Survival of the Firm is not Mandatory

Is that idea really understood by top management and the board?

Does the board leave every meeting certain that the firm will still be in business when the next scheduled board meeting comes around?  How did they get to that certainty?

Can management tell them the likelihood that the firm will experience a fatal loss and how much that likelihood has changed since the previous board meetings?

Can management tell them exactly what sorts of events could put the firm out of business?  Have they discussed the sorts of “highly unlikely” events that might take the firm down if they suddenly did happen?

Those are, of course, the conversations that the board might well demand to have if they really understood that Survival is not Mandatory.

Explore posts in the same categories: Black Swan, Enterprise Risk Management, Governence, Risk, Unknown Risks


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One Comment on “Survival of the Firm is not Mandatory”

  1. Responsible directors and officers have an affirmative obligation to consider firm-mortality in explicit terms.

    In terms of business model, operating risks, capital structure, and investment alternatives, the process starts (or should) with a clear understanding of the firm’s desired credit rating.

    It may be that a financial firm decides to be a double-A, because it is too expensive to be triple-A. That means that the financial will manage to, say, a one-in-400 annual mortality. Anything more remote, and it is missing critical market opportunities.

    Meanwhile, an industrial firm finds its best trade-off between cost of borrowing and capitalization at single-A, or triple-B. That risk level is sufficient to maximize the tax advantages of debt and the business advantages of operating leverage, yet let it trade on reasonable terms with suppliers as well as finance customers.

    And for all firms, the target mortality rate should inform decisions on hedging and insuring.

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