Preparing For Low-Probability High-Impact Events

Risk appetite, the balance between risk-taking and risk-management, should turn on a careful set of decisions by corporate leaders, with the general counsel and inside lawyers playing a central role. Risk management must follow strong organizational principles, and it must rigorously prioritize threats. Risk management must develop and implement systems and processes to prevent, mitigate, detect and respond.

One of the most important risk management problems is addressing a catastrophe. One of the best tools for preventing and responding to such occurrences is a systematic process for “scenario planning” and for debating disasters before they occur. Scenario planning requires a group of cross-functional experts (designated the “Blue Team”) to construct possible sequences and impacts of potential catastrophic events, and then to recommend preventive and responsive steps and costs to mitigate the effects of such events were they to occur.

For truly high-impact events, an important companion of scenario planning is the Blue Team/Red Team debate. Drawing from a military war-game tradition, this involves forming a multi-disciplinary Red Team to critique the Blue Team’s scenarios and its prevention and response plans.

Business leaders must give strong support to the constructive tension created by competing teams. General counsel, experts in finding truth through competing viewpoints, can help structure this process. Without debates about disaster, the risks of inattention, complacency and failure to examine key technical, financial or other assumptions can lead to being overwhelmed by events.