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RIskyHorizons White Paper

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RIskyHorizons White Paper

  1. 1. Facing Down Black Swans   Opening eyes, minds and ears to the unpredicted rareevents – the black swans looming over risky horizons – totransform the swan song kiss-of-death into a resuscitatinglifesaver for your company. Abstract Black swans emerge out of the ordinary unpredicted events that cantake a company under. In today’s flattened global world, black swans can flyin from out of the blue or even surface unexpectedly from internal waters.Because black swans are so extraordinary, it is human nature to want to denythat such events can happen to the corporate cultures in which we live. Andwhile denial is bliss, at least for its duration, denying the threat of blackswans, real or potential, has leveled many a company, organization and evenentire cultures. Short-term success and longevity require moving beyond denial toopen eyes, ears, and minds to even the most remote threats of internal andexternal black swans. In this paper we highlight: ● Why it is natural to deny danger ● The price of maintaining a stance of denial ● The value of opening eyes, ears, and minds to high probability threats and lowest probability black swans –internal, external, narrow, and broad. We also introduce a simple methodology for identifying anderadicating denial in order to identify and address risks, including the blackswans that may be lurking in the waters outside or inside of yourorganization.riskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  2. 2. Black Swans Can Save Companies What would a catastrophic event mean to the shareholder value ofyour company? The possibilities are endless, ranging from short-term lossesto the end of dynasties and companies. A company can evaporate if thefounder denies external competitive forces, e.g. Compaq’s drive intooblivion by desktop computers in every home. An organization can be takendown if senior leaders deny what customers want, e.g. Mom-and-pop storesreplaced by big box Walmarts. While denial of the unlikely black swans mayprovide a sense of security and control, you dont ever want to experiencethe infecting limitlessness an internal or external black swan can generate. John Corzine made the fateful decision of becoming CEO withoutadequately understanding the risk MF Global was facing. Without openinghis eyes to the risks posed by more ordinary white swans or the potentialrisks of extraordinary black swans, Corzine may have appeared to provideleadership but, in reality, he blindly led the company on a catastrophic swandive. Corzine managed to keep MF Global above water from March 2010-12only to bring the company spiraling down in bankruptcy, lawsuits andfederal investigations. MF Global is still unraveling in its demise andcontinues to be sued as the turmoil unravels. Or maybe we just need to look to last year’s headlines highlighting thedisruption of the supply chain for the automotive industry. According tosenior advisors at Booz & Company in 2011, two major ‘black swan’ stylecatastrophes, the Japanese tsunami and the flooding in Thailand, forcedautomakers, including Toyota and Honda, to curtail production around theworld. Pre-black swan a full range of risk measures and detailedcontingency plans were in place by the Japanese auto industry. But theseriskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  3. 3. were developed to deal with more predictable and common risks, the whiteswans, and did not consider the low probability of external natural disasters.The tsunami and the impact of such a black swan event led to thedevastation of the supply chain in Japan for many months to come. While we are not advocating ‘doom and gloom’ or over-analysisparalysis approaches to management and leadership decision-making, thebliss of a state of denial has hard-hitting, fatal impacts when the risks of low-probability black swan events are not considered or simply ignored. In fact,our brains are hardwired to avoid black swans, as this is part of themechanism that helped our ancient ancestors survive. Today’s developed brain has more modern techniques of avoidance.Rather than strictly fleeing or hiding under a pile of rocks, we harness moreevolved mechanisms for survival. Convincing ourselves that “it’ll neverhappen to us” or “what are the chances of…” With a shrug of the shoulderswe go about our merry business, hiding under piles of work that assure us noblack swans will raise their heads. Somewhere between the bliss of denialand the paralysis of the-sky-is-falling analysis exists a logical approach topredicting, assessing and readying for risk of the high and low-probabilitykind. We call this approach risk-readiness. And with risk-readiness andRiskyHorizons strategies to increase your RiskIQ, you can learn to look outto the horizons ahead to identify black and white swans and to developeffective strategies for readying and responding should one fly your way. How about you? Are you looking ahead to risky horizons? Are yourisk-smart— thinking clearly to make decisions and take action with duediligence as opposed to inadequate diligence that leaves you exposed? Or areriskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  4. 4. you stuck on the starting line of ‘paralysis by analysis’ while yourcompetitors leap to the front of your competitive pack? Are you ready for the corporate tsunamis that can be hurled by thecompetitive marketplace or the global economy – think Compaq, BearStearns? Have you truly considered and identified the internal curve balls, thelow-probability black swan risks that leaders and teams bring to each otherwhen they resort to protecting their own turf at the expense of shareholders,customers and trusted team members, e.g. Dennis Kozlowski of TYCO? Just ask any professional hockey player who watched from the penaltybox as his team was scored against in a playoff game. When we do notconsider the risks associated with high-probability or unusual ‘black swan’events, we leave ourselves, our teams and our organizations and culturesopen to be wiped out by an unforeseen event. So if considering and planning for risk is critical to short-term successand longevity, why isn’t everybody busy working the strategic risk plan? The answer is simple and grounded in human nature: uncertainty is atthe root of denial. We humans defend against anything that is uncertainbecause uncertainty leads us to feel threatened. Uncertainty generates asense of perceived threat that leads to the flood of chemicals associated withstress. These chemicals literally make us stupid and limit our ability torealistically assess or deal with risk. What we know from brain scienceresearch is that the natural chemicals released in the face of uncertainty,change, perceived threat and loss actually shut down the front part of theriskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  5. 5. brain that lies just beneath the forehead. This is the part of the brain thatenables us to think abstractly, strategically, and innovatively—i.e., toconsider and deliberate potential solutions and to make a well-informeddecision. That’s because, too, the natural chemical deluge released alsolimits the ability to shift attention, to take different points of view, toconsider alternate choices. Instead, in the face of uncertainty, we narrow into the one point-of-view that is our natural style. We defend our view ofreality and risk and fight alternate points of view, thus limiting the lensthrough which we see risk. Denial of risk, of swans of light or black color, is the most riskybusiness and can end lives and ruin the quality of any life left in a companyor of its shareholder value. Risk is a top priority of public companies since they are now startingto learn that compliance is not enough and that commitment is required.With risk as a top priority, there is increased pressure on Boards to assurethat potential catastrophes are identified and strategies developed to dealwith even the extremes such as the ‘black swans’. Black Swan events areunlikely events that are simultaneously unexpected and random. E.g.experiencing a life-threatening curve ball or winning the World Series whenyour team is down by 5 runs with two out in the bottom of the 9th inning inthe 7th game. The unlikely events that happen in sports move markets and billionsof dollars not unlike the events that have happened on Wall Street over thepast three years. 2011 is to be known as the year of ‘bank failures’ with70+ banks failing in the US and 17 of these banks racking up billions ofriskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  6. 6. dollars of additional lawsuits still to come. Also, let us not forget the 15worst data security breaches in history has happened right on top of thesebank failures exposing Intellectual Property and Personal IdentifiableInformation into double digit billions and over 10,000 loosing their jobs dueto the SONY breach. Perhaps it is appropriate timing for boards to focus on such unlikelyevents and predictable surprises for lately the frequency of occurrence ofextremely unlikely events and predictable surprises has been increasing.Predictable Surprises have three characteristics: at least some people areaware of the problem; the problem gets worse over time; and eventually theproblem becomes a crisis much to the surprise of most. On this definitionJapan’s tsunami was a black swan but the sub-prime was not, as severalmoney managers made fortunes by betting on the market’s collapse. 2 To demonstrate the immediate need for Boards and Senior Executivesto consider Black Swans we only need to look at current events. There havebeen so many devastating events of late that there is debate as to what eventsare being considered “Black Swan versus White Swan Events”—or are theyjust predictable surprises coming from our frail and weakened globalfinancial structure? Did all of these events happen because Boards,Management and their prevailing Enterprise Risk Management (ERM)systems failed to detect predictable surprises and early warning symptoms?Did they have a strong management system and, even so, an event stilloccurred? Regardless of whether we label these potentially devastatingevents as predictable or extraordinary, as white or black swans, identifyingand planning for risk is critical to success and longevity in the marketplace.Given that denial of risk and devastation is natural, it is even more criticalthat ‘black swan’ events be identified and that the risk be evaluated andriskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  7. 7. plans made to mitigate or deal head-on. Because, what we know for certainis that such high-magnitude and low frequency events could bring downyour company, destroy your brand, and decimate shareholder value. Just as athletes in sports must assess the risk of one move over anotherand plan for contingencies and curve balls, corporate leaders and BoardMembers must override the natural tendency to tighten up, run, fight, orfreeze in response to the uncertainty inherent in risk. They must learn to getsmart and stay smart in the face of high- and low-probability unlikely eventsin order to assess risk and plan for it- the good, the bad, and the ugly, thewhite common birds and the black extraordinary swans. Effective assessment means a full-brained assessment of the horizonthat opens the lens to see the whole truth, to expand beyond the stress-makes-us-stupid-in-the-face-of-uncertainty shortsightedness. To fully assesshigh and low probability threats and risk, it is critical to harness the fourlenses of attention: internal narrow, external narrow, internal broad, andexternal broad. Assessment includes identifying the probability of the eventsoccurring. One way for a board to evaluate the potential for such events is torequire senior management to identify the top two or three events, threemaximum, for the enterprise. Even if it turns out there is no Black Swanevent exposure the process of arriving at this determination is veryuseful. The next step is that the board requires senior management tomitigate and/or transfer such risk.riskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  8. 8. Public Company Boards: Managing Enterprise Catastrophic Risks Risk is a top priority of public companies with intense financialscrutiny by investors, creditors, Dodd Frank Act, SEC Mandates forGovernance and Compliance, not to mention the “financial plague” hittingEurope. Over the past 3 years we have experienced a global epidemic offailing banks and institutions that make us all question the risk oversightprocess currently in place for these institutions. Too many current boardsstill ignore their risk-oversight responsibilities to the detriment of theirshareholders and the economy. According to a 2011 IBM survey of 1200 CFO’s only 10% of majorcorporations employ Chief Risk Officers. Many current boards are takingaction to revamp their risk oversight process by forming risk managementcommittees at the board level and new risk oversight positions within the topmanagement of their companies. Yet, given the appalling 10% identified byIBM, one could question the process for risk oversight at the board level. The greater the uncertainty of the task, the greater the amount ofinformation that has to be processed between decision makers during theexecution of the task in order to achieve a certain level of performance(Galbraith). Are boards getting relevant and timely information about risksand are boards able to control the information supply they receive to ensurethey get what is necessary to make decisions? This is where an awareness ofthe natural tendency to deny risk is critical in order to keep the clear headsrequired to search over the horizon to see the whole truth and look risk in theeye and then, with clarity of an engaged brain, to generate and lead theimplementation of smart solutions. It is imperative that board members work together with theirmanagement teams to develop risk management frameworks that ensure thatthe right and relevant information be delivered in a timely manner to thewhole board when there is a surprise event or occurrence happening and,riskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  9. 9. better yet, before its occurrence when such an event looms on the horizon.The framework for this process needs to be put in place with planning priorto any Black Swan event. The board and management must share thisprocess. According to many public company board members interviewed forthis paper, the most common theme is that boards do not readily discussrisks that are complex and hard to understand. Also, risks that need a lot ofdata points to be understood are often overlooked due to their complexity.Many board members rightfully are looking for senior management to “boilthe ocean of data down” to its simplest form so it is relevant and understoodby all board members and stakeholders. Risk oversight at the board level should not be complex. It’s usuallyproof of exceptional understanding of their jobs when senior managers can“boil an ocean of data down” to elegant and salient points for the board.Here is the key element: the board must demand and accept nothing less thanexceptional managers who have the ability to explain what they do simply.It needs to be a living process that is updated and used by all relevantstakeholders. Fundamental to implementing such a process is to assure thatboth Board Members and senior leadership hold the critical information anddata and to change their ways of working together and shift their mindsabout the reality of risk and how to proactively approach risk so as tominimize the likelihood, occurrence and impact when curve balls are hurledfrom the sidelines. Most company’s risks are as unique as their business models. A riskaudit and gap analysis can be done for any size company with the rightframework and common mission of identifying gaps in the risk oversightprocess that can be monitored, mitigated and managed.riskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  10. 10. According to a Fortune 500 Board Member who chairs an auditcommittee and is a member of three public boards, the number one priorityfor risk oversight is to enact a business continuity plan at the board andenterprise level that is tested and monitored. This type of risk planningcould save the company their brand and save them from their own financialdemise. Also, the board may find that the organization has a strong processbut not the right people to carry out the best practices on risk management.According to several other board members interviewed, the risk oversightprocess lacked the right human capital and leadership to overcome some ofthe enterprise wide risks that were identified. In these examples most of theboard members exercised their fiduciary duty and made the changes inpositions or leadership that enabled the organization to manage the risksmore effectively. While it is management’s duty to set the enterprise risk appetite andtolerance, the board ultimately must approve these measures. Boards canhelp identify “Black Swans” by challenging basic business assumptions andprovide first-mover advantage.Some of the basic principles Boards need to put on their agendas include: ● Define the corporate risk appetite and risk tolerances that will reduce the risk of ruin ● Identify the causes of failure and execute business continuity planning for the enterprise ● Develop a crisis management plan that activates a speedy response and recovery ● Verify sources and the reliability of information for quality decision- making and factor in sustainability by taking a long-term perspective when they make short-term decisionsriskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  11. 11. So if you are a board member or a senior manager reading this paper wehope you ask your self the following questions: ● Has your Board been presented with the top enterprise catastrophic risks? ● Do you know the three top catastrophic risks and their affect on the financial value of the entity and its brand equity? ● Have you opened your eyes, ears, and minds to risks in all 4 domains: external-broad, external-narrow, internal-broad, and internal-narrow? The secret to risk-readiness lies in your risk-smarts—in moving beyondthe denial of bliss to engage eyes, ears, and minds at all levels of anorganization to be assess, identify, and address risks, current and potentialincluding the low probability black swans—and then to address risks withplans and resources and commitment for implementation. In the words ofHenry Ford, who avoided obsolescence by strategically facing down blackswan risk, “Before everything else, getting ready is the secret of success.”riskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  12. 12. About the Author and ContributorsMary Beth Borgwing, Author and Partner, RiskyHorizons Group Ms. Mary Beth Borgwing is a risk and technology savvy senior executive withgeneral management, strategy, finance, technology and operations experience in financialservices, global insurance, healthcare, manufacturing, and small business marketsegments and extensive start-up and turn around experience, With a strong track recordfor breakthrough problem solving, profit and market share improvement, speedy resultsand team building, Borgwing, has held leadership roles with top professional servicessuch as Marsh (MMC), Willis Group Holdings (WSH), Arthur J Gallagher (AJG) and hasbeen the Chief Financial Officer & Operations Officers at Sentillion (MFST: US), andFAST Company. By staying ahead of the curve, Borgwing has helped guide her clientsthrough Governance, Risk, Compliance/Enterprise Risk Management (ERM/GRC)process improvement and other risk efforts. Ms. Borgwing has been a frequent speaker on risk management topics in venuesthat include Women Corporate Directors, BIO CEO Institute, American ConferenceInstitute, American Bar Association, Massachusetts, MIT Sloan School Speaker SeriesBIO, Milken Institute, and other Industry Conferences. Mary Beth is the co-founder of RiskyHorizons Group, a consulting firm thatprovides clients with a proprietary system combining proven methodologies for riskassessment and mitigation from financial analysis with field-tested strategies from brainand behavioral science to enable clients to honestly assess and address risk from multipleand differing perspectives. The process enables an organization to eradicate denial of riskand to raise its enterprise RiskIQ. RiskyHorizons’ RiskAssessment and RiskAddressmentsystem promotes accountability throughout an organization, including at the Board level,for identifying and addressing risk in key areas that foster growth and innovation. Theprocess enhances teaming and overrides resistance to change and innovation to enhanceimplementation of strategic changes aligned with achieving organizational goals andlongevity in the marketplace.Contributing AuthorDr. Pamela Brill, Partner RiskyHorizons Group A respected expert on assessing, addressing, and readying for facing risk,competition, the challenges of implementing strategy and of performing under pressure,Dr. Pamela Brill is the founder and inventor of the In The Zone methods and the authorof the “The Winner’s Way”, a proven method for achieving your personal best. Dr.riskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  13. 13. Brill’s clients and followers are the leaders who perform at the top from Fortune 500CEO’s and political leaders and elected officials on Capital Hill to nationally rankedsports teams and surgical room operating teams in the heat of competing for patients’lives. The Winners Way has proven effective for clients facing challenges from theordinary to the extremes that can blindside any one of us—life-threatening accidents andviruses, black swan events brought on by marketplace and natural disasters. Dr. Brill has served in senior leadership and consultant roles with strategy andleadership development organizations including The Tom Peters Company as Principaland working directly for Tom Peters on organizational strategy, Computer SciencesCorporation as Director and Head of The Center for Leadership and Talent Developmentfor The Americas and Consulting, BAE Systems as Confidential Advisor to the SeniorCountermeasures Lead and Team, global leadership development firm Linkage, Inc. asSenior VP of Learning Solutions and Head of the Executive Coaching Practice, andDartmouth Medical School and Medical Center as a faculty member in the Department ofPsychiatry and Clinical Psychologist. Brill has been mentored by leadership andorganizational excellence gurus, Tom Peters and Marshall Goldsmith, with whom she hasworked shoulder-to-shoulder in apprentice-like roles. Brill has served on the Board of abipartisan political organization and as a Director on the Board of the SURDNAFoundation accountable for strategically gifting $40M a year to not-for-profitorganizations, and provides pro bono programs for community agencies. Dr. Brill is the published author of hundreds of articles and of 3 books: TheWinner’s Way: A Proven Method for Achieving Your Personal Best in Any Situation(McGraw-Hill, 2004, Kindleized by Amazon, published in China and India, and inaudio); No Winner Ever Got There Without a Coach –A Guide to Personal andProfessional Success, coauthored with David Rock, founder of The NeuroleadershipInstitute, and other contributors (Insight Publishing, 2012); and Coaching for Success,coauthored with Rock, and Rudy Rudtigger, famed “Rudy” of Notre Dame Football andthe movie “Rudy!” (Insight Publishing, 2009). Brill’s commentary has been featured inInvestor’s Business Daily, Entrepreneur, Harvard Business School Press publications,The New York Times, Chicago Tribune, Washington Post, Men’s Health and Runner’sWorld magazines. Described as both educational and inspirational, Brill has presented Winner’sWay programs in keynote and executive education programs including Wharton, Babson,and Whittemore Business Schools; Smith College Executive Education for Women; USOlympic Committee; Offices of the US Senate; Genzyme; Fidelity; and State StreetBank. An avid athlete, Brill walks the talk of living ‘in the zone’ running and working outdaily to maintain longevity and stave off risks in real life.riskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  14. 14. Michael Wiebe, Principal Wiebe Associates, LLC Mr. Wiebe is a Risk Management expert with 4 decades of experience. He hasdeep practical experience leading operational (as opposed to financial) Black Swananalysis prior to and subsequent to the many published theories of Black Swans.Mike was the Risk Manager for IBM as well as a Senior Vice President at Marsh &McLennan’s Companies. (MMC) and the head of IBM Captive insurance company.Mike is the founder of Wiebe Associates, a risk management and insurance consultingfirm with diverse industry clients in that range the spectrum of public, private,manufacturing, professional services including international clients.Advisory, Boards and Faculty:The Roundtable Group: www.roundtablegroup.com Mr. Wiebe is a member of theRoundtable Expert Network a network of professionals and academic experts availablefor consulting, speaking, teaching and expert witness testimony to attorneys, investmentmanagers and other businesses.Gerson Lehman Group: www.glgroup.com Mr. Wiebe is a member of the GLG Counciland the Scholars Program which provides advisor services to GLG clients to understandkey risk management events, critical trends and emerging opportunities.Member of faculty at Practicing Law Institute www.pli.edu. PLI is a continuing legaleducation organization chartered by the Regents of the University of the State of NY forproviding the legal community with professional education.US Technology Resources: www.ustri.com Former Board Member of US TechnologyResources, the US division of the $5b Comcraft Group headquartered in India. USTechnology is an information technology and BPO services provider.China Business Knowledge (CBK): www.chinabusinessknowledge.com Board Advisorof CBK, a startup digital aggregator of critical business information for China based USlisted companies for mitigating investor risk.riskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing
  15. 15. References"Black Swan." Definition. Investopedia. Web. 02 May 2012. <http://www.investopedia.com/terms/b/blackswan.asp>.Brill, Pam. The Winners Way: A Proven Method for Achieving Your Personal Best in Any Situation. New York: McGraw-Hill, 2004. Print.Galbraith, J.R. "Organizational Design." Babson College Faculty Web Server. Babson College, 1974. Web. 02 May 2012. <http://faculty.babson.edu/krollag/org_site/org_theory/Scott_articles/galbraith_or gdes.html>.Harvey, Vince. "The Last Word." Financial Times, 8 Aug. 2011. Web. 02 May 2012. <http://www.ft.com/ftfm/the-last-word>.Taleb, Nassim. The Black Swan: The Impact of the Highly Improbable. New York: Random House, 2007. Print.riskyhorizons@gmail.com  617.699.0525Mary Beth Borgwing

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