What could possibly go wrong…?

Being in the business of helping our clients manage complex credit, economic and financial risks, perhaps not surprisingly we the Awbury Team has a certain necessary fascination with how to understand and analyze the material risks any Obligor faces.

Over time, a number of attempts have been made to provide a systematic classification of such risks, the latest (and most comprehensive of which) is the (Cambridge Taxonomy of Business Risks), which uses what one might call a quasi-Linnaean system involving 6 Primary Classes, 37 Families and 175 (sic) Types.

The results are useful because they provide what one might call a checklist (cf. Dr. Atul Gawande’s “The Checklist Manifesto”) for any risk analyst or underwriter to set against the nature and complexity of the entity she or he is reviewing and assessing.

Of course, it is easy to mock a list that contains 175 Types as being far too complicated to be useful. However, the mere fact of its existence should at least compel an analyst to look at the risks which a business faces holistically, and consider which ones are material; or, if they arose, could potentially lead to failure and default. And bear in mind that many regulators require companies to maintain Risk Registers- which, in reality, are analogous to a basic taxonomy of risk.

The Taxonomy does not weight the risks, because, quite clearly, that (and their relevance) varies from entity to entity. However, the authors do comment that, of the 6 Primary Classes (Financial, Geopolitical, Technology, Environment, Social and Governance), Governance risk is often underestimated; while “Geopolitical risks and possibly Financial, [may be] being overestimated. And, yes, “Infectious Disease” is in there as a Family!

The “art”, therefore, lies in looking at an entity and determining the material risks to which it is subject, particularly the potentially “existential” ones. As the pandemic has brutally demonstrated, the trope “lack of cash (and liquidity) kills companies” has never been more true, even if no business executive is ever likely to have planned for revenues to fall to (perhaps) zero for what was hitherto considered a viable and well-run business.

This just serves to emphasize that it is not the “usual” risks that are likely to cause systemic issues (although they may have an idiosyncratic impact), but rather the ones thought to be out in the tail of any distribution. Perhaps ironically, one could clearly argue that the pandemic was a 1-in-100 year risk which should have been factored into (re)insurer risk models (as it surely will now be!), as other 1-in-200-, 1-in-250- and 1-in-500-year risks habitually are for NatCat programmes. This is not, in any sense, to denigrate the (re)insurance industry, because it was governmental behaviour and actions that caused the most harm in economic and loss-exposure terms, not the disease- in other words, a second- not a first-order effect- and that clearly now belongs in any taxonomy of risk under “Government Action”!

The pandemic also demonstrates the fact that world of risk is not Aristotelian and fixed, but evolves and changes as forces and events act upon it- the SARS-COV-2 pandemic simply being the latest example. Checklists are useful, but only as a guide, not as an expression of the limits of risk. As we have written before, it is usually the risks that you do not foresee that cause the most harm.

The Awbury Team

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Don’t just think about it, apply it (quickly!)…

Since the Industrial Revolution, the rate of growth of the world’s aggregate economic output has been extraordinary (https://ourworldindata.org/grapher/world-gdp-over-the-last-two-millennia), with the slope of the graph going from the almost horizontal to the almost vertical. There are many reasons for this, but a key one has been the increase in productivity, as fundamental scientific discoveries were converted into an iterative series of technological and process applications that enabled capital to be transformed into ever growing wealth, even if often unequally. In essence, most of the world “levelled up”.

As with reasons for growth, there is debate about why productivity varies over time and by geography. And vary it does. As economist Robert Gordon has shown, real US GDP per hour increased from an average of 1.79% per annum between 1870 and 1920, to 2.82% per hour between 1920 and 1970, only to fall back to 1.62% between 1970 and 2014.  A 1% annual variation may not seem much, but, because of the effect of compounding it matters.

And now, in the midst of a pandemic, there is much debate about whether a virtual and distributed workforce will be more or less productive. Frankly, it is too early to tell, as there is anecdotal evidence each way.

However that may be, productivity matters. It is clearly linked in some way to step changes or new directions in scientific knowledge; but pure science (which is undertaken for its own sake) has no economic value unless one does something with it. Knowledge has to be applied. In the supposed “golden age” of productivity, from 1920 to 1970, that was often through the medium of the corporate research laboratory, such as IBM, DuPont, Merck, Xerox PARC, and Bell Labs. Those milieu transformed basic science into technologies or products that have made the world what it is today, and which we now take for granted.

Nevertheless, there is a nagging sense that all is not well. Somehow quantity no longer seems to produce the same quality. Why is much debated, and is too large a subject for a blog post. What matters is somehow finding a better way to convert knowledge into applied intellectual capital. Without that, knowledge is just knowledge.

Consider, for example, the (re)insurance industry. Essential, knowledge-based, full of highly-educated and very smart individuals. And yet…

Somehow the industry is often still slow to incorporate, adapt and apply new knowledge, or to develop effective new products and processes. As a  result, it moves sideways, or improves incrementally at best, and sometimes goes backwards- at least so far as it appears to the outside world. As we have written before, according to a McKinsey study, many companies in the industry actually destroy, rather than create value, barely earning their cost of capital. Now the industry faces numerous challenges, some of which may prove existential if it proves unable to address, manage and mitigate them.

For Awbury, the creation and application of intellectual capital to create value-added products is a fundamental part of our “corporate DNA”. It is what our client base expects and demands. We do not pretend to be “better”, or that knowledge is an end in itself; but we do understand that thinking needs to be transformed into doing, rather than endlessly refined, discussed and debated.

The Awbury Team

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Fiscal insurance and the Reckoning…

Continuing the theme of our previous post (“Are you feeling (financially) repressed yet…?”), we now examine the issues posed by the pandemic from another perspective- that of fiscal policy and sustainable levels of government debt.

The level of fiscal support or “stimulus” to their economies being provided by governments  across much of the developed world already far-exceeds those seen in the wake of the GFC. Yet it is not really a “stimulus” (as HSBC pointed out in a recent paper entitled “Borrowing from the Future”): in reality it is insurance- a pay-out intended to help the recipient recover from an unexpected disaster, or economic CAT caused by an combination of a highly-contagious virus and subsequent government actions. However, the difference from insurance as such is that many governments do not have reserves set aside to address such an eventuality. Instead, they rely of the unique coercive power of the state to raise revenues through taxation, which, of course, ultimately depends upon the ability of its underlying economy not only to generate wealth sufficient to pay those taxes, but do so in ways that do not themselves inhibit wealth creation.

The general absence of a reserve means that in reality most governments (except those that have specific funds to act as a buffer against a decline in future revenues, such as most “petro-states”) raise the necessary funds in the short term through issuing debt in one form or another, to be repaid from future tax revenues.

The long-term downward trend in absolute and marginal levels of taxation across much of the world, coupled with rising (and now accelerated) ratios of government debt to GDP to levels not usually seen outside wartime, means that there is going to be a reckoning, because the pandemic will result in “economic scarring” in ways that are still unclear, but almost certain.

The scale and persistence of such “scarring” matters, because the intention behind the “insurance payout” by a government during the pandemic is to preserve not just income levels but to avoid the loss of future productive capacity in the economy. If the “scarring” is worse than expected, this will lead, amongst other things, to lower tax revenues and fewer jobs, and so likely lengthen the period over which government budget deficits persist at elevated levels, leading to more borrowing. Of course, this issue also has to be viewed in the context of the level of nominal interest rates on sovereign debt, when set against the nominal rate of growth in the same economy. As long as the latter exceeds the former, debt servicing is sustainable.

The situation is further complicated by the fact that the shape and trajectory of any economic recovery from the pandemic is still unclear for most economies. Anything other than a “sharp V” or “truncated U” means that the “scarring” will be real, while the recent general decline in many economies’ productivity is also cause for concern, particularly if it proves to be secular rather than cyclical.

Taking all the factors into account, any forecasts are merely estimates of possible scenarios. It is far too early to make any robust forecasts, so one has to remain wary about the build-up of the risks within economies, which always arise when a sovereign’s ability to raise and service its obligations becomes impaired. For Awbury, this is just another component in our systematic and continuing assessment of all the potential risks that may have a material impact on our existing portfolio and future business.

As Morgan Housel recently said: “Wounds heal; scars last”.

The Awbury Team

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Are you feeling (financially) repressed yet?

One of the major conundrums in the wake of the GFC has been why inflation has not yet risen consistently from barely above c.1% in most major economies in the wake of all the central bank “pump-priming” and Quantitative Easing (QE). The catalogue of “experts” forecasting a doom-loop of rising inflation and even hyper-inflation is a long, and by now largely discredited one.

Of course, one can be very wrong for a very long time, and then suddenly right as the narrative flips. There is just the slight intervening problem of being thoroughly ignored and discredited, although usually without suffering the fate of Cassandra, beyond reputational “death”.

However, we have been reading an interesting note by the Man Institute, entitled (The Inflation Regime Roadmap) which discusses how inflation, and good old-fashioned “financial repression” may return.

One basic problem is that inflation can have a range of causes beyond the “money-printing” that tends to obsess monetarists, as well as be curbed by off-setting factors, as has almost certainly been the case since the end of the GFC. However, as the balance shifts, this can (apparently suddenly) cause inflation to spike upwards. Reasons can range from supply/demand imbalances in an underlying economy to changes in the relative bargaining power of labour versus capital, to commodity-based “shocks” (as in the early to mid-1970s). Unfortunately, focusing on what happened on the previous occasion, or a particular path is naïve because it is invariably the unforeseen or unexpected that triggers the shift.

And different constituencies suffer disparate outcomes depending upon both scale and direction (inflation, disinflation or deflation), which makes the situation even more complicated.

However, for major fixed income investors, such as (re)insurers, a particular concern is financial repression, accompanied by negative real interest rates- i.e., where interest rates are manipulated by governments and central banks to be low in nominal terms (or even negative, as we have seen post-GFC), in an environment in which inflation starts rising. At present, central banks are more concerned with deflation and aggregate levels of demand than they are about inflation, with the pandemic seeing remarkable levels of fiscal relaxation and the creation of available money in the system to try to mitigate or prevent economic harm. As a result, nominal rates are at or close to historically low levels across the EU, US and Japan and many other jurisdictions, which makes it very hard for any (re)insurer to generate levels of Net Investment Income (NII) to act as a buffer against recent and continuing weak underwriting results.

Whether in government bonds, munis or high-grade corporates, both yields and spreads achievable on the re-investment of income and maturing portfolio assets remain low, which means that it is ever harder to mask the volatility that also flows through the P&L and Equity accounts from changes in market values.

At Awbury, we have long been aware of both the issues and the need for a solution. Therefore, we have designed and successfully implemented for the past several years a range of products which specifically address a (re)insurer’s need both to generate high quality premium flows, and to remove volatility. We believe that these products are tailor-made for today’s environment, and are happy to discuss them further with those interested in solving a demonstrable problem.

The Awbury Team

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So, how much uncertainty can you stomach…?

One of life’s enduring paradoxes is that human beings crave certainty, but are beset by a reality in which the arc of the future is inherently unknowable. This often creates cognitive dissonance. We want to persuade ourselves that we can predict what is to come; yet (if we think about it) recognize that as being impossible beyond certain parameters (and even those can be upended, as the outcome of the pandemic has shown).

We like to think that the natural order of things is both stability and progress in our world; yet recorded history is full of discontinuities in which what had been gained was (often) irretrievably lost for at least some cohort that thought it was secure- whether Roman citizens in the twilight Rome’s empire; Greek-speaking Byzantines in 1453; numerous African polities during the era of European colonization; the Russian aristocracy and intelligentsia during the Russian Revolution; or those singled out as “class enemies” during the Cultural Revolution in Communist China. The list is long. And now we have a global pandemic which may well disrupt and shatter the expectations of whole swathes of society.

How then can one both acknowledge and control all this in the context of managing risk?

Firstly, by understanding that just because everyone else agrees with us does not mean that we must be right. Being comfortable and secure in one’s certainty is an almost certain predictor of failure when thin tails prove to be fat.

Secondly, by realizing that there is no shame in expressing doubt. It is a sign of intellectual humility, which is an essential trait in anyone who seeks to forecast future outcomes.

Thirdly, (to quote Howard Marks of Oaktree), by accepting that we must make decisions regarding the future without knowing it.

Fourthly, by recognizing that the conditionality of the future exhibits both path dependencies and randomness, which can combine to produce outcomes that are wholly unexpected

And, finally, by taking comfort from the fact that that much of what we all do is a function of judgement, and not just expertise. Professing that one is “an expert” means nothing, and is often delusional.

In reality, the future is the result of our collective effort and interaction with each other and with the world in general. That may sound trite, but it is the truth. Events such the onset of the SARS-COV-2 virus may be random (in human terms) or not, but they then have consequences as we have seen. So we have, in responding both modified and created our own future, a fact over which we have some control.

To build a business founded on sourcing, structuring, placing and managing complex credit, economic and financial risks, one can hardly abdicate any decision-making processes, and metaphorically just “throw darts at the dartboard” hoping that the ratio of bullseyes to singles proves adequate! However, one can assess probabilities, identify parameters, and learn to understand how complex systems interact in order to build and test a thesis as to why a particular risk/reward in both sound and (most importantly) bounded to the downside. At Awbury, that is what we do every day. We live with inherent uncertainty, and navigate our path through it.

The Awbury Team

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Forward to the Past (again)…

It seems to us that the Iron Chancellor, Prince Otto von Bismarck, would recognize the current world more than one might expect. We have written before about the risk of the so-called “Thucydides Trap” in which the PRC challenges US hegemony, with unfortunate consequences for both sides.

However, the ratcheting-up of tensions recently between the US and PRC also echoes the end of the first era of globalization, which was cut short by World War I in 1914, as has been highlighted in a fascinating paper, “Beijing’s Bismarckian Ghosts:”

While history may not repeat itself, and it is always dangerous to draw the same conclusions about likely outcomes, the description of how a newly-reunified Germany challenged the then global superpower, the UK, and its Empire, is remarkably consistent with the range of methods the PRC has been using for the past several decades. While, in the same way that the “Kremlin’s” opacity in terms of decision-making kept US political analysts guessing for decades, the deliberation in Beijing’s Zhonhanhai produce the same effect. Are the parallels coincidence or deliberate re-use of the Bismarckian “playbook”?

Some points to consider:

  • A rising autocracy, with a state-protected economic system, challenges an established democracy with a free-market economic system
  • While they threaten and bluster at each other, they have significant interdependence in trading terms, with the rising power using exports as an engine of growth and “turning all her forces to the systematic conquest of external markets” (to quote Henri Hauser, a French economic historian writing during WW I)
  • The hegemon is adamant that the rising power has been “cheating” and using illicit means to gain knowledge of new and important technologies
  • Each side argues about the appropriate standards to be used in new technologies (the telegraph and radio then; the internet and 5G now)
  • The rising power seeks to build influence and economic advantage through the creation of huge infrastructure projects (the Berlin-Baghdad Railway then; the Belt and Road Initiative now)
  • Investment in basic research and advanced education becomes an obsession of the rising power
  • Each side tries to gain an advantage through influence on, control or manipulation of the global financial system, and the wielding of financial tools as a weapon
  • The rising power feels threatened and hemmed in by it geography, and seeks to challenge the hegemon’s control of vital global sea lanes
  • The hegemon starts wielding tariffs as a means to curb the rising power’s mercantile expansion

With its authority unchallenged, the Chinese Communist Party is able to play “long game”; and is quite clearly a student of the ways in which great power rivalry is conducted, and the tools and techniques that should be used.

However, what remains to be seen is the extent to which it is willing to push and consolidate any advantages it gains in the various realms of competition, how the hegemon responds- which brings us back to the Thucydides Trap- and whether the CCP is willing to stand its ground when challenged.

As we said above, assuming that the past will inevitably repeat in the future is dangerous. However, being aware of the currents and eddies of history is essential to being able to create the informed scenarios that enable Awbury to continue to build its franchise in the management of complex credit, financial and economic risks. These do not exist in isolation, but are profoundly influenced by the interplay and rivalries of geo-politics, so awareness and understanding are a key to managing risk.

The Awbury Team

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Hard and Fast…?

For what seems like forever, (re)insurers have been forecasting the return of the industry’s nirvana of a sustained and sustainable hard market. After the significant CAT events of late 2018, many hoped that such a market would follow. However it turned out to be much like the “Curate’s Egg”, good in parts.

Now, in the wake of the pandemic, there is new hope that there will be a broad-based rise in premia, at least in part to off-set an expected significant rise in claims in certain business lines.

Much public “hand-wringing” has occurred over how the negative consequences of the pandemic could be an “existential threat” if worst-case scenarios occur- such as the legislative or judicial compulsion of the payment of supposedly excluded Business Interruption (BI) claims from businesses shut down by government (and so administrative) fiat.

Off-setting this, there are now said to be clear signs that pricing is hardening significantly across a number of business lines, including D&O, BI, and NatCAT, sometimes doubling; while the increasing amount of fresh capital being raised indicates that at least some executives believe that attractive new opportunities exist.

On the face of it, this is a welcome development for (re)insurers. Yet, paradoxically it comes at a time when many insureds are least able to absorb such increases because of the impact of the pandemic on their underlying business.

This combination is going to require a careful balancing act within the industry. On the one hand, premia are the lifeblood of any (re)insurer; on the other, that is not of much use if the client cannot afford to, or will not pay the level of increases demanded.

In addition, in some lines, such as auto, companies are expected, if not required, to rebate premia received because less driving means fewer accidents. This, objectively, is a good thing in terms of the welfare of society, but it yet again reduces premium flow.

And if, as in the case of BI, insurance buyers perceive that they are not being covered for something which they believed they were, they may simply stop buying insurance lines that are not mandatory, even if that is actually counter-productive.

All these competing factors mean that the outlook over next few months and years for the (re)insurance industry as a whole is still rather murky in terms of whether and, if so, how the recent negative trends in underwriting outcomes will reverse. One can try to increase pricing, but that will not “stick” if insureds cannot or will not pay such prices. Compounding this is the clear damage caused to the NII and asset side of many (re)insurers’ balance sheets by both market volatility and low and falling nominal interest rates.

In this context, Awbury is, as always, able to provide high quality, large scale premium flows, which, by definition, come from motivated insureds, who see the value in what we do. At the same time, we can help our partners manage the volatility of the asset side of their balance sheets.

The next few years are, in our opinion, going to lead to a further “winnowing” of the industry’s ranks, in which risk selection, value-based products and pricing, and the ability to dampen volatility will prove ever more necessary.

The Awbury Team

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A societal experiment, or Brave New World…?

The economic consequences; governmental actions (or lack thereof); and behavioural changes wrought by the current pandemic are likely to have many as yet unforeseen outcomes.

One of these may well be the realization that how our societies are currently constructed and function will need to change to make them more resilient against future disruptions, while at the same time recognizing that not all of its members are equally-equipped to adapt, or may not wish to.

First, as a statement of the obvious- human beings are remarkably adaptable; although they tend not to practice that unless forced to. Nevertheless, consider that the (re)insurance industry in most countries “went virtual” within days in the second half of March, with no obvious deterioration in functionality, but clear changes in risk appetite. The industry “adapted”, but its behaviour changed.

However, second, any society is a network, with patterns formed by billions of interpersonal connections, decisions and actions. At the macro scale, its behaviours can sometimes be predicted with a reasonable degree of certainty, in the absence of discontinuities; but, as the pandemic itself demonstrates, or such “surprises” as Brexit, or, a century before, the Russian Revolution, it is the discontinuities one has to focus on. And, at the micro or individual level, modelled demographic averages do not apply, nor necessarily provide any protection against adverse outcomes to individuals.

Therefore, while changes will only occur if behaviours adjust and are adopted at the macro level, the benefit to the many may harm the few.

So, the question arises as to how to balance conflicting impacts.

On the one hand, controlling, suppressing and eliminating the SARS-COV-2 virus demands society-level collective action; on the other, as we have seen, it can destroy the value and meaning of many individuals’ and sub-groups’ lives and livelihood. Bentham and Mill vs. Hayek and Rand.

In essence, the pandemic has created the circumstances, as this post’s title suggests, for a global-scale societal experiment. What do human beings regard as the fundamental, non-negotiable components of their societies, and what are they prepared or willing to discard? What will they resist and what will they accept?

Certainly, so far as the “distributed workforce” is concerned, there will need to be both a retained critical mass for it to become the norm, or at least part of a hybrid model, with the conventions and infrastructure to support it. In many cases, it may work as a temporary “fix”, but it is not a viable solution for space-constrained, child-burdened families without some sharing of incremental costs and recognition of needs. New “learned behaviours” require time to become habits or conventions, so the longer the Great Cessation continues, the more likely new paradigms are to be created and become embedded. Ironically, rather than going “back to the future”, we may be heading “forward to the past”, when workforces were much more fragmented and widely distributed.

Yet even if the workforce does become more distributed, what of the longer term effects on, for example, public transport, or mental health? If people do not travel, and when they do, are more likely to use a personal mode of transport, what then? And human beings are social animals. Working long-term in isolation is likely to have an adverse impact on mental health. It is also not effective for many forms of necessary communication, and for establishing sufficient levels of trust, let alone its potential impact on innovation. Chance encounters and conversations are often a source of new ideas.

As students of history and assessors of the future, the Awbury team continues to monitor the actual and potential impact of the pandemic on our societies, because assuming that the past simply continues into the future unchanged and undifferentiated is the height of folly.

The Awbury Team

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Mind the Gap…

To re-state the obvious, we are in the midst of the Great Cessation and Yearning-to-Re-open, in which both the demand and supply sides of the economic equation have been significantly impacted. As a result, debate is re-surfacing about what the nature and extent of the “output gap” will be once the world, or at least most of it, starts clawing its way back to something resembling normality- even if it is to the “new normal”.

In basic terms, the “gap” is the difference in an economy between its actual output (or GDP) and its potential output (or GDP). This gap matters, because it is linked to many other factors, such as employment levels and inflation.

In an ideal world, governments and their central banks want there to be as small a gap as possible between the demand and supply side consistent with a low and stable rate of inflation (and people’s expectations for it) and low unemployment, with most developed economies having what is seen as a sustainable level that allows GDP to grow in real terms over time.

In the case of the pandemic, the starting assumption is that GDP growth will recover relatively quickly to its former trajectory, with “quickly” meaning something like “within a year to 18-months”, rather than the 10 years it took output to catch up with potential in the wake of the GFC. However, this assumes that both available capacity and sustainable demand have not been impaired, which seems less and less likely the longer the Great Cessation continues.

Unfortunately, the longer economies are stalled, the greater the likelihood there will be permanent damage to businesses that supply capacity, which reduces the rate at which an economy can grow, assuming the demand is there, and represents a significant opportunity cost.

Conversely, it seems likely that the nature and scale of demand will also be impacted, especially when no longer propped up by governments’ fiscal stimulus- and that assumes that individuals will spend, rather than save because of the “psychological scarring” they have just suffered.

All this amounts to the introduction of even greater levels of uncertainty into economic forecasting and business planning. Does a manufacturer, say, re-tool and adapt, or wait to see what the “new normal” may be? What if service businesses have to try to function in a way that constrains that service, or suppresses demand?

And what of inflation? Is it kept in check because the output gap remains wide, or given a shock to the upside because of both money supply growth and unexpected tightness caused by greater than expected supply destruction?

In this context, with the only certainty being uncertainty, Awbury continues to be prudent in sourcing, analyzing, structuring and pricing risks based on ensuring a margin of safety and on building and testing a thesis which will survive extreme downside shocks and volatility of the sort which we are all now witnessing. Any risks that do not meet our “prudential test” will continue to be discarded, because one cannot be paid adequately for them.

The Awbury Team

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Les Futurs or L”Avenir? It makes all the difference…

Forgive the French!

However, the title was prompted by pondering the work of the late Arie De Geus [including “The Living Company”], recently mentioned in a thoughtful column by Andrew Thornhill of the Financial Times when discussing the possible distinctions between those companies which will, and those which will not survive The Great Cessation.

For business executives of a certain “vintage”, De Geus (who formally retired in 1980 after 38 years) was famous as the leader of Royal Dutch Shell’s (RDS), Strategic Planning Unit, and thus the main progenitor of the process of scenario planning- something which may well be taken for granted now, yet which was little short of revolutionary in its day.

What De Geus tried to do was make managers distinguish between “l’avenir” and “les futurs”. The former essentially means “what will come”, and the latter “potential futures”. While both matter, it is the ability to foresee and adapt to the latter which is fundamental for any entity’s long-term survival and prosperity.

As De Geus pointed out, those companies, which he termed “intolerant”, going for “maximum results with minimum resources” appear to do remarkably well when times are stable. However, when dislocation, stresses or volatility appear, they become very vulnerable to existential risks. And the consequences of the pandemic certainly count as a “dislocation”!

De Geus’ underlying thesis was that companies which manage to survive for decades, then centuries, and occasionally a millennium*, treat their enterprises as “living work communities”, rather than just as purely economic machines- i.e., people, not industrial or financial assets. Consider that the average life of a S&P company is now estimated at well under 50 years, while the corporation in a recognizably modern “joint stock company” guise is barely 200 years old.   In fact, De Geus found that the average “life expectancy” of a northern hemisphere business was no more than 20 years.

So, what did De Geus see as the characteristics of resilient, long-lived businesses?

  • Their managers realize that they are a community of human beings in business to stay alive and prosper
  • They are good at managing for change- i.e., adaptable- as their environment changes
  • They are tenacious in protecting their capital, and so financially conservative
  • All the members of the business know what its goals are
  • New ideas are tolerated, rather than ignored or even suppressed
  • They value people, not assets
  • Their corporate structures are flexible in terms of control and decision-making
  • They are learning organizations
  • Managers and executives see themselves as stewards for the next generation- i.e., they are not selfishly self-interested.

At Awbury, we cannot say whether we shall survive as a business for centuries. However, as our business is based upon our ability to adapt as the world and its risks change around us, and on providing bespoke solutions to our clients as their needs change, we aim to give it a good try!

And a parting quote from De Geus: “The ability to learn faster than your competitors may be the only sustainable competitive advantage”. Indeed!

The Awbury Team

*For the record, the world’s oldest surviving business is considered to be Kongo Gumi, a Japanese construction business, founded in 578AD and specializing in Buddhist temples; while the oldest in Europe is believed to be Stiftskeller St. Peter, a bierkeller/restaurant founded within an Austrian monastery in 803AD. The sublime, vs. the hedonistic!

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