Directors and officers face increased exposure to ‘grey swan’ risks, with shareholders on average losing 26% of value in their holdings in the year following reputation crises caused by such events according to a new report from Aon and Pentland Analytics.
Grey swans are long-tail risks, known but thought highly unlikely – and thus firms have often neglected to invest scarce resources to prepare for them.
Grey swan events can come from within an organisation in the form of governance crises or in an extreme external event such as COVID-19, the 2008 financial crisis, 9/11 or hurricane Katrina. The warning signs had been in place for all these events, yet preparation was low and the impact great.
The report says critical pre-and post-event decisions determine the trajectory of shareholder value following a grey swan event, putting directors and officers in the firing line of any shareholder action to recover their losses.
Aon CEO Greg Case said, “How leaders respond to these long-tail or grey swan risks are a key indicator of the overall strength of their leadership and their business.”
The report found that of the 300 corporate reputational crises analysed, 36% were driven by failures of governance and poor business practices, which has increased during the past decade. Next came product or service failure (20%), followed by cyber attacks (13%). A further 12% of reputational crisis followed fire or explosion, 10% from financial irregularities, 5% from air or maritime crashes and 4% from marketing/communications.
Pentland Analytics founder Dr Deborah Pretty said, “This research provides us with an evidence-based picture of the many challenges we face, not only when managing grey swan events in the moment, but also in our preparation and need to invest in resilience.”
Shareholder value has fallen by half in more than 10% of cases among the 300 corporate reputation crises analysed during the last 40 years, said the report. M