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Are you prepared for a black swan?

UANTCHERN LOH looks at some black swan crises and how risk intelligence can prepare organisations for them

I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the Moon and returning him back safely to the Earth. On May 25, 1961, President John F Kennedy committed the United States of America to the unknown, and for many, the unthinkable. At the time of the speech, the US had only 15 minutes of human spaceflight experience. The first crisis of the Apollo programme occurred when a fire swept through the spacecraft of Apollo 1 during a pre-flight test. Three astronauts died in this tragic accident. The exhaustive investigation of the fire resulted in recommendations that led to major design and engineering modifications, revisions to test planning, manufacturing processes and procedures, and quality control.

By all accounts, the design changes were successful and worth the subsequent delay of almost 21 months before the first successful launch and completion of a manned mission. During the Apollo 11 Moon landing, the spacecraft computer unexpectedly began giving errors which threatened to abort the landing. Mission Control in Houston had only a few seconds to determine that it was safe to proceed, which saved the mission. Apollo 11 landed on the Moon with less than 30 seconds worth of fuel left. Neil Armstrong, the commander of Apollo 11, became the first man to step on the Moon. Of course, the most famous crisis of the Apollo programme was the ill-fated Apollo 13 mission. Launched on 11 April 1970, Apollo 13 was not broadcast over the air. The television networks had decided then that travelling to the Moon was a routine occurrence. No one was watching.

Two days after its launch, the Apollo 13 spacecraft was crippled by an explosion. Astronaut James Lovells (played by actor Tom Hanks in the movie Apollo 13) understated radio message to Mission Control was Houston, weve had a problem here. An oxygen tank in the Apollo 13 spacecraft had exploded and crippled the spacecraft. Facing imminent death and insurmountable technical challenges, the only solution was for the astronauts to abort their planned landing, swing around the Moon, and return on a trajectory back to Earth. Apollo 13 proved the programmes ability and resilience to weather a major crisis and bring the astronauts back home safely. The Apollo 13 crisis was a black swan. Before black swans were discovered in Australia in the 17th century, people thought that all swans were white. In Nassim Nicholas Talebs 2007 bestselling book, The Black Swan: The Impact of the Highly Improbable, the author referred to a black swan as an event characterised by three attributes: It is unpredictable. It has a massive impact. In spite of its unpredictability, we create explanations for the occurrence of a black swan after it has occurred. Modern day examples of black swans include Google, Facebook, wikis, 9/11 and the current financial crisis. The black swan logic makes the unthinkable, the unexpected, and the unknown far more relevant than what you know.

Past and recent cases of frauds, corporate failures and financial crises have highlighted the extensive range of scenarios to which organisations are exposed, and unprepared for. In the much quoted case study on Polaroid, it is evident that the organisations decline started when top executives refused to acknowledge the emergence of a black swan - challenges posed by digital technology and the preoccupation to preserve a core business that was fast becoming obsolete. These scenarios have caused risk intelligence to be at the top on the boards agenda. Risk intelligence begins with a clear understanding that each organisation has to purposefully evolve the relationships that address key measures, mould management behaviour, and align it with the interests of key stakeholders. The strong relationship between Mission Control on Earth and the astronauts ensured that during a routine mission, everyone was doing the things right. The same relationship also ensured that personal accountability resulted in the right things being done in a time of crisis. The Mission Controls focal point is the Flight Control Room. From the moment a spacecraft clears its launch tower until it lands back on Earth, it is in the hands of the flight controllers. Flight controllers are responsible for the success of the mission, and for the lives of the astronauts under their watch. The flight controllers creed states that they must always be aware that suddenly and unexpectedly they may find themselves in a role where their performance has ultimate consequences. The board and the CEO of each organisation must have a similar creed and personal accountability. They must prepare the organisation through a risk intelligent structure that encompasses: A monitoring and incentive system that ensures proper checks and balances in its day-to-day operations. A key focus of this dimension is a sound and robust system of internal controls which is effective and generally complied with. A clear linkage to the forces operating in the market for corporate control, which ensures that market discipline may be enforced on malfunctioning management and boards.

Modern day examples of black swans include Google, Facebook, wikis, 9/11 and the current financial crisis. The black swan logic makes the unthinkable, the unexpected, and the unknown far more relevant than what you know.

A proper disclosure regime that ensures all relevant market moving news is made available to the investing public such that organisations with good corporate governance are rewarded with higher valuations. By applying a structured, proactive and integrated approach to risk intelligence, organisations have discovered what it takes for them to build the resilience needed to withstand systemic discontinuities and adapt to new risk environments. In a period of economic uncertainty, businesses face increased economic pressures and look to cut costs. This makes it harder for organisations to maintain strong corporate governance as managements attention turns to more immediate operational concerns. The tone at the top is crucial during a crisis. On the flipside, arrogance and greed permeate organisations during boom years. Will the organisations creed be compromised when it matters most? When properly managed, risk intelligence can be the means to achieve enterprise resilience by enabling organisations to align their strategy, operations, management systems, governance structure, and decision-support capabilities so as to uncover and adjust to continually changing risks, endure disruptions to their primary earnings drivers. Risk intelligence can generate insights on impending industry trends (which could be either opportunities or threats), devise action plans to deal with these trends, monitor the trends closely, and create advantages over less adaptive competitors. Apollo 11, 12, 14, 15, 16 and 17 were the six manned missions that resulted in astronauts successfully landing on the moon. Apollo 13 was also a success in its own right. NASA called the Apollo 13 mission a successful failure, in that the astronauts were successfully brought home despite not landing on the moon. Risk intelligence can prepare organisations for crises and achieve both success and successful failures.

NASA called the Apollo 13 mission a successful failure, in that the astronauts were successfully brought home despite not landing on the moon. Risk intelligence can prepare organisations for crises and achieve both success and successful failures.
40 years after landing on the Moon, the US is facing a black swan crisis that was unexpected and with still many unknown consequences. In a speech to Congress on Feb 24, 2009, President Barack Obama said: But while our economy may be weakened and our confidence shaken, though we are living through difficult and uncertain times, tonight I want every American to know this: We will rebuild, we will recover, and the United States of America will emerge stronger than before. The weight of this crisis will not determine the destiny of this nation. The answers to our problems dont lie beyond our reach. They exist in our laboratories and our universities, in our fields and our factories, in the imaginations of our entrepreneurs and the pride of the hardestworking people on Earth. Can the US emerge stronger than before? The answer lies in the Science magazine, which observed in November 1968 that the space programmes most valuable spin-off of all will be human rather than technological: better knowledge of how to plan, coordinate, and monitor the multitudinous and varied activities of the organisations required to accomplish great social undertakings. Starting with 15 minutes of space-flight experience, the Apollo programme had weaved resilience into the fabric of the American psyche and made the country tough and competent. Is your organisation prepared for a black swan?

Uantchern Loh is the regional leader for Deloittes Enterprise Risk Services practice in Asia-Pacific. This article was first published in The Business Times on March 25, 2009.

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