In over 10% of crises in recent years - including COVID-19, 9/11 and the GFC - more than 50% of shareholder value was destroyed
Major crises can have a significant impact on reputation and shareholder value, emphasising the need for organisations to recalibrate their approach to risk and crisis in a highly volatile world. This is according to a report - Respecting the Grey Swan - published by Aon and Pentland Analytics.
Like their better-known ’Black Swan’ event cousins, ’Grey Swan’’ events can greatly impact firms. Unlike Black Swans, which seem inconceivable before they happen, Grey Swans are known beforehand.
The report draws attention to cognitive biases and explains how ambiguous and uncomfortable data are easy to ignore, how the impact of crises are substantial and enduring, and how value recovery is a function of critical pre- and post-loss decisions.
It also highlights the financial value of reputation – in over 10% of crises, more than 50% of shareholder value is destroyed – and directors’ and officers’ increased risk exposure, especially following a Grey Swan event. On average, shareholders can expect to lose 26% of value at some point during the post-event year.
“Risk management awareness has heightened over the last year. This research provides us with an evidence-based picture of the many challenges we face, not only when managing Grey Swan events in the moment, but also in our preparation and need to invest in resilience,” according to Dr Deborah Pretty, Founder of Pentland Analytics.
Evidence from the research suggests three areas on which organisations should focus to build resilience:
- Reimagining the risk landscape through a broader risk assessment
- Acknowledging the seriousness of impact with a focused investment in risk preparedness and crisis management
- Translating understanding into action, fostering a responsive and agile culture
Known, ignored risks
The report highlights how crises remain a major risk for organisations globally, analysing data from 300 corporate crises from the last 40 years, examining Grey Swans’ impact on shareholder value and identifying drivers of recovery.
Grey Swans are long-tail risks, known but thought highly unlikely – and thus firms have often neglected to invest scarce resources to prepare for them.
Many extreme events, such as the 9/11 attacks, the 2008 financial crisis and, most recently, the COVID-19 pandemic, are considered Grey Swan events because of the size of the impact and the many warning signs that were ignored.
Other types of reputation Grey Swans come from within an organisation, including, for example, governance crises or product failures.
For most organisations, the likelihood of a Grey Swan event occurring is greater than preparation for it.
“Today, clients are justifiably focused on the unprecedented socioeconomic impact of the COVID-19 pandemic, but they are also increasingly aware of other challenges like climate change, supply chain disruption, reimagining and reconfiguring how and where work gets done and the growing health-wealth gap,” said Greg Case, CEO of Aon.
“If, and when, a reputation crisis occurs, this research reinforces the importance of promptly acknowledging the seriousness of the event itself and, most importantly, how to translate this understanding into decisive action.”