant as to merger & acquisition threats, and hawk-eyed on competitors’ new product development and marketing strategies. But they are often weak in analysing operational risk exposure, and they underplay, or even ignore, the very thought of a crisis-inducing Black Swan. The effect is an indecisiveness around planning for the unexpected.
Ironically, the excellence of many global supply chains contributes to their fragility in the new business context. They rely on unfettered trade, predictable government policies and stable regulatory environments; with these criteria thrown into doubt, the connections of worldwide value networks, with diversified access to markets and materials, are now exposed to forces of flux and fracture.
However, "How to fix things?" is the wrong question. Risk resilience is about prevention, not treatment. A major corporate dilemma is that few rewards are allocated to smart decisions around preventative measures, because they work only in the non-occurrence. There’s a salutary lesson in the Fukushima catastrophe of March 2011, when a magnitude-9 earthquake off northeastern Japan triggered a savage tsunami. Japanese prosecutors are testing the concept of corporate governance and accountability: the former chair and two vice-presidents of Tokyo Electric Power Co face possible five-year prison terms for not extrapolating the foreseeability of a tsunami to its worst-case scenario, its maximum potential impact.
People, evidently, are hardwired for optimism. But corporate resilience vests in iterative management processes, systems designed for constant monitoring and control — even for the little things. In 1986 the Challenger space shuttle exploded, a tragedy traced to tiny O-ring gasket seal flaws. Subsequently named, the O-ring theory posits that complex systems become hugely reliant on the full functioning of even the tiniest, single part. Similarly, the 2010 BP Deepwater Horizon disaster — attributable to a dead battery and faulty wiring on a blowout preventer — testifies to the enormous consequences of not attending to details, in this case routine but vital maintenance.
Passivity, or innate fatalism, may be the most damaging of all conditions. The avoidance of action worsens the risk. Climate change is an example: the threat looms so large that it foreshadows any sense of immediacy; even as we experience its current impact, we feel powerless on an individual level. Helpless inevitability morphs easily into shoulder-shrugging resignation.
Perhaps a new-normal effect of Trump’s presidency will be the end of naive predictions of the future based on a stable past.
In the years ahead, the most crucial trait in a businessperson’s outlook or personality might be a pessimistic bent.
CASE STUDIES: The dark, disturbing effects of Black Swans on business
Iceland’s Eyjafjallajökull volcanic eruption caused a week of turmoil in halting or severely disrupting European air travel and logistics in April 2010.
Almost simultaneous to Eyjafjallajökull, in the Gulf of Mexico BP’s Deepwater Horizon rig exploded, killing 11 workers and spewing 3-million barrels of oil into the ocean. The environmental cost is unquantifiable; some species may never recover. BP’s market capitalisation halved within two months of the disaster, with an overall cost to the company of about $62bn.
Sony suffered a huge cyberattack, emanating from North Korea, in December 2014. It cost the company about $100m — 20% of its film division’s annual profits — but immeasurably more in reputation.