In my past columns I talked about the importance of selling your products and services to avoid the bankruptcy of a small company and the importance of liquidity to avoid rapid bankruptcies of consolidated companies. On this occasion, I would like to talk about the risks that have led the world’s largest companies to go bankrupt.

The financial and economic world has already adopted a term to describe the phenomena that bankrupt big companies and even giants. It was coined by Nicolas Nassim Taleb in 2007 with his book The Black Swan.

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A black swan is a highly improbable event, but with an impact so great that it can change society or destroy empires. Precisely because it is improbable, people underestimate it and predictive models do not take it into account and dismiss it as a reasonably improbable event.

Black swans include cultural changes such as animal movements, technological changes such as the iphone, political changes such as Donald Trump becoming president of the United States, epidemics such as COVID-19, legal or juridical changes such as the regulation of cryptocurrencies, or wars such as the Arab Spring or the war in Ukraine.

However, a black swan alone is not the cause of a company’s failure; it is the black swan coupled with a lack of controls to navigate difficult environments that causes failures to occur. This last part is what managers should focus on, because it is what we have control over.

This is why all good managers of big companies should have the value of paranoia as one of their core values.

Paranoia will prevent you from underestimating the technological advances that put your company at risk 5 or 10 years from now. It will allow you to be vigilant, alert and learning. Paranoia will make you take action against the improbable, against the unknown; it will make you not rely on your ego and stay humble.

Paranoia will protect your company from reputational risks. You will be cautious and act quickly to do damage control for any loss of prestige.

Let’s look at some of the latest black swans and learn from their history:

• Kodak underestimated the technological disruption of digitization and so went bankrupt, after less than 5 years of decline. Management’s ego tied them to the existing business model and they did not make the changes required to survive.
• Hertz (car rental company) went bankrupt because of COVID-19. It did not have sufficient liquidity to survive a crisis lasting more than six months.
• Silicon Valley Bank was unprepared for a change in U.S. interest rate regulation, which was coupled with an ineffective response to rumors of illiquidity and mismanagement. This led to bankruptcy in less than a month.
• Pan Am: This iconic airline was the victim of a terrorist attack in December 1988 on British soil, which damaged its reputation and did not allow it to recover from its already delicate situation.
• Cambridge Analytica: Two factors converged in the bankruptcy of this company: the political polarity in the United States, associated with the arrival of Donald Trump to the presidency, and the cultural change that made digital privacy one of the most important values for Americans.

As it is, keep in mind that it is impossible to predict a black swan. Don’t spend time on this exercise because they are impossible to see. What is possible is to be alert and believe that everything can be a black swan.

If you run a big company your mission is to keep it alive, afloat, with its dominant position and that is why I suggest you repeat like a mantra the words of Intel CEO Andrew Groove: “Only the paranoid survive”.

Note: This article was proofread by ChatGPT.

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