This article was published by the World Economic Forum

5 ways investors can create value through organizational resilience

    • The COVID-19 pandemic triggered companies to realize that resilience-building and risk-proofing against global shocks were key to their sustainability.
    • Resilience building is not simply about having an insurance policy but is integral to value creation.
    • A five-point plan for creating value based on key resilience enablers can provide a framework for seeing beyond the first-order effects of shocks and give organizations a competitive edge.

In a turbulent world, resilience is an ever more important concept. As outlined in a recent World Economic Forum report, a widening range of potential shocks is testing organizations with increasing frequency, elevating the importance of “risk-proofing” businesses for a more volatile future. But building resilience against events such as climate change, cyber attacks, geopolitical upheaval, economic uncertainty or pandemics costs money and effort.

So how can investors view such expenditure compared to their mandate on generating investment returns? And in light of the increased focus on assessing a company’s resilience capabilities, what does a practical framework even look like to guide such investment decision-making?

The Forum’s recent Industry Strategy Meeting focused on these questions, where over 50 strategists and other executives convened to discuss the organizational resilience imperative. One of the key themes discussed was the critical role of investors in accelerating investment in resilience and how organizations across different industries can identify and invest in critical resilience enablers to more easily attract investor capital.

Creating a value-creation plan

Particularly in the face of near-term economic uncertainty, the discussion raised the question of how firms can best action a resilience agenda in the current economy. Emerging research shows firms that invest in resilience outperform their peers. With that in mind, how can leaders best position resilience-building as a pillar of future long-term value creation and strategic investment rather than a short-term cost in need of explanation?

Resilience for sustainable inclusive growth. Image: World Economic Forum and McKinsey & Company

One such approach highlighted was that used by Brightstar Capital Partners, a US private equity firm focused on partnering with families, founders and entrepreneurs in the middle market. In this approach, shared by many other successful private equity firms and long-term investors, resilience is viewed not just as an insurance policy but as an integral part of value creation in an investment.

The approach starts with thoroughly analyzing a potential investment’s exposure to adverse events in its business operations and business model. The entire value chain of a business is then considered – from its suppliers through its operations to its customers, including the logistics weaving it all together.

Guiding this analysis is a comprehensive value creation plan built around key resilience enablers and five core principles, some of which are inspired by the natural world:

1. Identify and mitigate single points of failure

In nature, ecosystems are far more resilient than monocultures – the same applies to business. At one of Brightstar’s former portfolio companies, Capstone Nutrition, single-point, transactional supplier relationships were replaced with a platform ecosystem that connected customers, suppliers and factory operations.

Consequently, the business could scale significantly within 18 months and generate a substantial return for its investors.

2. Beware of hidden correlations

A yucca plant and a yucca moth look very different and at first glance, you would assume they are wholly independent. However, it turns out that one is the only pollinator for the other. If either species disappears, so will the other – a perfect correlation.

In business, seemingly uncorrelated drivers can suddenly “snap into alignment” and create catastrophic momentum – as was the case with regional US mortgage portfolios in the 2007/8 financial crisis, which led to cascading bank failures.

3. Look beyond first-order effects

The proverbial wings of a butterfly in Brazil changing the weather half a world away might be a bit hyperbolic but for true resilience, it is important to look beyond first-order effects. In climate change, the same first-order effect (rising temperatures) can have vastly different precipitation outcomes even within the same country.

During the pandemic, a chip shortage initially affected new car availability, which caused prices for used cars to dramatically increase, with one-year-old cars at some point costing more than the recommended sticker price for a new car. This price hike dramatically affected businesses operating in the used car market.

4. Anticipate and game-plan unexpected behaviour

Walking a Canadian forest in winter, you don’t need to worry about bears as they’re hibernating. In summer, it is a different story. For Silicon Valley Bank, a liquidity strategy that seemed perfectly reasonable in 2021 contributed to a bank run two years later.

When building organizational resilience, there is no substitute for articulating the assumptions underpinning the business’s success – and then stress-testing them repeatedly through simulations and scenarios.

5. Embed prior principles through governance

Whether it is succession planning across the layers of an organization (eliminating single points of failure) or regular “war games” simulating a cyber attack or business disruption (game-planning unexpected behaviour), the above principles can only work if they are embedded in the operations of the business.

To successfully embed such principles, governance is essential – and for investors, this should be put in place the day of the deal closing.

“A more resilient business will navigate market volatility better, creating a steadier stream of cash flows than its competitors”

Michael Drexler, Managing Director & Chief Strategy Officer, Brightstar Capital Partners | Andre Belelieu, Head of Insurance, Asset Management and Institutional Investors Industries, World Economic Forum

Resilience as a competitive advantage

Overall, this analysis aims to inform a value creation plan that makes businesses more resilient against unexpected shocks and positions them to be more agile and competitive in adjusting their business models. An ability to “see around the corner” by going beyond first-order effects and considering unexpected behaviour helps mitigate supply chain disruptions driven by geopolitical friction. It equally helps with anticipating shifts in competitors’ moves and customer preferences.

Resilience is not just about the big shocks and catastrophic risks, such as ransomware attacks. A more resilient business will navigate market volatility better, creating a steadier stream of cash flows than its competitors. That, in turn, will lead to a higher valuation – something investors care deeply about.

The Forum’s recent report on organizational resilience notes, “the unprecedented challenges of the COVID-19 pandemic should be a wake-up call for companies everywhere to go beyond mere rhetorical commitments and take specific action now to be prepared for the next crisis.” This reality check is at the heart of how resilience has become a core metric for investors and why it will only continue to gain momentum in a future defined by increasing uncertainty.

And for investors, the “new normal” means that old approaches such as buying insurance against risk – while undoubtedly helpful and critical – can no longer substitute for a deeper and more thoughtful analysis of – and investment in – the resilience of companies. As resilience becomes ever more essential to business performance, investors need to own this important driver of value creation to generate competitive advantage across their portfolios and contribute to a future of more sustainable economic growth.