REVIEW OF FINANCIAL MARKETS


Finally, white elephants (or the known FIGURE 1: BLACK SWANS, GREY RHINOS, AND WHITE ELEPHANTS


knowns) pose potential existential risks to the company. A well-documented example of a white elephant is that although Kodak invented digital photography, the board was unwilling to cannibalise its existing chemical photography business until it was too late. Other examples of white elephants include global climate change and cybersecurity.


No signals Weak signals Strong signals Peripheral signals Source: Sustainable Foresight Institute, 20045 Weak signals No signals


C. THEY INTERNALISE EXTERNALITIES Another factor identified during the Sustainable Foresight Institute’s annual survey1


is that long-lived companies


swans, grey rhinos, and white elephants (Figure 1). Black swans or wildcards (or the


unknown unknowns) were specified as a phenomenon by Herman Kahn (1960s) and Pierre Wack (1970s). It was, however, former options trader Nassim Taleb who popularised the term ‘black swan’, which he describes as having three characteristics: 1) low probability, 2) big impact, and 3) can only be logically explained after the facts.4 Taleb’s definition is incomplete, though, and has been developed from the perspective of a mathematician, who approaches future events from a purely probabilistic perspective. A key characteristic of a black swan is


that the event in question cannot be anticipated, either in time or in space.6 In addition, black swans emerge suddenly, without any early warning. Thus, examples of black swans are Covid-19, the Fukushima triple disaster (earthquake, tsunami, and nuclear meltdown), and the 2010 BP Macondo oil spill. None of these events were anticipated by anybody, either in time or in space.


Niall Ferguson (2021) puts it as follows:


Disasters are inherently hard to predict. Pandemics, like earthquakes, and wars, are not normally distributed; there is no cycle of history to help us anticipate the next catastrophe. But when catastrophe strikes, we ought to be better prepared than the Romans were when Vesuvius erupted or medieval Italians when the Black


Death struck.7 66 THE REVIEW SEPTEMBER 2022 Grey rhinos (or the known unknowns)


are different in that they are driven by an event or a combination of events that can be reasonably anticipated based on cause and effect. They also tend to emerge gradually and therefore weak signals provide early indications of what is about to unfold.6,8


Examples


of grey rhinos include the global financial crisis, the use of blockchain to make global value chains more resilient, and the emergence of driverless vehicles.


have an experimental mindset at the fringes of their market. Therefore, it is not sufficient to continuously scan the periphery in search of discontinuities in the external environment. Corporate Governance 4.0 boards need to make judgements in the face of uncertainty to contribute to the sustainable long-term success of the company. Although black swans cannot be


anticipated either in time or in space, it is still important for boards to try to anticipate ‘possible’ future black swans as part of their risk practices. The benefit for companies to anticipate


TABLE 1: VARIOUS FORESIGHT TOOLS AND THEIR USE


Black swans ‘unknown unknowns’


Characteristics Cannot be accurately anticipated in time or in space


Manifestation Abruptly (no early warning)


Examples


Pandemics, natural disasters


Mitigation tool Contingency planning


Objective


Operational readiness and rapid response


Source: Sustainable Foresight Institute, 20049


Grey rhinos ‘known unknowns’


An event or series of events that can be reasonably anticipated based on cause and effect


Gradually (early warning signs)


Financial crises


Scenario-planning- driven peripheral vision


Avoid being blindsided or disrupted


White elephants ‘known knowns’


The writing is on the wall


Already omnipresent


Strong signals


Complacency, lack of vision, and risk taking


Internal peripheral vision


Avoid becoming obsolete


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