Chapter 1Firing Failed Risk Practices
1.1Brexit and the failure of ERM
There has been much written on the over-emphasis of “Black Swans”
1 in risk management. The 2016 Brexit vote not only sent shock waves through financial markets but also created a completely new paradigm to world economic stability both short and long term. If risk is defined as uncertainty, then today this must be one of our greatest risks.
Figure 1-1
So what happened with Brexit? After all, the vote was a 50/50 risk! I believe it was an enormous accident. No one really thought it would happen. Just look at the graphic above to see the odds bookies were offering of the U.K. staying in the EU! Over 2 to 1. Even I bought shares that Thursday, discounting the vote as a non-event. From the petitions still circulating in the U.K., I would say complacency amongst the media, middle classes, and business community was the major culprit.
The same complacency with “nutter” politics voted in Donald Trump (as shown by his absurd “congratulation on taking your country back” comment on landing in SCOTLAND, which voted No!).
So where to from here?
My “guess” is that the U.K.’s exit from the EU (now exacerbated by COVID) will result in a Thatcherite period of recession, social unrest, and economic restructuring. I believe this, like its namesake, will leave U.K. stronger. Ireland will boom as the new English-speaking base for European access, and the EU will devolve back to its roots, plus maybe the Czech Republic. This is not because of any political bias, but purely economic rationalism. Proven both in business and the USSR, management of large dispersed operations (like the EU) must be delegated and decentralised. This is why small “start-ups” outperform large market leaders, and why the short-lived “Intrapreneurship” fad failed.
The trap of the Risk Matrix and Heat Maps
The first requirement for resilience is awareness. Awareness of how different aspects affect your processes and objectives is a foundation of risk management. Like a 1980s entrepreneur, the EU has been fixated on expansion (a historical trait for Germany) at all costs. Most of these 1980s entrepreneur companies ended up unravelling, but some restructured back to core business and survived. I see this as the only way of survival for the EU and ERM.
Sadly, ERM’s over-concentration on risk heat-maps and dashboards that have created
