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Risk management in the Black Swan era

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If the financial crisis and Great Recession did anything, they made clear that improbable events can happen.

The whole lexicon of risk management has changed, as terms such as Fat Tail  and Black Swans generate new discussions within boards rooms and executive suites. PwC offers an interesting take on the subject, noting that many companies have highly developed internal risk management programs, but have fallen behind on programs that can monitor and mitigate external risks.

The survey says that Black Swan events, will be "among the greatest risks facing companies over the next 18 months. These events include those emanating from geopolitical events, economic developments, new technologies, talent and labor resources, global trade, commodity costs and terrorism."

By definition, these are events that take companies by surprise. The research found that more than 50 percent of companies say they are not doing enough to manage these as-yet unspecified risks.  PwC offers the following tips:

  • Use "reverse stress-testing" to identify vulnerabilities. Rather than running a typical stress-testing scenario, companies are starting from a failure scenario and working backward to understand their organization's level of resilience.
  • Manage crises as if they occur every day. Unpredicted risk events will happen, and companies must go beyond a disaster recovery mindset to ensure they can manage these events and assure business continuity. 
  • Enable a company-wide response to emerging threats. Threats on a scale that could endanger a firm's viability tend to require firm-wide responses. Companies should be prepared to respond to an actual risk event that may require firm-wide integration of multiple departments.
  • Integrate risk management and strategic planning. Strategic risks that often jeopardize a firm's survival are usually embedded within particular corporate strategies, therefore integration of strategy and risk is necessary to manage these risks effectively.

 

  • Do not focus exclusively on the downside of risk events. Firms must plan effectively for unexpected success, such as providing for better-than-expected product launches, or developing innovative ways to provide finance to reach new customers.

For more:
- here's a copy of the report
- here's a summary

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