RIskyHorizons White Paper

Facing Down Black Swans

Opening eyes, minds and ears to the unpredicted rare
events – the black swans looming over risky horizons – to
transform the swan song kiss-of-death into a resuscitating
lifesaver for your company.
Abstract
Black swans emerge out of the ordinary unpredicted events that can
take a company under. In today’s flattened global world, black swans can fly
in from out of the blue or even surface unexpectedly from internal waters.
Because black swans are so extraordinary, it is human nature to want to deny
that such events can happen to the corporate cultures in which we live. And
while denial is bliss, at least for its duration, denying the threat of black
swans, real or potential, has leveled many a company, organization and even
entire cultures.

Short-term success and longevity require moving beyond denial to
open eyes, ears, and minds to even the most remote threats of internal and
external black swans. In this paper we highlight:
● Why it is natural to deny danger
● The price of maintaining a stance of denial
● The value of opening eyes, ears, and minds to high probability
threats and lowest probability black swans –internal, external,
narrow, and broad.
We also introduce a simple methodology for identifying and
eradicating denial in order to identify and address risks, including the black
swans that may be lurking in the waters outside or inside of your
organization.

riskyhorizons@gmail.com

617.699.0525
Mary Beth Borgwing

Black Swans Can Save Companies
What would a catastrophic event mean to the shareholder value of
your company? The possibilities are endless, ranging from short-term losses
to the end of dynasties and companies. A company can evaporate if the
founder denies external competitive forces, e.g. Compaq’s drive into
oblivion by desktop computers in every home. An organization can be taken
down if senior leaders deny what customers want, e.g. Mom-and-pop stores
replaced by big box Walmarts. While denial of the unlikely black swans may
provide a sense of security and control, you don't ever want to experience
the infecting limitlessness an internal or external black swan can generate.

John Corzine made the fateful decision of becoming CEO without
adequately understanding the risk MF Global was facing. Without opening
his eyes to the risks posed by more ordinary white swans or the potential
risks of extraordinary black swans, Corzine may have appeared to provide
leadership but, in reality, he blindly led the company on a catastrophic swan
dive. Corzine managed to keep MF Global above water from March 2010-12
only to bring the company spiraling down in bankruptcy, lawsuits and
federal investigations. MF Global is still unraveling in its demise and
continues to be sued as the turmoil unravels.

Or maybe we just need to look to last year’s headlines highlighting the
disruption of the supply chain for the automotive industry. According to
senior advisors at Booz & Company in 2011, two major ‘black swan’ style
catastrophes, the Japanese tsunami and the flooding in Thailand, forced
automakers, including Toyota and Honda, to curtail production around the
world. Pre-black swan a full range of risk measures and detailed
contingency plans were in place by the Japanese auto industry. But these


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Mary Beth Borgwing

were developed to deal with more predictable and common risks, the white
swans, and did not consider the low probability of external natural disasters.
The tsunami and the impact of such a black swan event led to the
devastation of the supply chain in Japan for many months to come.

While we are not advocating ‘doom and gloom’ or over-analysis
paralysis approaches to management and leadership decision-making, the
bliss of a state of denial has hard-hitting, fatal impacts when the risks of low-
probability black swan events are not considered or simply ignored. In fact,
our brains are hardwired to avoid black swans, as this is part of the
mechanism that helped our ancient ancestors survive.

Today’s developed brain has more modern techniques of avoidance.
Rather than strictly fleeing or hiding under a pile of rocks, we harness more
evolved mechanisms for survival. Convincing ourselves that “it’ll never
happen to us” or “what are the chances of…” With a shrug of the shoulders
we go about our merry business, hiding under piles of work that assure us no
black swans will raise their heads. Somewhere between the bliss of denial
and the paralysis of the-sky-is-falling analysis exists a logical approach to
predicting, assessing and readying for risk of the high and low-probability
kind. We call this approach risk-readiness. And with risk-readiness and
RiskyHorizons strategies to increase your RiskIQ, you can learn to look out
to the horizons ahead to identify black and white swans and to develop
effective strategies for readying and responding should one fly your way.

How about you? Are you looking ahead to risky horizons? Are you
risk-smart— thinking clearly to make decisions and take action with due
diligence as opposed to inadequate diligence that leaves you exposed? Or are


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Mary Beth Borgwing

you stuck on the starting line of ‘paralysis by analysis’ while your
competitors leap to the front of your competitive pack?

Are you ready for the corporate tsunamis that can be hurled by the
competitive marketplace or the global economy – think Compaq, Bear
Stearns?

Have you truly considered and identified the internal curve balls, the
low-probability black swan risks that leaders and teams bring to each other
when they resort to protecting their own turf at the expense of shareholders,
customers and trusted team members, e.g. Dennis Kozlowski of TYCO?

Just ask any professional hockey player who watched from the penalty
box as his team was scored against in a playoff game. When we do not
consider the risks associated with high-probability or unusual ‘black swan’
events, we leave ourselves, our teams and our organizations and cultures
open to be wiped out by an unforeseen event.

So if considering and planning for risk is critical to short-term success
and longevity, why isn’t everybody busy working the strategic risk plan?

The answer is simple and grounded in human nature: uncertainty is at
the root of denial. We humans defend against anything that is uncertain
because uncertainty leads us to feel threatened. Uncertainty generates a
sense of perceived threat that leads to the flood of chemicals associated with
stress. These chemicals literally make us stupid and limit our ability to
realistically assess or deal with risk. What we know from brain science
research is that the natural chemicals released in the face of uncertainty,
change, perceived threat and loss actually shut down the front part of the


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Mary Beth Borgwing

brain that lies just beneath the forehead. This is the part of the brain that
enables us to think abstractly, strategically, and innovatively—i.e., to
consider and deliberate potential solutions and to make a well-informed
decision. That’s because, too, the natural chemical deluge released also
limits the ability to shift attention, to take different points of view, to
consider alternate choices. Instead, in the face of uncertainty, we narrow in
to the one point-of-view that is our natural style. We defend our view of
reality and risk and fight alternate points of view, thus limiting the lens
through which we see risk.

Denial of risk, of swans of light or black color, is the most risky
business and can end lives and ruin the quality of any life left in a company
or of its shareholder value.

Risk is a top priority of public companies since they are now starting
to learn that compliance is not enough and that commitment is required.
With risk as a top priority, there is increased pressure on Boards to assure
that potential catastrophes are identified and strategies developed to deal
with even the extremes such as the ‘black swans’. Black Swan events are
unlikely events that are simultaneously unexpected and random. E.g.
experiencing a life-threatening curve ball or winning the World Series when
your team is down by 5 runs with two out in the bottom of the 9th inning in
the 7th game.

The unlikely events that happen in sports move markets and billions
of dollars not unlike the events that have happened on Wall Street over the
past three years. 2011 is to be known as the year of ‘bank failures’ with
70+ banks failing in the US and 17 of these banks racking up billions of


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Mary Beth Borgwing

dollars of additional lawsuits still to come. Also, let us not forget the 15
worst data security breaches in history has happened right on top of these
bank failures exposing Intellectual Property and Personal Identifiable
Information into double digit billions and over 10,000 loosing their jobs due
to the SONY breach.

Perhaps it is appropriate timing for boards to focus on such unlikely
events and predictable surprises for lately the frequency of occurrence of
extremely unlikely events and predictable surprises has been increasing.
Predictable Surprises have three characteristics: at least some people are
aware of the problem; the problem gets worse over time; and eventually the
problem becomes a crisis much to the surprise of most. On this definition
Japan’s tsunami was a black swan but the sub-prime was not, as several
money managers made fortunes by betting on the market’s collapse. 2

To demonstrate the immediate need for Boards and Senior Executives
to consider Black Swans we only need to look at current events. There have
been so many devastating events of late that there is debate as to what events
are being considered “Black Swan versus White Swan Events”—or are they
just predictable surprises coming from our frail and weakened global
financial structure? Did all of these events happen because Boards,
Management and their prevailing Enterprise Risk Management (ERM)
systems failed to detect predictable surprises and early warning symptoms?
Did they have a strong management system and, even so, an event still
occurred? Regardless of whether we label these potentially devastating
events as predictable or extraordinary, as white or black swans, identifying
and planning for risk is critical to success and longevity in the marketplace.
Given that denial of risk and devastation is natural, it is even more critical
that ‘black swan’ events be identified and that the risk be evaluated and


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Mary Beth Borgwing

plans made to mitigate or deal head-on. Because, what we know for certain
is that such high-magnitude and low frequency events could bring down
your company, destroy your brand, and decimate shareholder value.

Just as athletes in sports must assess the risk of one move over another
and plan for contingencies and curve balls, corporate leaders and Board
Members must override the natural tendency to tighten up, run, fight, or
freeze in response to the uncertainty inherent in risk. They must learn to get
smart and stay smart in the face of high- and low-probability unlikely events
in order to assess risk and plan for it- the good, the bad, and the ugly, the
white common birds and the black extraordinary swans.

Effective assessment means a full-brained assessment of the horizon
that opens the lens to see the whole truth, to expand beyond the stress-
makes-us-stupid-in-the-face-of-uncertainty shortsightedness. To fully assess
high and low probability threats and risk, it is critical to harness the four
lenses of attention: internal narrow, external narrow, internal broad, and
external broad.

Assessment includes identifying the probability of the events
occurring. One way for a board to evaluate the potential for such events is to
require senior management to identify the top two or three events, three
maximum, for the enterprise. Even if it turns out there is no Black Swan
event exposure the process of arriving at this determination is very
useful. The next step is that the board requires senior management to
mitigate and/or transfer such risk.


617.699.0525
Mary Beth Borgwing

Public Company Boards: Managing Enterprise Catastrophic Risks
Risk is a top priority of public companies with intense financial
scrutiny by investors, creditors, Dodd Frank Act, SEC Mandates for
Governance and Compliance, not to mention the “financial plague” hitting
Europe. Over the past 3 years we have experienced a global epidemic of
failing banks and institutions that make us all question the risk oversight
process currently in place for these institutions. Too many current boards
still ignore their risk-oversight responsibilities to the detriment of their
shareholders and the economy.

According to a 2011 IBM survey of 1200 CFO’s only 10% of major
corporations employ Chief Risk Officers. Many current boards are taking
action to revamp their risk oversight process by forming risk management
committees at the board level and new risk oversight positions within the top
management of their companies. Yet, given the appalling 10% identified by
IBM, one could question the process for risk oversight at the board level.

The greater the uncertainty of the task, the greater the amount of
information that has to be processed between decision makers during the
execution of the task in order to achieve a certain level of performance
(Galbraith). Are boards getting relevant and timely information about risks
and are boards able to control the information supply they receive to ensure
they get what is necessary to make decisions? This is where an awareness of
the natural tendency to deny risk is critical in order to keep the clear heads
required to search over the horizon to see the whole truth and look risk in the
eye and then, with clarity of an engaged brain, to generate and lead the
implementation of smart solutions.

It is imperative that board members work together with their
management teams to develop risk management frameworks that ensure that
the right and relevant information be delivered in a timely manner to the
whole board when there is a surprise event or occurrence happening and,

617.699.0525
Mary Beth Borgwing

better yet, before its occurrence when such an event looms on the horizon.
The framework for this process needs to be put in place with planning prior
to any Black Swan event. The board and management must share this
process. According to many public company board members interviewed for
this paper, the most common theme is that boards do not readily discuss
risks that are complex and hard to understand. Also, risks that need a lot of
data points to be understood are often overlooked due to their complexity.
Many board members rightfully are looking for senior management to “boil
the ocean of data down” to its simplest form so it is relevant and understood
by all board members and stakeholders.

Risk oversight at the board level should not be complex. It’s usually
proof of exceptional understanding of their jobs when senior managers can
“boil an ocean of data down” to elegant and salient points for the board.
Here is the key element: the board must demand and accept nothing less than
exceptional managers who have the ability to explain what they do simply.
It needs to be a living process that is updated and used by all relevant
stakeholders. Fundamental to implementing such a process is to assure that
both Board Members and senior leadership hold the critical information and
data and to change their ways of working together and shift their minds
about the reality of risk and how to proactively approach risk so as to
minimize the likelihood, occurrence and impact when curve balls are hurled
from the sidelines.

Most company’s risks are as unique as their business models. A risk
audit and gap analysis can be done for any size company with the right
framework and common mission of identifying gaps in the risk oversight
process that can be monitored, mitigated and managed.


617.699.0525
Mary Beth Borgwing

According to a Fortune 500 Board Member who chairs an audit
committee and is a member of three public boards, the number one priority
for risk oversight is to enact a business continuity plan at the board and
enterprise level that is tested and monitored. This type of risk planning
could save the company their brand and save them from their own financial
demise. Also, the board may find that the organization has a strong process
but not the right people to carry out the best practices on risk management.
According to several other board members interviewed, the risk oversight
process lacked the right human capital and leadership to overcome some of
the enterprise wide risks that were identified. In these examples most of the
board members exercised their fiduciary duty and made the changes in
positions or leadership that enabled the organization to manage the risks
more effectively.

While it is management’s duty to set the enterprise risk appetite and
tolerance, the board ultimately must approve these measures. Boards can
help identify “Black Swans” by challenging basic business assumptions and
provide first-mover advantage.

Some of the basic principles Boards need to put on their agendas include:

● Define the corporate risk appetite and risk tolerances that will reduce
the risk of ruin
● Identify the causes of failure and execute business continuity planning
for the enterprise
● Develop a crisis management plan that activates a speedy response
and recovery
● Verify sources and the reliability of information for quality decision-
making and factor in sustainability by taking a long-term perspective
when they make short-term decisions


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Mary Beth Borgwing

So if you are a board member or a senior manager reading this paper we
hope you ask your self the following questions:

● Has your Board been presented with the top enterprise catastrophic
risks?
● Do you know the three top catastrophic risks and their affect on the
financial value of the entity and its brand equity?
● Have you opened your eyes, ears, and minds to risks in all 4 domains:
external-broad, external-narrow, internal-broad, and internal-narrow?

The secret to risk-readiness lies in your risk-smarts—in moving beyond
the denial of bliss to engage eyes, ears, and minds at all levels of an
organization to be assess, identify, and address risks, current and potential
including the low probability black swans—and then to address risks with
plans and resources and commitment for implementation. In the words of
Henry Ford, who avoided obsolescence by strategically facing down black
swan risk,

“Before everything else, getting ready is the secret of success.”


617.699.0525
Mary Beth Borgwing

About the Author and Contributors
Mary Beth Borgwing, Author and Partner, RiskyHorizons Group
Ms. Mary Beth Borgwing is a risk and technology savvy senior executive with
general management, strategy, finance, technology and operations experience in financial
services, global insurance, healthcare, manufacturing, and small business market
segments and extensive start-up and turn around experience, With a strong track record
for breakthrough problem solving, profit and market share improvement, speedy results
and team building, Borgwing, has held leadership roles with top professional services
such as Marsh (MMC), Willis Group Holdings (WSH), Arthur J Gallagher (AJG) and has
been the Chief Financial Officer & Operations Officers at Sentillion (MFST: US), and
FAST Company. By staying ahead of the curve, Borgwing has helped guide her clients
through Governance, Risk, Compliance/Enterprise Risk Management (ERM/GRC)
process improvement and other risk efforts.
Ms. Borgwing has been a frequent speaker on risk management topics in venues
that include Women Corporate Directors, BIO CEO Institute, American Conference
Institute, American Bar Association, Massachusetts, MIT Sloan School Speaker Series
BIO, Milken Institute, and other Industry Conferences.
Mary Beth is the co-founder of RiskyHorizons Group, a consulting firm that
provides clients with a proprietary system combining proven methodologies for risk
assessment and mitigation from financial analysis with field-tested strategies from brain
and behavioral science to enable clients to honestly assess and address risk from multiple
and differing perspectives. The process enables an organization to eradicate denial of risk
and to raise its enterprise RiskIQ. RiskyHorizons’ RiskAssessment and RiskAddressment
system promotes accountability throughout an organization, including at the Board level,
for identifying and addressing risk in key areas that foster growth and innovation. The
process enhances teaming and overrides resistance to change and innovation to enhance
implementation of strategic changes aligned with achieving organizational goals and
longevity in the marketplace.

Contributing Author

Dr. Pamela Brill, Partner RiskyHorizons Group
A respected expert on assessing, addressing, and readying for facing risk,
competition, the challenges of implementing strategy and of performing under pressure,
Dr. Pamela Brill is the founder and inventor of the In The Zone methods and the author
of the “The Winner’s Way”, a proven method for achieving your personal best. Dr.


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Mary Beth Borgwing

Brill’s clients and followers are the leaders who perform at the top from Fortune 500
CEO’s and political leaders and elected officials on Capital Hill to nationally ranked
sports teams and surgical room operating teams in the heat of competing for patients’
lives. The Winner's Way has proven effective for clients facing challenges from the
ordinary to the extremes that can blindside any one of us—life-threatening accidents and
viruses, black swan events brought on by marketplace and natural disasters.

Dr. Brill has served in senior leadership and consultant roles with strategy and
leadership development organizations including The Tom Peters Company as Principal
and working directly for Tom Peters on organizational strategy, Computer Sciences
Corporation as Director and Head of The Center for Leadership and Talent Development
for The Americas and Consulting, BAE Systems as Confidential Advisor to the Senior
Countermeasures Lead and Team, global leadership development firm Linkage, Inc. as
Senior VP of Learning Solutions and Head of the Executive Coaching Practice, and
Dartmouth Medical School and Medical Center as a faculty member in the Department of
Psychiatry and Clinical Psychologist. Brill has been mentored by leadership and
organizational excellence gurus, Tom Peters and Marshall Goldsmith, with whom she has
worked shoulder-to-shoulder in apprentice-like roles. Brill has served on the Board of a
bipartisan political organization and as a Director on the Board of the SURDNA
Foundation accountable for strategically gifting $40M a year to not-for-profit
organizations, and provides pro bono programs for community agencies.

Dr. Brill is the published author of hundreds of articles and of 3 books: The
Winner’s Way: A Proven Method for Achieving Your Personal Best in Any Situation
(McGraw-Hill, 2004, Kindleized by Amazon, published in China and India, and in
audio); No Winner Ever Got There Without a Coach –A Guide to Personal and
Professional Success, coauthored with David Rock, founder of The Neuroleadership
Institute, and other contributors (Insight Publishing, 2012); and Coaching for Success,
coauthored with Rock, and Rudy Rudtigger, famed “Rudy” of Notre Dame Football and
the movie “Rudy!” (Insight Publishing, 2009). Brill’s commentary has been featured in
Investor’s Business Daily, Entrepreneur, Harvard Business School Press publications,
The New York Times, Chicago Tribune, Washington Post, Men’s Health and Runner’s
World magazines.

Described as both educational and inspirational, Brill has presented Winner’s
Way programs in keynote and executive education programs including Wharton, Babson,
and Whittemore Business Schools; Smith College Executive Education for Women; US
Olympic Committee; Offices of the US Senate; Genzyme; Fidelity; and State Street
Bank. An avid athlete, Brill walks the talk of living ‘in the zone’ running and working out
daily to maintain longevity and stave off risks in real life.


617.699.0525
Mary Beth Borgwing

Michael Wiebe, Principal Wiebe Associates, LLC
Mr. Wiebe is a Risk Management expert with 4 decades of experience. He has
deep practical experience leading operational (as opposed to financial) Black Swan
analysis prior to and subsequent to the many published theories of Black Swans.
Mike was the Risk Manager for IBM as well as a Senior Vice President at Marsh &
McLennan’s Companies. (MMC) and the head of IBM Captive insurance company.
Mike is the founder of Wiebe Associates, a risk management and insurance consulting
firm with diverse industry clients in that range the spectrum of public, private,
manufacturing, professional services including international clients.
Advisory, Boards and Faculty:
The Roundtable Group: www.roundtablegroup.com Mr. Wiebe is a member of the
Roundtable Expert Network a network of professionals and academic experts available
for consulting, speaking, teaching and expert witness testimony to attorneys, investment
managers and other businesses.
Gerson Lehman Group: www.glgroup.com Mr. Wiebe is a member of the GLG Council
and the Scholars Program which provides advisor services to GLG clients to understand
key risk management events, critical trends and emerging opportunities.
Member of faculty at Practicing Law Institute www.pli.edu. PLI is a continuing legal
education organization chartered by the Regents of the University of the State of NY for
providing the legal community with professional education.
US Technology Resources: www.ustri.com Former Board Member of US Technology
Resources, the US division of the $5b Comcraft Group headquartered in India. US
Technology is an information technology and BPO services provider.
China Business Knowledge (CBK): www.chinabusinessknowledge.com Board Advisor
of CBK, a startup digital aggregator of critical business information for China based US
listed companies for mitigating investor risk.


617.699.0525
Mary Beth Borgwing

References
"Black Swan." Definition. Investopedia. Web. 02 May 2012.

<http://www.investopedia.com/terms/b/blackswan.asp>.

Brill, Pam. The Winner's Way: A Proven Method for Achieving Your Personal Best in

Any Situation. New York: McGraw-Hill, 2004. Print.

Galbraith, J.R. "Organizational Design." Babson College Faculty Web Server. Babson

College, 1974. Web. 02 May 2012.

<http://faculty.babson.edu/krollag/org_site/org_theory/Scott_articles/galbraith_or

gdes.html>.

Harvey, Vince. "The Last Word." Financial Times, 8 Aug. 2011. Web. 02 May 2012.

<http://www.ft.com/ftfm/the-last-word>.

Taleb, Nassim. The Black Swan: The Impact of the Highly Improbable. New York:

Random House, 2007. Print.


617.699.0525
Mary Beth Borgwing

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