Michael D. Moberly May 8, 2012
The term ‘systemic risk’ has a relatively long history. Its revival, in terms of becoming the presumably focus-grouped explanation for the calamities of the financial services sector beginning in early Fall, 2008 has now come to be embedded in business lexicon to represent a broad cross-section of risk.
The subsequent wide spread use of ‘systemic risk’ in legislative (House, Senate) committee hearings wherein testifying cabinet secretaries, legislators, regulatory agency heads, and financial service c-suites routinely evoked the term (systemic risk) as part of their narrative for explaining (a.) how – why financial institutions and the financial services sector were literally unraveling, (b.) the intertwined elements of the now globalized financial system, and (c.) the underlying rationale for the notion of ’too big to fail’ which eventually prompted the TARP (bailout) provisions.
One of the better understood definitions of systemic risk, in my view, is one provided by Steven Schwarcz of Duke University School of Law wherein he described it (systemic risk) as ’the probability that cumulative losses will occur from an event that ignites a series of successive losses along a chain of (financial) institutions or markets comprising a system’.
Another, but, admittedly, cherry picked definition of systemic risk is provided by BusinessDictionary.com wherein it defines systemic risk as ’the probability of loss common to all businesses, and inherent in all dealings’. In other words risk that cannot be circumvented or totally eliminated.
A commonality embedded throughout the various definitions of systemic risk is the concept of a (preceding) ‘triggering event’. A triggering event is one that causes (internal, external domino or cascading types of) consequences, usually adverse, e.g., loss or undermining of a company’s competitive advantages, asset value, market position, reputation, brand, image, goodwill, supply chain, stakeholders, etc.
In the case of companies with fairly intensive portfolios of intellectual property and other forms of intangible assets, triggering events could include (a.) theft, misappropriation, infringement, and/or premature leakage of key assets, e.g., plans, intentions, capabilities, etc., and/or (b.) significant counterfeiting or product piracy operations against company produced assets. Should anyone of these ’triggering events’ occur, it would collectively undermine or stifle asset value, competitive position, sources of revenue, and future growth opportunities, etc.
Outside the financial services sector, insofar as IP and other intangible assets are concerned, systemic risks would represent those assets cumulative risk, i.e., the vulnerability, probability, and criticality associated with, for example, theft, misappropriation, infringement, compromise, and/or premature leakage of IP and its underlying intellectual capital. Of course, loss and/or compromise of those assets are generally less containable and can rapidly and adversely cascade – ripple throughout a company and its entire chain of stakeholders.
Such adverse affects, are in my view, on the same or comparable plain as the much touted term ‘systemic risk’ and the accompanying market shocks experienced globally by the financial services sector in 2008, i.e., in the form of defaults, bankruptcies, employee layoffs, loss of markets and market share, and competitive advantages,
Several fine studies report that systemic risks (threats) to a company’s intellectual property and other forms of intangible (knowledge-based) assets lies largely with ’insiders’ along with the proliferation of extraordinarily sophisticated and predatorial data mining, information brokering, infringement, misappropriation, and counterfeiting operations that function profitably on a global scale.
The risks (threats) presented by these entities and the subsequent asset compromises that occur are persistent, asymmetric, and frequently devastating to company’s profitability, competitive advantages, and reputation, etc. Multiple respected studies consistently report that U.S. company losses of IP (largely attributed to insiders, infringement, theft, and misappropriation, etc.) range from $45 to $200+ billion annually.
True enough, the adverse affects/consequences of IP – intangible asset losses and/or compromises incurred by small, medium enterprises (SME’s) or small, medium multinationals (SMM’s), may not rise to the same ’systemic risk level’ as experienced by the likes of AIG, Lehman Brothers, or Bank of America, etc., but, they do carry adverse cascading (systemic) affects that are often equally devastating.
Collectively then, this constitutes a fairly strong rationale why company’s should engage in routine monitoring, valuation, and ’stress tests’ regarding their IP and intangible assets. The purpose of these activities if of course, to objectively and proactively determine if any (asset) materiality changes, value erosion, and/or undermining, etc., are occurring and determine if further asset hemorrhaging can be mitigated. Such exercises are now being recognized by management teams, boards, and c-suites alike, as useful and necessary ingredients to (a.) the effective stewardship, oversight, and management of their companies’ intangible assets, and (b.) avoiding costly and often times irreversible surprise will occur.
The inspiration for this post was sparked by (1.) ‘Allegiance in a Time of Globalization’ (Defense Personnel Security Research Center, Technical Report 08-10, December, 2008) and (2.) ‘Technological, Social, and Economic Trends That Are Increasing U.S. Vulnerability To Insider Espionage’ Defense Personnel Security Research Center Lisa A. Kramer, Richards J. Heuer, Jr., Kent S. Crawford Technical Report 05-10 May, 2005 International Journal of Intelligence and Counterintelligence as ‘America’s Increased Vulnerability to Insider Espionage’ (20: 50-64, 2007)