Surviving and Thriving in Uncertainty

Risky Business

Events can overcome businesses rapidly, showing the danger of unmanaged risk. Take the 2008 fiscal crisis: In just three weeks that March, Bear Stearns collapsed after 85 years in business. British money manager Peloton, having earned 87% returns on $10 billion in clients’ funds in 2007, disappeared “almost overnight.” And US home foreclosures leaped 225% in two years.

Directors and executives are responsible for preparing for such contingencies, if not necessarily for predicting them. But ill-informed, time-pressed directors and increasing CEO turnover can result in inadequate safeguards against unexpected crises. Without the right data and tools to judge a firm’s risk profile, top leaders often shun any risk taking, rather than focusing on how measured, acknowledged risk can enhance their firms’ value and long-term outlook. A company needs “resilience” to endure a crisis and “agility” to change and adapt to unforeseen events.

“Conventional risk management,” which relies on statistical probabilities and accepted wisdom based on past events, can’t protect a firm from the “once-in-a-lifetime crises” that belie their name and occur with frightening...