Black Swans: A Commercial Approach to Managing Civil and National Security Risks

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Monday, December 3, 2012
Atula Abeysekera

 

Atula Abeysekera is a senior risk management and corporate governance practitioner and Council Member and Deputy Treasurer of the Bow Group.

He authored the Bow Group’s recent paper on risk management “Black Swans Mean Business” 

 

When, in 2007, Nassim Nicholas Taleb published his now famous book, ‘The Black Swan’, the notion was expanded beyond financial markets into the seemingly unpredictable and devastating events which carry extreme impact, but seem explainable after the fact. These occurrences he called ‘Black Swans’. Recent examples include the UK urban riots (2011), the volcanic ash cloud (2010) and the Fukushima power plant disaster (2011).

Black Swans have now entered into the common parlance of big business, with risk managers busily deploying strategies to better predict and deal with the fall-out of Black Swans. The Boards of Directors of large enterprises are gradually realising not only that the risks to their business can be fully quantified but also that, in this knowledge, they gain a competitive advantage by being better prepared than their competitors to deal with crises.

So as Business begins to acknowledge the necessity of understanding Black Swan events and incorporating contingency (as best they can) into their business models, the UK Government has started to lag in its thinking around Black Swan risk.

Managing its civil and national security risk is one of the greater challenges facing any government. Since, 2010 the UK government has made great strides to firm up the way it predicts and manages these risks. On the other hand, there is a great deal more it can be doing. As a starting point for this process of reform, the Bow Group makes the following five urgent policy recommendations:

1)    Setting up of a new  'Office for Risk Management'

2)    Bringing in external advice to reduce group-think within the government's processes

3)    Encouraging a common risk culture across government based on corporate models

4)    Introducing best practice risk management structures from business, including the 'three lines of defence' approach

5)    Introducing quantitative risk modeling strategies to both the Office for Risk Management and government departments. 

 

It is essential that the government acts to reform its risk management framework. The policy proposals put forward in this paper and summarised above are a pragmatic and cost effective way of achieving meaningful results for the country. The Government must act swiftly, as what is at stake is nothing short of the life of the nation and the security of its citizens, and government failure to effectively handle black-swan events have a tendency to live long in the public memory.

 

http://www.bowgroup.org/policy/black-swans-mean-business