How Individuals and Companies can Protect Themselves from Systemic Risks

Systemic Risks and their Impacts

Business continuity planning and management is an approach that companies adopt to protect themselves from unforeseen and high impact events. In recent years, Black Swan events or low probability high impact events that no one can foresee with accuracy have become common.

For instance, the collapse of the American Investment Bank, Lehmann Brothers in September 2008 was a major event that precipitated a near meltdown of the financial system. Similarly, the Fukushima Nuclear Plant disaster following the Japanese Tsunami of March 2011 was another such event that took everyone by surprise. Hence, the clear implications of these and other similar events is that companies and individuals must be prepared for such events that threaten their very existence.

The key aspect here is that such events used to happen in earlier decades as well. However, given the rapid integration of the global economy, the impact of such events has been magnified several times leading to systemic threats and systemic risks. In this context, it is important more than ever for companies and individuals to be on the lookout for such systemic threats to their existence.

Systemic Risks in the Global Age

We all know how the relentless 24/7 news cycle and the breaking news phenomenon have amplified the impact of events that happen half a world away but nonetheless cause damage to faraway places.

The point to be noted is that as globalization helped companies and individuals reach out to a global consumer base and global news audience, it has also increased the exposure of companies and individuals to happenings all over the world. This is more the reason why companies and individuals must be prepared to deal with global events that cause local impact and the intersection of a global event and the local impact that it brings has to be planned for and guarded against.

For instance, companies that are publicly listed have to ensure that their exposure to global risks is quantified and accounted for. Otherwise, happenings in one corner of the world would have an impact on their stock prices and the market capitalization of such companies.

Interconnections between Events and Impacts

Apart from this, companies have to be prepared for tail risks that are the leftover risks from such systemic threats.

For instance, Ranbaxy has been fined for adulteration of medicines in the United States. The cascading effect of such an event has been felt in India and across the world where hospitals and pharmacies are advising against buying their medicines.

Though the fact that its drugs might be adulterated in India as well, the key aspect here is that in a globalized world, happenings in one corner of the world affect global companies elsewhere as well.

Further, companies must be prepared to deal with manmade and natural disasters at the same time.

Astute business continuity planning and management can serve to minimize and mitigate the risk from such events.

For instance, many multinational companies have backup locations or off sites in secondary cities so that employees can be taken there and business restored in the shortest time possible.

There is the other aspect of companies having data centers and software backups in secondary locations so that in the event of a disaster, data can be restored, business up, and running.

Concluding Thoughts

Finally, it is the prerogative of companies to mitigate themselves against systemic risks. However, in recent months, even regulators are advising companies to have foolproof backup plans so that in case of systemic risks, they are well prepared and planned for. This is the case with many financial institutions that have been asked by the market regulators to keep the documents and artifacts safe and secure and to protect consumer data and records so that any systemic event does not render the data inaccessible.

In conclusion, in this 24/7 global age, all of us are vulnerable to systemic risks and hence, safe and secure planning for unanticipated events must be done so that the downsides of such risks are mitigated.