For firms large and small, with each day comes a new possibility for disruption. Perhaps there’s a natural disaster, a terrorist incident, or an economy-wide shock, like the 2008 U.S. financial crisis. Threats can emerge within a firm’s own walls, or through a government regulation, or even come in the form of a technological breakthrough—overturning business models that have been in place for years.
Kunreuther, along with Wharton leadership expert Michael Useem, recently published “Mastering Catastrophic Risk: How Companies are Coping with Disruption.” The book showcases what Useem calls the “hidden story” within S&P 500 companies that have ramped up risk-management after being overcome by their own worst-case scenarios, including catastrophes like the 9/11 terrorist attacks, Hurricane Katrina in 2005, the financial crisis of 2008-09, and the Japanese earthquake and tsunami in 2011.
“We wanted to find out what’s going on, in-depth, inside these companies,” Useem says.
By interviewing leaders at over 100 large, diverse global companies about their most adverse risks—and, importantly, how they rebounded from them—Useem and Kunreuther were able to identify effective practices for catastrophe risk management, distilling important information for other business leaders, their governing boards, and decision makers at all levels, including those in nonprofit organizations and government agencies.
Interestingly, since they’ve finished writing their book, Useem says, the issue of catastrophic risk for companies has “become all much more evident.” He notes, specifically, the disasters that have struck Facebook, Volkswagen, and Wells Fargo. “Seeing this happen repeatedly to others is causing companies to double down on their own risk management.”
Kunreuther and Useem end their book with a “mission-critical checklist” as a means of “transforming deliberative thinking into deliberative action.”
Here’s a glimpse into the Top 5 guidelines, out of 10:
“The ‘unthinkable’ has gone from not being on anyone’s radar screen to now being central,” says Useem, director of Wharton’s Center for Leadership and Change Management. “But to think about it, you need tools, and wisdom.”
Kunreuther, who co-directs the Wharton Risk Management and Decision Processes Center, says a major challenge firms face is the tendency to be myopic.
“Managers in firms think about the next year instead of the long term,” Kunreuther explains. “As a result, disasters are viewed as low probability events. They think, ‘It’s not going to happen to me.’”
This sometimes causes a decision maker to be shortsighted when faced with the expense of investing in protection against a high-consequence event—the near-term payoffs don’t appear to justify the up-front costs.
“But if they stretch the time horizon to 10 or 20 years, then the likelihood of at least one catastrophe occurring during this period is high enough for them to pay attention to the consequences and justify the investment,” Kunreuther says.
But, says Useem, cautioning that he doesn’t want to seem “too somber,” but the world is “becoming a riskier place to inhabit. Recognizing risk and its impact, and thinking through preparations for it and responses to it, is for everybody.”
The growing concern of risk, explain Kunreuther and Useem, is evident in influential business gatherings. They note, particularly, the World Economic Forum, on which they’ve collaborated together for years.
“In the 1990s, the Forum devoted only a few sessions in its annual meeting in Davos, Switzerland, to risk issues,” they write. “Of its nearly 250 sessions at the at the 1997 annual gathering, for instance, just a dozen were explicitly focused on the topic. By the mid-2000s, however, a third of its sessions touched on risk, and by the 2010s nearly half.”
In an earlier volume, “Learning from Catastrophes: Strategies for Reaction and Response,” published in 2010, Kunreuther and Useem featured the contributions of leading experts in risk assessment, risk perception, risk management, and disaster recovery, identifying the behavioral biases that misinform leaders about the likelihood and consequences of catastrophes.
With their new “Mastering Catastrophic Risk,” they take their mission up a notch.
“Companies must get their act together, and get it together now,” says Useem.
Howard Kunreuther is the James G. Dinan Professor at the Wharton School, and co-director of the Wharton Risk Management and Decision Processes Center.
Michael Useem is the William and Jacalyn Egan Professor of Management at the Wharton School, and the director of the school’s Center for Leadership and Change Management.