ANSIE RAMALHO: Of boards and black swans
Could boards of directors have foreseen Covid-19? Maybe. But contrary to what some say, you can prepare for a black swan
By now, we’ve all been through the emotional stages of the corona-virus crisis: denial, anger, bargaining (and all the messiness in between) to reluctant acceptance. It is time to figure it out — particularly in the boardroom, where dealing with this new reality and its implied disastrous possibilities will weigh heavily on SA’s directors.
It was statistician Nassim Taleb who popularised the term "black swan" in his bestselling book The Black Swan: The Impact of the Highly Improbable. He explained that black swan events share three characteristics: they are improbable and rare; they have extreme consequences; and third, with the benefit of hindsight, they appear to have been entirely predictable.
Some commentators, including Taleb, who predicted a corona-virus-like risk in his 2007 book, are not convinced the coronavirus was an unpredictable outlier. They point to various epidemic outbreaks in the past and warnings issued by experts about the lack of preparedness for epidemics. So, admittedly, the coronavirus should have been on the radar of our expectations. But whether it’s a black or somewhat grey swan, it’s fair to say the disastrous societal and economic consequences caught us wholly unprepared.
There are a couple of lessons for the boardroom from this ordeal. Perhaps the most sobering is that we are clearly very bad at predicting the future. Many studies confirm this.
So, knowing that disastrous events are inevitable, the lesson is to improve the odds of early identification by staying attuned to the environment and anticipating trends. Still, boards will have to make peace with the fact that despite their best efforts, the truly unpredictable remains, well, unpredictable.
The worrying thing about classifying the virus as a black swan is that it may allow governments and business leaders to put their heads in the sand and plead helplessness.
Which they are not — even if it is an unpredictable outlier.
The fact is, we can reduce our vulnerability to these events by strengthening the resilience of the organisation and its ability to absorb shocks. This is where boards must fill the gap — and this is vital because the impact of black swan events is likely to intensify as our economic, political and environmental systems become more interconnected.
But preparing for black swans goes beyond traditional risk management. It requires an assessment of the extent to which an organisation relies upon its supply chain, customer base, human and financial resources and technology systems. And business leaders must use different scenarios to stress-test business continuity plans.
Another lesson comes from Mother Nature, the ultimate risk engineer. Contrary to what business schools teach — that redundancy and efficiency are incompatible — Mother Nature uses redundancy as an insurance mechanism.
The world of technology does too. In data centres, a fault-tolerant system provides full hardware redundancy, as two or more identical systems often run in tandem so there’s a backup should the main system fail. Building a measure of redundancy into businesses is a buffer in times of crisis.
Still, the nature of black swans is that despite the best-laid plans, they may still threaten the survival of an organisation. So how do you respond when they happen?
The ostrich reaction is to wait for the crisis to pass. But this won’t work — we must respond as the situation unfolds. We must explore novel solutions, and guard against panic or emotion-driven decisions.
A last word to boards: don’t waste this. The virus is a chance to become more agile so as to thrive in an increasingly complex world. Just saying "We couldn’t see this coming" won’t cut it any more.
- Ramalho is a professional director and trainer at the Institute of Directors