Measurable Resilience – The New Gold Standard

 

To say that the past few years have brought us higher volatility and unpleasant surprises is an understatement. On so many fronts, the name of the game is decision-making in a more dangerous world.

As I write this article on my way to participate in the final round of G20 meetings in Mexico, I feel lucky that my flight from New York is on time and departing at all. Thousands of businesses are only just starting to reopen, and millions of Americans are still without power because of Hurricane Sandy and the storm surge that ravaged the East Coast of the United States. For the first time since the19th century, the New York Stock Exchange had to close for two consecutive days due to a natural disaster. Early loss estimates put Sandy’s price tag at about US$ 50 billion.

But despite the devastation, Sandy had a positive aspect, too. The country demonstrated resilience, our capacity to confront adversity and to bounce back.

The USA of Sandy contrasts vividly with the USA of Hurricane Katrina. In 2005, the government’s inability to address victims’ most basic needs surprised the world, and Americans. The largest economy on the planet looked like a third-world country to the billions watching the crisis unfold live on TV. Inaction and the local long-lasting economic and social impact of Katrina were indicative of unpreparedness.

While comparisons are never perfect, one figure is eye-opening: more than 1,300 people lost their lives due to Katrina. Many fewer died from Hurricane Sandy.

What happened in between? First, there have been a number of other disasters in a very short period of time. They all contributed to keep disaster management salient on the agenda of top decision-makers: four hurricanes in 2004, three in 2005, another one in 2008, then again in 2011, and Isaac a few weeks before Sandy, not to mention the other catastrophes that occurred in China, Haiti, Chile, New Zealand, Japan and Thailand.

Second, the capacity of the country to build resilience is slowly being recognized as good governance practice to ensure economic development and social stability. In the case of Sandy, evacuations were large-scale and expensive, but they were well organized and necessary. In this instance, it’s not only about disaster risk but also about measuring this risk and acting on it because you can manage only what you can measure.

Then it is about investing, now, significant human and financial capital in our capacity to limit the consequences of future catastrophes. This will have a cost, of course, but if done properly, the return on investment will be huge. I have argued that America urgently needs to invest trillions of dollars to turn itself into a fully resilient nation; this will create numerous benefits, not the least of which is massive job creation.

Finally, Sandy hit the US days before the presidential election. If you have to choose when to be a victim of a disaster, a few days before a presidential election is ideal: everybody loves you (and your vote). Both Barack Obama and Mitt Romney put the campaign on hold to address this crisis; it was the top national priority. From experience, catastrophes always have a political impact: they have contributed to presidents and prime ministers winning and losing elections.

While Sandy is the most recent chapter in our new era of catastrophes and crises, similar good practices can be developed for many future untoward events, from economic and fiscal crises, to food and water scarcity, global supply chain protection and international security.

The imperative to follow good practices is true not only for heads of state, but for the C-suite and boards of corporations, too. With the trillions of dollars of economic losses, thousands of lives lost and the huge financial impact on businesses worldwide in recent years, our vulnerability to extreme events is hard to ignore.

How to develop, and implement, successful strategies for better managing and financing extreme events is getting much more attention in the boardroom today than, say, five years ago. This was confirmed in a series of 100 interviews of the top management of S&P500 firms that my Wharton colleagues Howard Kunreuther, Mike Useem and I finished this month.

In the business world, implementing measurable resilience is turning to be the new gold standard of a fully redesigned (and thankfully, much more strategic) risk management activity.

Notably, under the leadership of Klaus Schwab, the World Economic Forum and its partners recognized this necessity many years ago and have done a tremendous job at pressing world leaders on these issues. The eighth edition of the Forum’s Global Risk Report, which we plan to release in January before Davos, will help to advance the global discussion. The theme of the 2013 World Economic Forum Annual Meeting, Resilient Dynamism, is particularly well chosen.

 

Author: Erwann Michel-Kerjan is Managing Director of the Wharton Business School’s Center for Risk Management and Decision Processes, which has been at the forefront of managing catastrophe risks for nearly three decades, and partner of the World Economic Forum on global risks since 2005. YGL alumni (class of 2007), Professor Michel-Kerjan regularly advises heads of state, corporations and foundations on these issues and currently serves as Chairman of the OECD Secretary-General Board on Financial Management of Catastrophes. Recent books include The Irrational Economist: Making Decisions in a Dangerous World (with P. Slovic) and At War with the Weather: Managing Large-scale Risks in a New Era of Catastrophes (with H. Kunreuther), winner of the Kulp-Wright prize for the most influential publication on risk management. www.erwannmichelkerjan.com

Photo Credit: Reuters Pictures.