Managing Risk in Uncertain

Senior executives and boards of directors are often thought of as being omnipotent and even prescient. When you have risen to this level in an organization, people assume you have the smarts to lead the company into the future, no matter what happens. But anyone on a board of directors or working as a senior executive knows that this perception is false. No one has a crystal ball to read the future.

We live in a VUCA world--volatile, uncertain, complex, and ambiguous—so predicting and planning for the future is full of risks. Market trends might change, upstart competitors appear out of nowhere, global financial conditions become less stable, manufacturing or production delays interfere with plans, and who knows what else can befall the best-laid annual or multi-year projections. And all of these dimensions are exacerbated by the uncertainty of the COVID-19 pandemic.

The problem is, humans are hardwired to seek certainty and stability, so boards and executives must make every effort to prepare for risks. Not only is it their fiduciary responsibility to mitigate the probability of adverse events causing serious problems for the company, but it is also in their interest to create steadiness to ride the waves of time. To this end, I have developed a simple but rigorous approach for boards and senior leaders to prepare for many risks that they may have believed were too uncertain to plan for and therefore were inclined to leave to fate before deciding what to do.

To prepare for uncertainty, I recommend that boards and senior leaders evaluate every risk they can identify and map each one to its worst possible outcome. Take this thinking seriously and go to the extreme in figuring out what the worst scenario might be. Then make a plan to respond to each worst outcome, taking into account any domino effects—such as having any suppliers or downline distribution affected—that might affect the mitigation plan as well. This type of risk planning will help companies convert unmanageable uncertainty into manageable risk.

This method is invaluable when boards and senior leaders can identify the known risks the company may face in the future. The most difficult challenge, however, is planning for unknown risks, i.e., events no one had any expectation whatsoever of occurring and would never have predicted them. To account for those unknowns you can’t anticipate, maintain a keen global intelligence collecting and analysis function. ?In so doing, over time what might have been unknown risks are identified and converted to known risks. This function, composed of internal experts as well as outside advisors should inform the board and senior leaders of new world events or market conditions that have the potential to affect the company in novel ways that were not expected.

Making the unknown known is the key to modern risk mitigation.?