Connecting the dots to the next crisis: foreseeing impending disaster involves watching for it, but spotting the signs may not be on the radar of those responsible. Following what the nation has been through recently, will this change?

• Author: Cheney, Glenn
• Position: RISK MANAGEMENT

The current financial crisis is hurting--both profits and pocketbooks--but what really stings is the fact that so few saw it coming.

The warning signs were there: the breathtaking real-estate bubble; the lush pastures of credit; the burgeoning consumer debt; the shaky price of oil; the skulking hordes of black-box derivatives that seemed to have dispatched risk to the dustbin of history.

Some saw signs. Others didn't.

The good news about the current situation is that it is not the last crisis. The world will recover. And on the horizon of those happy days will rise the inevitable dark clouds of the next crisis.

Will we see that one coming? Will it look like the current crisis? Will we be ready to deal with it? Will we have learned anything this time?

It is possible to foresee and prepare for financial crises. They aren't tsunamis, freak tornadoes or asteroids from out of the blue. They have warning signs. The current crisis had them and so will the next.

Fundamentally, foreseeing an economic crisis is a matter of watching for it. But watching for it is one thing, while spotting the signs is another. Too often, those assigned the task of foreseeing financial disaster are watching for a return of a previous crisis rather than the arrival of the new one; the one that's not on anybody's radar.

Or is it a matter of not enough radars? Kenneth Daly, president and chief executive officer of the National Association of Corporate Directors, says that too often problems become crises because they were never considered problematic. "The role of the board is to listen to dissenting opinions and make sure they get the minority view on issues," Daly says.

"They need to make sure there is a process through which those views get into the boardroom."

Those views can come from anyone--janitor to chief executive--often with a chief financial officer, chief knowledge officer or chief risk officer overseeing the process. To avoid what Daly calls "asymmetrical information"--information received through the narrow channel of the company's perspective--consultants may be brought in to report on more distant or disconnected risks. The board may even want to bring on a new board member with expertise in economic prognostication or a specific threat.

In this way the diligent board will infuse its organization with the urgency of tomorrow, the need for everyone to keep an eye on their respective horizons. It will foster a culture of risk assessment and management. That culture will extend from something as nebulous and essential as setting the right tone at the top to something as complex and expensive as establishing an effective enterprise risk-management system.

Risk...