Respecting the Grey Swan: 40 Years of Reputation Crises

The global impact of the novel coronavirus (COVID-19) pandemic has reminded us all of the challenges we face in managing extreme events. Certain events are so extremely rare, they have yet to be imagined. They are “unknown unknowns” with unpredictable causes.

And then there are others: occasionally referenced and seldom defined. These events too, are rare, but we know that they exist. However, they are not so rare that we cannot make sense of them.

The report proposes that analysis of the impact of Grey Swan events offers the most potential for improving risk management strategies and making value-enhancing decisions.

In the report Respecting the Grey Swan: 40 Years of Reputation Crises, Aon partnered with Pentland Analytics to produce research focused on a better understanding of why some organisations succeed and emerge stronger after a crisis. Dr. Deborah Pretty of Pentland Analytics proposes that many extreme events are referred to as “Black Swans”¹ but, once investigated, are found to be “Grey Swan” events. These Grey Swan events are “unknown knowns” that are anticipated, discussed and warned about with increasing urgency, but the warnings are unheeded.

Like their better-known “Black Swan” cousins, “Grey Swan” events can greatly impact firms; unlike Black Swans, which seem inconceivable before they happen, Grey Swans are known beforehand. Grey Swans are long-tail risks, known but thought highly unlikely – and thus firms have often neglected to invest scarce resources to prepare for them. Many extreme events, such as the 9/11 attacks, the 2008 financial crisis and, most recently, the COVID-19 pandemic, are considered Grey Swan events because of the size of the impact and the many warning signs that were ignored. Other types of reputation Grey Swans come from within the organization, including governance crises or product failures.

Drawing on 40 years of data from Pentland Analytics’ Reputation Crisis Databank, the report highlights how crises remain a major risk for organizations globally, analyzing data from 300 corporate crises from the last 40 years, examining Grey Swans’ impact on shareholder value and identifying drivers of recovery.

The likelihood of a Grey Swan event occurring is greater than most organizations prepare for. The report draws attention to cognitive biases and explains how ambiguous and uncomfortable data are easy to ignore, how the impact of Grey Swan events is substantial and enduring, and how value recovery is a function of critical pre- and post-loss decisions. It also highlights the financial value of reputation — in over 10% of crises, more than 50% of shareholder value is destroyed – and directors and officers’ increased risk exposure, especially following a Grey Swan event. On average, shareholders can expect to lose 26% of value at some point during the post-event year.