Wharton@Work

November 2018 | 

Mastering Catastrophic Risk: How Companies Are Coping with Disruption


Mastering Catastrophic Risk: How Companies Are Coping with Disruption

Risks to organizations have never been more numerous, calamitous, or wide reaching. Climate change has increased the severity of natural disasters, terrorist attacks make headlines worldwide, and technological breakthroughs are disrupting companies in many industries. Global interdependencies, whether in financial markets or supply chains, mean we can all be negatively affected by crises occurring anywhere.

That’s the bad news. The good news, according to the authors of Mastering Catastrophic Risk: How Companies Are Coping with Disruption (Oxford University Press, 2018), is that organizations are responding. After interviewing more than 100 directors, executives, and managers of large publicly traded firms in the U.S. and abroad, Howard Kunreuther and Michael Useem say many of these leaders — all of whom have already faced crises — are now appraising their risks in a more deliberative fashion, engaging more directly with their directors in risk oversight, and making risk management an integral part of business strategy.

The authors contend that by learning from others’ experiences and through scenario planning exercises, leaders can better manage adverse risks without having experienced a crisis themselves.

But despite the heightened readiness for facing new rounds of familiar disruptions, there are new challenges that can differ vastly from what has come before. There are also leaders who haven’t been tested yet by catastrophes, and who aren’t taking such proactive steps. For those tested and untested, the book offers a pragmatic framework for effectively preparing for and responding to new catastrophic risks.

First it introduces the DISRUPT model of the six drivers of disruption: interdependencies that increase exposure; short-term focus that results in limited vision; regulations that require change and constrain opportunities; urbanization that increases the costs of disasters; probabilities of disasters that have increased; and transparency that has enhanced public awareness of problems and impacts on firms’ reputations.

The authors, both Wharton professors, also identify a set of management practices for reducing the likelihood and the impacts of large-scale disruptions. These practices focus not just on the “before” — what you can do now to better manage the risk of potential future crises — but also during and after a catastrophe.

For leaders who want to be better prepared to guard against future crises, and survive and thrive after those they can’t avoid, Mastering Risk serves as an eminently practical guide. The authors contend that by learning from others’ experiences and through scenario planning exercises, leaders can better manage adverse risks without having experienced a crisis themselves. Given the increasing pace and scale of disruptive events, there is no time like the present to do it.