Black swans - unlikely, unexpected events that change paradigms - justify investment in ERM but now there is even greater justification with the advent of black elephants - looming disasters that are visible but no one wants to address or deal with them. History teaches us the importance of building resilient organizations comprised of people that are self-confident, believe in each other, and feel a sense of responsibility to control their collective fate for the better.
“In the panic of the Great Plague, Athenians had experienced something about their world they would never purge and revealed something about themselves they could never forget. Gone were the days when they could comfortably see themselves in the words Pericles spoke in his famed funeral oration at the beginning of the Peloponnesian War, before the Plague carried him off to a less-than-glorious death: We are not suspicious of one another . . . a spirit of reverence pervades our public acts; we are prevented from doing wrong by respect for the authorities and for the laws.” The Great Plague tested this Athenian self-conception and found it wanting. Who people collectively believe they are is of the utmost importance, particularly in a democracy where the people are tasked with the grave responsibility of government. Self-government requires self-confidence. A democracy is unlikely to survive when the people have grown unsure of themselves and their leaders, laws, and institutions.” - K. Kelaidis, What the Great Plague of Athens Can Teach Us Now, The Atlantic (March 23, 2020).
Part I of this article series discussed how the coronavirus pandemic was reshaping the business landscape and affecting companies like Hertz, a 102 year-old iconic institution in the rental car industry (My childhood memories of television advertising include watching Hertz commercials showing O.J. Simpson, arguably the most famous professional football player of his day, running through airports to the tagline: “The superstar in a rent-a-car.”). We pointed out that prior to the pandemic, Hertz and others (e.g., J.C. Penney) had made numerous strategic mistakes, accumulated debt and were in such bad shape that the pandemic simply finished them off.
Even though enterprise risk management (“ERM”) is a new field that is still finding its way, an argument can be made that a well built and functional ERM framework could have made companies like Hertz and J.C. Penney more resilient. Building ERM infrastructure takes committed leadership, however, and that requires an appreciation of history and understanding the risk posed by black elephants - looming disasters that are visible but no one wants to address or deal with them.
One of my favorite writers on the rise of globalization is Thomas Friedman of the New York Times. In 2014, Friedman wrote an article about a new phrase - black elephant - that he just learned about while listening to a talk given by Adam Sweidan, a British investor and environmentalist, at the World Parks Congress in Sydney, Australia
(T. Friedman, Stampeding Black Elephants, New York Times (Nov. 22, 2014). Sweidan explained that a black elephant was a cross between “a black swan” (an unlikely, unexpected event with enormous ramifications) and the “elephant in the room” (a problem that is visible to everyone, yet no one still wants to address it) even though one day it will have momentous consequences.
A 2020 example of a black elephant is the coronavirus pandemic - an entirely predictable consequence of the age we live in. Frank Snowden, a historian of pandemics and Yale professor, explains:
Like all pandemics, COVID-19 is not an accidental or random event. Epidemics afflict societies through the specific vulnerabilities people have created by their relationships with the environment, other species, and each other. Microbes that ignite pandemics are those whose evolution has adapted them to fill the ecological niches that we have prepared. COVID-19 flared up and spread because it is suited to the society we have made. A world with nearly eight billion people, the majority of whom live in densely crowded cities and all linked by rapid air travel, creates innumerable opportunities for pulmonary viruses. At the same time, demographic increase and frenetic urbanization lead to the invasion and destruction of animal habitat, altering the relationship of humans to the animal world. Particularly relevant is the multiplication of contacts with bats, which are a natural reservoir of innumerable viruses capable of crossing the species barrier and spilling over to humans. F. Snowden, Epidemics and Society, From the Black Death to the Present, at ix (Preface to the Paperback Edition, 2020)(emphasis added).
The point is that pathogens and a myriad of other challenges that come with globalization (e.g., increased potential for cyber crime) require business leaders to build better infrastructures for risk-taking. Friedman puts it succinctly: “technically speaking, globalization is inevitable. How we shape it is not.” (T. Friedman, How We Broke the World: Greed and Globalization Set Us Up for Disaster, New York Times (May 30, 2020).
Knowing that global capitalism is here to stay, ERM can be a vehicle that helps organizations summon the collective energy to do the necessary things, especially things that are big and hard. For guidance on the way forward, we can turn to the lessons of history, starting with the Great Plague of Athens, a typhus or typhoid epidemic that swept through the city in 430 BC. Thucydides, an Athenian general, is credited with writing the best ancient account of the plague (History of the Peloponnesian War) which led to him being called the father of political realism (K. Kelaidis, What the Great Plague of Athens Can Teach Us Now, The Atlantic (March 23, 2020)). His perspective was derived from counting and then comparing instances of selflessness and courage, and those of selfishness and cowardice. Noting that the latter strongly outweighed the former, Thucydides believed that the plague undermined cooperation and collaboration, the underpinnings of Athenian democratic state (and the first of its kind), as too many of his fellow citizen pursued their own personal interests and security, instead of the collective good.
Why? Thucydides concluded that “too many citizens had grown unsure of themselves and their leaders, laws and institutions.” (Id.)
Thucydides’ assessment of the downfall of Athenian democracy matches that of Thomas Friedman’s assessment of what ails American institutions, including the business world. Returning to the subject of black elephants and globalization in May 2020, six years after his initial column, Friedman wrote:
“As the world gets more deeply intertwined, everyone’s behavior - the values that each of us bring to this interdependent world - matters more than ever. And therefore, so does the “Golden Rule.” It’s never been more important. Do unto others as you wish them to do unto you, because more people in more places in more ways on more days can now do unto you and you unto them like never before.” (T. Friedman, How We Broke the World: Greed and Globalization Set Us Up for Disaster, New York Times (May 30, 2020).
Using the coronavirus pandemic and cyber crime as examples, the next two sections will discuss how building an ERM infrastructure can help us better cope with black elephants and other forms of uncertainty in the modern age.
Part I of this article series discussed how the coronavirus pandemic was reshaping the business landscape and affecting companies like Hertz, a 102 year-old iconic institution in the rental car industry (My childhood memories of television advertising include watching Hertz commercials showing O.J. Simpson, arguably the most famous professional football player of his day, running through airports to the tagline: “The superstar in a rent-a-car.”). We pointed out that prior to the pandemic, Hertz and others (e.g., J.C. Penney) had made numerous strategic mistakes, accumulated debt and were in such bad shape that the pandemic simply finished them off.
Even though enterprise risk management (“ERM”) is a new field that is still finding its way, an argument can be made that a well built and functional ERM framework could have made companies like Hertz and J.C. Penney more resilient. Building ERM infrastructure takes committed leadership, however, and that requires an appreciation of history and understanding the risk posed by black elephants - looming disasters that are visible but no one wants to address or deal with them.
One of my favorite writers on the rise of globalization is Thomas Friedman of the New York Times. In 2014, Friedman wrote an article about a new phrase - black elephant - that he just learned about while listening to a talk given by Adam Sweidan, a British investor and environmentalist, at the World Parks Congress in Sydney, Australia
(T. Friedman, Stampeding Black Elephants, New York Times (Nov. 22, 2014). Sweidan explained that a black elephant was a cross between “a black swan” (an unlikely, unexpected event with enormous ramifications) and the “elephant in the room” (a problem that is visible to everyone, yet no one still wants to address it) even though one day it will have momentous consequences.
A 2020 example of a black elephant is the coronavirus pandemic - an entirely predictable consequence of the age we live in. Frank Snowden, a historian of pandemics and Yale professor, explains:
Like all pandemics, COVID-19 is not an accidental or random event. Epidemics afflict societies through the specific vulnerabilities people have created by their relationships with the environment, other species, and each other. Microbes that ignite pandemics are those whose evolution has adapted them to fill the ecological niches that we have prepared. COVID-19 flared up and spread because it is suited to the society we have made. A world with nearly eight billion people, the majority of whom live in densely crowded cities and all linked by rapid air travel, creates innumerable opportunities for pulmonary viruses. At the same time, demographic increase and frenetic urbanization lead to the invasion and destruction of animal habitat, altering the relationship of humans to the animal world. Particularly relevant is the multiplication of contacts with bats, which are a natural reservoir of innumerable viruses capable of crossing the species barrier and spilling over to humans. F. Snowden, Epidemics and Society, From the Black Death to the Present, at ix (Preface to the Paperback Edition, 2020)(emphasis added).
The point is that pathogens and a myriad of other challenges that come with globalization (e.g., increased potential for cyber crime) require business leaders to build better infrastructures for risk-taking. Friedman puts it succinctly: “technically speaking, globalization is inevitable. How we shape it is not.” (T. Friedman, How We Broke the World: Greed and Globalization Set Us Up for Disaster, New York Times (May 30, 2020).
Knowing that global capitalism is here to stay, ERM can be a vehicle that helps organizations summon the collective energy to do the necessary things, especially things that are big and hard. For guidance on the way forward, we can turn to the lessons of history, starting with the Great Plague of Athens, a typhus or typhoid epidemic that swept through the city in 430 BC. Thucydides, an Athenian general, is credited with writing the best ancient account of the plague (History of the Peloponnesian War) which led to him being called the father of political realism (K. Kelaidis, What the Great Plague of Athens Can Teach Us Now, The Atlantic (March 23, 2020)). His perspective was derived from counting and then comparing instances of selflessness and courage, and those of selfishness and cowardice. Noting that the latter strongly outweighed the former, Thucydides believed that the plague undermined cooperation and collaboration, the underpinnings of Athenian democratic state (and the first of its kind), as too many of his fellow citizen pursued their own personal interests and security, instead of the collective good.
Why? Thucydides concluded that “too many citizens had grown unsure of themselves and their leaders, laws and institutions.” (Id.)
Thucydides’ assessment of the downfall of Athenian democracy matches that of Thomas Friedman’s assessment of what ails American institutions, including the business world. Returning to the subject of black elephants and globalization in May 2020, six years after his initial column, Friedman wrote:
“As the world gets more deeply intertwined, everyone’s behavior - the values that each of us bring to this interdependent world - matters more than ever. And therefore, so does the “Golden Rule.” It’s never been more important. Do unto others as you wish them to do unto you, because more people in more places in more ways on more days can now do unto you and you unto them like never before.” (T. Friedman, How We Broke the World: Greed and Globalization Set Us Up for Disaster, New York Times (May 30, 2020).
Using the coronavirus pandemic and cyber crime as examples, the next two sections will discuss how building an ERM infrastructure can help us better cope with black elephants and other forms of uncertainty in the modern age.
RSS Feed