A central responsibility of boards is oversight of the company's risk management, and this often begins with categorizing the different types of risk to which the company is exposed. While risks may vary by company and industry, macroeconomic risk is a factor for all companies. The health of the national or regional economy, interest rates and levels of inflation all affect businesses of every industry, size and description. Failure to effectively manage this universal area of risk can cause problems, ranging from mild to severe, when companies lack readiness for the occurrence of macroeconomic changes. However, companies can also get into trouble when they respond to a “false alarm,” believing that a macroeconomic problem is going to occur and taking action, when none is truly necessary.
Board members now have access to an excellent recently published book to help them navigate this important area of board oversight. Shocks, Crises and False Alarms: How to Assess True Macroeconomic Risk, coauthored by Philipp Carlsson-Szlezak and Paul Swartz, was published earlier this year. Carlsson-Szlezak is a managing director and partner in the New York office of Boston Consulting Group (BCG) and is BCG's global chief economist, and Swartz is a senior economist in that office.
As its title suggests, the book focuses on the nature of macroeconomic risk and how companies can best manage it. The authors were inspired to write this book because they observed that most of the information carried in the news about macroeconomic risk isn't that useful for executives and can even be harmful, since it is often superficial and can lead to management responses that are unnecessary, excessive or executed prematurely. The authors believe that we tend to overlook that headlines in websites, newspapers and other media are intended to attract “eyeballs” and are therefore often expressed in excessively dramatic or doomsaying terms. This can easily lead to the “false alarms” in the book's title. The authors advocate a more “calibrated” approach to macroeconomic risk, saying that there is too much of a tendency to think tactically about macroeconomic risk, whereas it is important to think strategically, especially as it affects a company's technology, labor markets and basic economics.
In that vein, the authors state that macroeconomics presents opportunities for companies, not just risks. Therefore, the consideration of macroeconomics by companies and their boards should be continuous, not “once-and-done.” The authors also believe that macroeconomic risk is a key area of overall risk management oversight by boards and should be included whenever boards discuss risk. This extends to how boards organize to provide risk management oversight, which is often by assignment to an audit or risk committee. In my opinion, the creation of a separate risk committee is an underutilized tool by boards, other than the boards of banks or other financial companies, which are required to have a risk committee. For more information on the benefits of a risk committee, check out my article “Don't Underestimate the Value of a Risk Committee” in the fourth quarter 2023 edition of Directors & Boards.
The authors note that the inadequate attention paid by companies to macroeconomic risk often leads to such risk being blamed for underperformance, rather than blaming the decisions that companies and their leadership make based upon an inadequate understanding of macroeconomic risk.
It is perhaps no coincidence that the authors hail from BCG, which was largely responsible for originating the importance of focusing on corporate strategy. Speaking personally, it was particularly interesting and enjoyable for me to read this excellent book and interview its coauthors, since my first job following graduate school was in BCG's Boston office, working with its founder, Bruce Henderson, back when corporate strategy was still a relatively new concept. Shocks, Crises and False Alarms: How to Assess True Macroeconomic Risk is an interesting and worthwhile book for directors, one that will help them as they reassess how boards oversee the management of risk in general.