Should we have seen COVID-19 coming?
A pandemic was far from the top risk on corporate radars a few months ago, even though experts in a variety of fields warned about the possibility of one for years.
Best-selling author Michele Wucker refers to risks like this as “gray rhinos.” It’s a metaphor for the obvious challenges that societies tend to neglect, often due to the size of the risk.
“It’s meant to evoke a two-ton thing with its horn [pointed] straight at you, and pawing the ground, snorting, probably about to charge,” says Wucker, the author of “The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore.” She is the CEO and founder of Gray Rhino & Co., which helps leaders and organizations identify and respond to these risks.
To learn about preparing for the next big threat, I interviewed Wucker about why we often ignore obvious threats, and how to approach the next crisis. The transcript that follows has been edited for brevity, clarity and flow.
BD: What are the most powerful forces that keep us from identifying and addressing gray rhinos?
MW: There are psychological and organizational and governmental [forces] that keep us from recognizing what we need to. Human beings are hardwired to ignore some of the things that we don’t want to see. We tend to deny information if we don’t like it — if we don’t like the solution to a problem. A lot of this is unconscious. So, when you recognize that unconscious bias, you’re way ahead of everybody else because it makes you much more able to see what’s in front of you.
But in terms of organizations and governments, more structural and policy factors, some of them have to do with decision-making. We like to surround ourselves with people who think the way that we do. And when we do that, it confirms what we already think. It makes us even less likely to see red flags. So, decision-making processes and organizational culture are one reason.
In terms of governments and even corporations, the incentives that we’ve set up are misaligned.
Businesses look so much at quarterly earnings, and too often pay so much attention to the short term, that they forget they are putting long-term value at risk. And for politicians who are looking at election cycles of just a few years, it’s much easier for them to tell people what they want to hear and kick the can down the road so that the problem explodes on the next guy’s watch. Our society tends to reward people for picking up the mess after the fact. And when somebody makes a hard decision that prevents the mess from happening in the first place, we don’t celebrate as much as we should.
BD: One of the things we often talk about [at Bank Director] is the danger of groupthink and the lack of diversity on corporate boards. As we’re looking at the impact of this pandemic, I would not be surprised to see things like diversity and similar initiatives taking a back seat to these more short-term concerns that we’re seeing now. Is that a mistake?
MW: Absolutely. It would be a huge mistake to stop looking at how we can make better decisions by bringing the right voices around the table, having a group of people who can overcome groupthink. And really what would be most helpful now would be an extra emphasis on who else are you going to bring to the table to help solve the problems right now? An injection of diversity in decision-making could be one of the most important factors helping us to not just get out of the crisis, but set ourselves up for future success.
In “The Gray Rhino,” I quote [European Central Bank President] Christine Lagarde … [her] comment that if Lehman Brothers had been Lehman Sisters instead, we wouldn’t have had that problem. In my mind, that’s not quite right. It should have been Lehman Siblings, because too much of any gender or outlook or perspective or risk attitude is the wrong approach to take. There’s a lot of research showing that when you have diverse voices in different demographics, different specializations, different perspectives, you’re much better set up to make good decisions for the future.
One problem we are having right now is that there were unintended consequences of some of the decisions that were made to get us out of the 2008 crisis. It’s important when you’re getting out of a crisis to make sure that you’re not setting yourself up for something worse down the road, and to put in place check-in measures along the way, to make sure that the fixes you put in place are working the way you meant them to.
BD: Crises can force change. What do you hope to see business leaders learn from this current crisis to ensure they’re better prepared for the next crisis on the horizon?
MW: I love the way you phrased that because people are always trying to look backwards, because they’re so used to thinking of black swans. [Editor’s Note: A “black swan” refers to a rare, unforeseeable crisis.] It’s important to look back to learn what we’ve done wrong, but unless you apply it to the future, it’s a bit of an exercise in futility.
The biggest lesson I think people should learn is how important it is to be proactive about problems, particularly big problems that seem overwhelming. It’s very important for everybody to do their part to address problems. … Leaders really need to focus on two new mindsets. One, proactive, long-term, forward-looking emphasis on creating value, and thinking in complex systems. The Business Roundtable statement last August about restating the purpose of a corporation was interesting in that way. They came out and said it’s no longer a matter of prioritizing your shareholders alone, because if you don’t think about all of the other stakeholders in your orbit, that has the potential to reduce shareholder value.
I think it really brought a complex systems approach to this debate in business communities. For so long, people had looked just at shareholders, and thought about other stakeholders’ needs as a zero-sum game. This new systems-thinking approach shows how they’re all related; that you can’t effectively protect your shareholders unless you’re also looking at your other stakeholders. That brings us back to your point about having diverse voices and making sure you’re getting all the inputs you need.
BD: What are the other gray rhinos that banks and corporations might be ignoring right now?
MW: I’ve been focusing personally on a trio of interrelated gray rhinos. Inequality. The fact that the people in the bottom whatever percent you want to apply are falling behind. [This is] already hurting economic growth and making the entire economy much more vulnerable, as we’re now seeing in a painful way. So, inequality is the first one.
Second one is climate change, which is closely related to inequality, because the people who are contributing the most to greenhouse gas emissions and climate change generally tend to not be the same ones as the people who are affected the most. And third, financial fragilities, which are closely related to both climate change and inequality, as we’re seeing right now when the bottom part of the population loses their jobs and they’re blown apart, taking the whole economy down with it.
As we saw in the conversations in Davos in January, and with BlackRock’s statement about climate risk and investment risk being one and the same, there’s a close relationship between climate change decisions and shoring up the way that the whole financial system and the global economy works. Many central banks and researchers around the world last year made the point that insurers are undercapitalized if you look at the potential impact of climate change.
I think there’s also complex systems thinking, a limit to that — if you’re financing fossil fuel companies, but you have other investments that are negatively affected by climate change, say oceanfront property, then you’re basically investing in hurting the other companies and investments in your portfolio.
So, that trio to me is important, and the pandemic has shown how dangerous all three of them are and that we need to deal with all three of them together.