Grey Swans destroy 50pc of shareholder value

In over 10% of reputational crises from the past 40 years, over 50% of shareholder value has been destroyed, with the average impact reflecting a total of almost £1trn in lost value. On average, shareholders can expect to lose 26% of value at some point during the post-event year.

So says a joint report from Aon and Pentland Analytics which analysed the impact of and recoveries following 300 crises, emphasising the need for firms to recalibrate their approach to risk and crisis in a highly volatile world.

“Today, clients are justifiably focused on the unprecedented socioeconomic impact of the COVID-19 pandemic, but they are also increasingly aware of other challenges like climate change, supply chain disruption, reimagining and reconfiguring how and where work gets done and the growing health-wealth gap,” said Greg Case, Aon CEO. “If, and when, a reputation crisis occurs, this research reinforces the importance of promptly acknowledging the seriousness of the event itself and, most importantly, how to translate this understanding into decisive action.”

Like Black Swans, Grey Swan events can greatly impact firms; but unlike Black Swans, which seem inconceivable before they happen, Grey Swans are known beforehand. 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.

Extreme events, such as the 9/11 attacks, the 2008 financial crisis and, most recently, the COVID-19 pandemic, are considered Grey Swan events because of the size of the impact and the many warning signs that were ignored. Other types of reputation Grey Swans come from within an organisation, including, for example, governance crises or product failures.

“Risk management awareness has heightened over the last year. 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,” added Dr. Deborah Pretty, industrial economics expert and founder of Pentland Analytics.

For most organisations, the likelihood of a Grey Swan event occurring is greater than the likelihood it's been prepared for. The report draws attention to cognitive biases and explains how ambiguous and uncomfortable data are easy to ignore, how the impact of Grey Swan events is substantial and enduring, and how value recovery is a function of critical pre- and post-loss decisions.

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