As background to a podcast I participated in to support the Association of Corporate Treasurers (ACT) Advanced Diploma, I undertook some research and found that it was the Romans who first made reference to a seemingly mythical animal – ‘rara avis in terris nigroque simillima cygno – or a rare bird in the lands and very much like a black swan’.
In modern times, Google the term ‘black swan event’ and the definition comes back: ‘an unpredictable or unforeseen event, typically one with extreme consequences’.
This modern definition was first coined around 2007 by Nassim Taleb, a professor, statistician and options trader.
In any event, it is generally agreed that a black swan event is one that is unforeseen. The question should be: what do we do about it?
This was what we discussed in the podcast and, focusing heavily on the lessons learned from the COVID-19 crisis, we came up with the following thoughts for the treasurer.
As Field Marshal Rommel pointed out: “No plan survives contact with the enemy” – and it is the same with planning for a black swan event.
Many organisations will have invested in identifying potential black swan events and then determining appropriate mitigants.
Some will have gone as far as to have tested these mitigants. However, most companies will not have contemplated the far-reaching consequences of a global pandemic.
Liquidity has been the most important consideration for most businesses, and the ACT produced a liquidity barometer during the height of the pandemic to gauge market sentiment.
One key message was the importance of cash forecasting. Many organisations increased the frequency of the forecasts; and variance analysis and commentary became scrutinised in much greater detail.
For some treasurers this required starting from scratch; for others it meant a redesign of the forecast process. This required an understanding of what information the organisation had available, the quality and integrity of the data and the process of data consolidation.
Having access to flexible tools and being agile with their application has been the key to success for many treasurers and – I’m sure – the difference between sleepless and restful nights.
Having the right technology to cope with a major disruption is critical. The pandemic has illustrated the value of cloud-based solutions that can easily be deployed from any location (subject to access to adequate internet connectivity).
For example, retaining straight-through-processing for many firms has ensured that operational risks continue to be minimised.
Most scenario planning of black swan events contemplates a physical event. However, we learnt from COVID-19 that such events could also impact individuals at a personal level.
Despite the role of technology, it is this human element that has been seen to be either the weakest or the strongest link in managing through a black swan event.
We’re all too aware of the challenges of working from home, but doing so over a sustained period of time – combined with looking after young families or elderly parents – has been daunting for many people.
Irrespective of the debate of whether COVID-19 is a black swan event, the effect for anyone dealing with treasury activities has been significant
For many treasurers, leading teams while managing one’s own personal domestic situation has added to the stress. Treasurers need to be flexible to accommodate the impact of school closures and complex domestic arrangements (caring for dependants) on not only the treasury team, but also peers and the C-suite. And this needs to be balanced with the ongoing needs of the business.
Providing support to beleaguered staff is much harder over a video call, and even more so if the internet connection is not reliable. But ensuring that the team remains motivated and clear on its purpose is a key objective for most treasurers and leaders.
The final topic the podcast considered was what black swan events to consider next. The phrase ‘paralysis by analysis’ featured often in the discussion and it is easy to invest significant resources identifying a wide range of potential events and how to mitigate these completely.
As the debate continued, what was clear was the benefit of focusing on outcomes rather than the causes of these outcomes.
Doing so removes the need to exhaustively consider different sources of disruption and accept that some of these events are going to happen despite efforts to prevent them.
I’ve heard UK regulators focus on the response time to get payment systems back up and running rather than concentrating on how to prevent them ever failing.
Irrespective of the debate of whether COVID-19 is a black swan event, the effect for anyone dealing with treasury activities has been significant.
We have seen that the ability to respond to a crisis fundamentally depends on the ability of all staff to understand the implications of a black swan event on their business and to be able to respond accordingly.
We know that technology has been a key enabler during this crisis, allowing many treasurers to provide a continuous and interrupted service for their organisation, but it cannot be the sole solution.
Nor can identifying all potential black swan events.
What is more important is focusing on disruptive outcomes and identifying what appropriate responses could be.
Naresh Aggarwal is director – policy and technical at the ACT
This article was taken from the October/November 2020 issue of The Treasurer magazine.