{"id":34727,"date":"2010-09-13T09:15:23","date_gmt":"2010-09-13T08:15:23","guid":{"rendered":"http:\/\/www.corporate-eye.com\/blog\/?p=34727"},"modified":"2020-08-13T11:22:19","modified_gmt":"2020-08-13T10:22:19","slug":"corporate-governance-black-swans","status":"publish","type":"post","link":"https:\/\/www.corporate-eye.com\/main\/corporate-governance-black-swans\/","title":{"rendered":"Corporate Governance, Ostriches and Black Swans"},"content":{"rendered":"<p>Simply put, a Black Swan event is one that has a low chance of happening but if it does the impact could be catastrophic. The most current example is the BP oil spill in the USA.<\/p>\n<p>Underpinning Black Swans are some interesting philosophical and psychological factors of human frailties.<\/p>\n<div class=\"clearall\"><\/div>\n<blockquote ><p>A black swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was. The astonishing success of Google was a black swan; so was 9\/11. For Nassim Nicholas Taleb (author The Black Swan: The Impact of the Highly Improbable), black swans underlie almost everything about our world, from the rise of religions to events in our own personal lives.<\/p>\n<p>Why do we not acknowledge the phenomenon of black swans until after they occur? Part of the answer, according to Taleb, is that humans are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time and time again fail to take into consideration what we don\u2019t know. We are, therefore, unable to truly estimate opportunities, too vulnerable to the impulse to simplify, narrate, and categorize, <strong>and not open enough to rewarding those who can imagine the \u201cimpossible.\u201d<\/strong><\/p>\n<p><a href=\"https:\/\/operationalrisk.blogspot.com\/2014\/01\/black-swan-strategy-execution-for.html\">Black Swan: Strategy Execution for the &#8220;Outlier&#8221;<\/a><\/p>\n<\/blockquote>\n<div class=\"clearall\"><\/div>\n<p>When Black Swan events occur, shareholders can suffer significant losses. Forbes magazine in their article, <a href=\"http:\/\/www.forbes.com\/2010\/06\/18\/bp-gulf-of-mexico-spill-markets-streettalk-lenzner.html\"><em>Of Brown Pelicans And Black Swans<\/em><\/a> chronicled the financial impact of various corporate Black Swans&#8211;<\/p>\n<table class=\"simpletable\" width=\"90%\" cellspacing=\"0\" cellpadding=\"0\">\n<tbody>\n<tr class=\"tablehead\">\n<td valign=\"top\"><\/td>\n<td valign=\"top\">\n<p><strong>Company<\/strong><\/p>\n<\/td>\n<td valign=\"top\">\n<p><strong>Start Date<\/strong><\/p>\n<\/td>\n<td valign=\"top\">\n<p><strong>End date<\/strong><\/p>\n<\/td>\n<td valign=\"top\">\n<p><strong>Market cap<br \/>(start date, in millions)<\/strong><\/p>\n<\/td>\n<td valign=\"top\">\n<p><strong>Market cap<br \/>(end date, in millions)<\/strong><\/p>\n<\/td>\n<td valign=\"top\">\n<p><strong>Money Lost<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p>XOM<\/p>\n<\/td>\n<td>\n<p>Exxon Mobil<\/p>\n<\/td>\n<td>\n<p>3\/24\/89<\/p>\n<\/td>\n<td>\n<p>4\/10\/89<\/p>\n<\/td>\n<td>\n<p>55,275<\/p>\n<\/td>\n<td>\n<p>52,170<\/p>\n<\/td>\n<td>\n<p><strong>3,105<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr class=\"altrow\">\n<td>\n<p>MS<\/p>\n<\/td>\n<td>\n<p>Morgan Stanley<\/p>\n<\/td>\n<td>\n<p>9\/10\/01<\/p>\n<\/td>\n<td>\n<p>9\/17\/01<\/p>\n<\/td>\n<td>\n<p>45,171<\/p>\n<\/td>\n<td>\n<p>39,259<\/p>\n<\/td>\n<td>\n<p><strong>5,912<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p>BAC<\/p>\n<\/td>\n<td>\n<p>Bank of America<\/p>\n<\/td>\n<td>\n<p>9\/10\/01<\/p>\n<\/td>\n<td>\n<p>9\/17\/01<\/p>\n<\/td>\n<td>\n<p>92,439<\/p>\n<\/td>\n<td>\n<p>87,147<\/p>\n<\/td>\n<td>\n<p><strong>5,291<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr class=\"altrow\">\n<td>\n<p>MAR<\/p>\n<\/td>\n<td>\n<p>Marriott International, Inc<\/p>\n<\/td>\n<td>\n<p>9\/10\/01<\/p>\n<\/td>\n<td>\n<p>9\/17\/01<\/p>\n<\/td>\n<td>\n<p>9,996<\/p>\n<\/td>\n<td>\n<p>7,892<\/p>\n<\/td>\n<td>\n<p><strong>2,104<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p>BID<\/p>\n<\/td>\n<td>\n<p>Sotheby&#8217;s<\/p>\n<\/td>\n<td>\n<p>9\/10\/01<\/p>\n<\/td>\n<td>\n<p>9\/17\/01<\/p>\n<\/td>\n<td>\n<p>636<\/p>\n<\/td>\n<td>\n<p>550<\/p>\n<\/td>\n<td>\n<p><strong>85<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr class=\"altrow\">\n<td>\n<p>AXP<\/p>\n<\/td>\n<td>\n<p>American Express Company<\/p>\n<\/td>\n<td>\n<p>9\/10\/01<\/p>\n<\/td>\n<td>\n<p>9\/17\/01<\/p>\n<\/td>\n<td>\n<p>40,563<\/p>\n<\/td>\n<td>\n<p>35,048<\/p>\n<\/td>\n<td>\n<p><strong>5,515<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p>BK<\/p>\n<\/td>\n<td>\n<p>The Bank of New York Mellon Corporation<\/p>\n<\/td>\n<td>\n<p>9\/10\/01<\/p>\n<\/td>\n<td>\n<p>9\/21\/01<\/p>\n<\/td>\n<td>\n<p>27,269<\/p>\n<\/td>\n<td>\n<p>22,555<\/p>\n<\/td>\n<td>\n<p><strong>4,714<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr class=\"altrow\">\n<td>\n<p>XOM<\/p>\n<\/td>\n<td>\n<p>Exxon Mobil<\/p>\n<\/td>\n<td>\n<p>8\/29\/05<\/p>\n<\/td>\n<td>\n<p>10\/21\/05<\/p>\n<\/td>\n<td>\n<p>368,346<\/p>\n<\/td>\n<td>\n<p>349,115<\/p>\n<\/td>\n<td>\n<p><strong>19,231<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p>COP<\/p>\n<\/td>\n<td>\n<p>Conoco Phillips<\/p>\n<\/td>\n<td>\n<p>8\/29\/05<\/p>\n<\/td>\n<td>\n<p>10\/21\/05<\/p>\n<\/td>\n<td>\n<p>87,791<\/p>\n<\/td>\n<td>\n<p>80,943<\/p>\n<\/td>\n<td>\n<p><strong>6,848<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr class=\"altrow\">\n<td>\n<p>SCGLY<\/p>\n<\/td>\n<td>\n<p>Societe Generale SA (ADR)<\/p>\n<\/td>\n<td>\n<p>1\/18\/08<\/p>\n<\/td>\n<td>\n<p>1\/28\/08<\/p>\n<\/td>\n<td>\n<p>58,192<\/p>\n<\/td>\n<td>\n<p>49,014<\/p>\n<\/td>\n<td>\n<p><strong>9,178<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p>TM<\/p>\n<\/td>\n<td>\n<p>Toyota<\/p>\n<\/td>\n<td>\n<p>1\/21\/10<\/p>\n<\/td>\n<td>\n<p>2\/4\/10<\/p>\n<\/td>\n<td>\n<p>155,884<\/p>\n<\/td>\n<td>\n<p>123,749<\/p>\n<\/td>\n<td>\n<p><strong>32,135<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr class=\"altrow\">\n<td>\n<p>DLAKY<\/p>\n<\/td>\n<td>\n<p>Deutsche Lufthansa AG<\/p>\n<\/td>\n<td>\n<p>4\/15\/10<\/p>\n<\/td>\n<td>\n<p>4\/28\/10<\/p>\n<\/td>\n<td>\n<p>8,207<\/p>\n<\/td>\n<td>\n<p>7,395<\/p>\n<\/td>\n<td>\n<p><strong>812<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p>BAIRY<\/p>\n<\/td>\n<td>\n<p>British Airways<\/p>\n<\/td>\n<td>\n<p>4\/15\/10<\/p>\n<\/td>\n<td>\n<p>4\/28\/10<\/p>\n<\/td>\n<td>\n<p>4,338<\/p>\n<\/td>\n<td>\n<p>3,952<\/p>\n<\/td>\n<td>\n<p><strong>386<\/strong><\/p>\n<\/td>\n<\/tr>\n<tr class=\"altrow\">\n<td>\n<p>BP<\/p>\n<\/td>\n<td>\n<p>BP<\/p>\n<\/td>\n<td>\n<p>4\/22\/10<\/p>\n<\/td>\n<td>\n<p>6\/17\/10<\/p>\n<\/td>\n<td>\n<p>186,431<\/p>\n<\/td>\n<td>\n<p>99,273<\/p>\n<\/td>\n<td>\n<p><strong>87,158<\/strong><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The costs of Black Swans can be daunting.<\/p>\n<p><span class=\"alignright\"><img decoding=\"async\" data-src=\"https:\/\/www.corporate-eye.com\/main\/wp-content\/uploads\/2010\/09\/ostrich-heads.jpg\" alt=\"ostrich heads\" title=\"ostrich heads\" width=\"250\" height=\"310\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" class=\"lazyload\" style=\"--smush-placeholder-width: 250px; --smush-placeholder-aspect-ratio: 250\/310;\" \/><\/span><\/p>\n<p>For Corporate Governance, dealing with Black Swans is risk management. The Board is responsible for oversight and the strategic direction of the company&#8212; not execution. This means Board members should take on a devil&#8217;s advocate role by asking C-Level managers questions such as&#8211;<\/p>\n<ul>\n<li>How will you make the strategic direction come alive?<\/li>\n<li>Have you considered all financial, strategic, ethical and risk issues?<\/li>\n<li>What is the worst that could go wrong and how will you manage the outcomes?<\/li>\n<\/ul>\n<p>More insights for dealing with Black Swans are covered in the report <a href=\"http:\/\/www.google.com\/url?sa=t&amp;source=web&amp;cd=1&amp;ved=0CBUQFjAA&amp;url=http%3A%2F%2Fweb.ifac.org%2Fdownload%2F2.2-coombe-black-swans-do-exist-final.pdf&amp;rct=j&amp;q=site%3Aweb.ifac.org%20%22black%20swans%22&amp;ei=a9qHTNbYLsL58AbRxZTMAQ&amp;usg=AFQjCNEtCKT6os0j53rovN6w1bXsn8nqJQ&amp;sig2=g2xnw57nHpytVgjLMPmdEA&amp;cad=rja\">Black Swans Do Exist<\/a> published by International Federation of Accountants&#8211;<\/p>\n<ul>\n<li>Directors should increase their focus on risk, and engage more in detailed appreciation and understanding of the risks in their company\u2019s products and service areas. For the financial services industry, a solution could be for boards to establish a specialized risk committee, and consider the employment of an external risk specialist.<\/li>\n<li>Black swans do, and will always, exist. Therefore, be much more alert to the fact that, even at the extreme end of risk possibility, things do actually happen.<\/li>\n<li>Executive remuneration should be better aligned with the longer-term real performance (in terms of profitability, not sales volume) of the organization\u2014for example, via deferred remuneration in the form of shares.<\/li>\n<li>Governance issues are probably best tackled with a mixture of regulatory, investor, and board responsibility. To only look to investors being more active is unlikely to be effective.<\/li>\n<\/ul>\n<p>What do you think? Would this help companies deal with the arrival of a Black Swan event &#8211; and avoid the ostrich &#8216;head in the sand&#8217; syndrome?<\/p>\n<p>Coming soon: How Shell Uses Scenarios To Manage Risks.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Simply put, a Black Swan event is one that has a low chance of happening but if it does the impact could be catastrophic. The most current example is the BP oil spill in the USA. Underpinning Black Swans are some interesting philosophical and psychological factors of human frailties. A black swan is a highly [&hellip;]<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[9,29,1145,6240],"tags":[6523,6524,8252,1342],"class_list":{"0":"post-34727","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-best-practices","7":"category-corporate-governance","8":"category-featured","9":"category-featured-corpgov","10":"tag-black-swans","11":"tag-board","12":"tag-corporate-governance","13":"tag-risk-management","14":"entry"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.0 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Black Swans, Corporate Governance and Risk Management<\/title>\n<meta name=\"description\" content=\"Corporate governance: a black swan event is unlikely but could have big consequences. 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