Three concepts about how a company should be run that executives must follow to survive and beat the "black swan"

The Deputy General Director of KIDO Group has more than 20 years of experience in corporate governance and advising, and he has faced and overcome unpredictable economic risks. He offered three corporate governance principles that CEOs should follow to survive and overcome the "black swan."

"Black swans" are unpredictable events, have bad results, and can only be understood after the fact (through available data). As the "black swan" of the 21st century, there are events that cause crises and heavy losses, which I've put temporarily into the three groups below:

-       Political problems like the terrorist attacks of September 11, 2001, and the war between Russia and Ukraine (2021).

-       Economic crises like the Dot-com bubble bursting and crashing in 2001, the financial crisis of 2008, and the stock market crash (April 2022).

-       Natural disasters like the tsunami in Southeast Asia in 2004, the Fukushima nuclear disaster in 2011, and the start of the COVID pandemic in the 19th century (2020–2022).

The survival of every business on the market is affected by these events in different ways and over a wide range of time. Ironically, we can't tell when or how much these things will affect us. But the fact that their effects can be explained by the available data shows that it's because of a lot of weak spots in the enterprise that have been added up over time.

From the point of view of risk management, businesses need to stop solving problems based on old biases if they want to "prepare themselves" well and be ready for "black swans" even when they happen.

After 20 years of working in corporate governance and consulting and facing and overcoming uncertain risks to the economy, I've come up with three corporate governance principles that leaders need to follow to survive and beat the "black swan."

Principle 1: Plan the signs so they can be watched and evaluated all the time.

A "black swan" is a big, unexpected event that could kill a business at any time. But many businesses think their chances are too low, so they wait until the crisis happens before they look at the signs and figure out what to do.

Plans should be made to check on these signs early in each area, based on how the business works. We need to add "microprobability, extreme impact" problems to the risk management program so that they can be looked at regularly and their warning signs are given.

Enterprises should always be ready to set up a quick response team that can deal with emergencies and respond quickly to urgent situations.

We must do what we can to make sure that the "black swan" doesn't cause things to fall apart. By getting ready first, businesses will be in the best position to turn things around while their competitors are still in "shock" from facing the same problem.

Principle 2: Always have a plan for how to handle risk.

Planning and keeping an eye on the business's signs won't mean anything without a risk response scenario.

Have plans for "all the worst and most unexpected things that could happen" to get the best results.

Scenarios can predict bad volatility on a scale that is many times higher than what has happened in the past.

The developed risk response scenario should be based on an analysis of the risks and a plan for reserves for two important resources: money and people's health.

Contingent financial resources must be able to quickly turn into cash to deal with unexpected situations, such as financial provisions, standards that banks and financial institutions give to businesses, and inventory at a reasonable level.

Welfare and insurance policies need to be in place for employees of the business so that they can stay with the business even when times are hard.

When it comes to "sudden" crises from the environment, a business will have more flexibility and resilience if it can respond to more than one scenario.

Principle 3: Always look for ways to spread and transfer risk.

Before "black swan" events happen, businesses must find ways to reduce risks in all situations, such as through insurance, reinsurance, and building relationships with partners (to supply chain backup).

Organizations, businesses, and even individuals must think about things that are scary but can be insured (like a fire, explosion, or accident at work) and make backup plans as carefully as possible.

For example, in a stock market that is extremely sensitive to volatility, businesses can hedge against the risk of an unexpected market drop by assigning it to professional funds to manage because they have an "investment profession" and we should watch the market more closely.

Individuals should have a safe hedge based on the ratio of their stock and cash portfolios and cut losses according to their stamina. To prevent unexpected accidents, you need to "drive with brakes."

If you apply the three above principles to the cooking oil industry of KIDO Group, you can see that this industry is still having trouble because of the COVID-19 pandemic, but the political conflict between Russia and Ukraine hasn't changed. Something happened that made things worse. Ukraine is the top exporter of sunflower oil.

When it joined the war, it cut off supplies and caused cooking oil prices to rise, not just for sunflower oil but also for canola oil and palm oil. These effects don't just happen in Europe. They quickly spread to Asia and Africa as well. Indonesia is the largest exporter of palm oil in the world. At the end of April, all palm oil exports were banned so that there would be enough cooking oil for its 270 million people.

These are the steps the Indonesian government is taking to avoid an oil price crisis at home. But this action "threatens" to cause a shortage of cheap cooking oil in many places around the world, including Vietnam.

In short, no one can predict 100 per cent that a "black swan" like the COVID-19 pandemic will happen in the next 100 years. But its symptoms can be predicted based on pandemics of flu, Ebola, and other diseases that have happened in the past.

So, to deal with the "black swan," businesses need a big change in how they think about risk management. Enterprises can get into a lot of trouble if they "deliberately" ignore the warning signs that they should see.

In the process of running a business, many bad habits are still allowed to continue until they grow into cancerous tumours that spread to all the nooks and crannies and destroy the business from the inside. It is also a "black swan" that is hidden inside the enterprise. Don't just look at and understand 10% of the problem without also having a plan for the other 90% of the problem's "iceberg."

I want to tell business owners to always look at themselves (rethink) because "change is not important; it is important to recognize where the danger is and where the real opportunity is." The appearance of a "black swan" could kill one business but be a good chance for another. People, businesses, and organizations can beat the "black swan" only if they plan for and build good backup plans.

 Ma Thanh Danh - Deputy general director of KIDO enterprises