Boards Face Down Separate Black Swan and White Elephant Events (February 8, 2020)

Boards Face Down Separate Black Swan and White Elephant Events (February 8, 2020)

Board Lens

Boards Face Down Separate Black Swan and White Elephant Events (February 8, 2020)

Board-level oversight of management in times of crisis is critical for the strategic success of companies, whether the event is a black swan (improbable and difficult to predict) or a white elephant (apparent yet difficult to address). Companies have faced the consequences of both long-brewing and tragically unexpected events in the past few weeks, underlining the notion that economic slowdown can come from either kind of disruption. The coronavirus epidemic emerging in China and Brexit coming to fruition have created a volatile international business landscape. Boards should be sensitive to the ripple effects that these two risk events might have on their companies in the coming weeks and year.

Since the June 2016 referendum on Britain’s membership in the European Union (EU), Brexit has been a known risk lumbering along at a glacial pace—a white elephant. On January 31, Britain officially exited the EU but, according to coverage from the BBC, the nation will continue to follow EU rules and regulations until the end of the transition period on December 31st. Uncertainty surrounding the outcome of Brexit trade policy has left many bracing for increased costs and disrupted supply chains, according to The Economist. A large percentage of Britain’s manufacturing product goes to the EU and a failure to strike an agreement could lead to increased compliance costs and disrupted production.

Meanwhile, the coronavirus—the black swan no one saw coming—caused a decrease of nearly $700 billion in value of mainland Chinese stocks earlier in the week, according to Reuters. The disruption sparked by the virus is felt globally. Manufacturing plants are at a standstill, severing critical supply chain links for companies the world over and goods are now being stranded on shipping vessels in China, which is home to seven of the world’s most active ports. Looking beyond manufacturing, the outbreak has drastically impacted air travel with dozens of airlines canceling or restricting flights to China, further impacting global business, and some countries are banning entry to anyone who has recently visited China all together.

Implications for Boards: These unexpected disruptions and others are leaving many scrambling to rethink their business strategy in the short and long terms. A fundamental aspect of effective board oversight is being prepared for all types of risk—both white elephant and black swan risks. Boards should use the current disruptions to identify areas in their supply chain where the company may be vulnerable in the future. Each board member should be knowledgeable about the company’s risk appetite, planning, and mitigation strategies. Open communication with management around the response to unforeseen risks is crucial. Traditional enterprise risk management (ERM) programs do not factor in disruptive risks, creating the need for directors to specifically pressure test the enterprise’s readiness to oversee emerging risks.

Key Questions Directors Should Ask:

  • Are disruptive risks a standing agenda item either at the committee level or for the full board?
  • Do we have effective, open, and clear communication with management about their risk preparedness?
  • Are we properly evaluating our upstream supply chains to understand where our business is vulnerable to outside risks?
  • Is management presenting a comprehensive risk metric report that includes emerging risks?

NACD Resources:

The Report of the NACD Blue Ribbon Commission on Adaptive Governance: Board Oversight of Disruptive Risks provides guidance to boards looking to improve their visibility of disruptive risks and provide oversight in a fast-changing landscape. An NACD Directorship article, “An Animal Kingdom of Disruptive Risks,” offers directors a framework to rethink their current views on disruptive risks. NACD’s Resource Center for Risk Oversight provides information on the board’s role in risk-oversight—from risk reporting to committees, to ensuring effective crisis oversight.