Of course businessmen still get things wrong and may lose money for their shareholders when this never was the intention. Some of these ‘errors’ become the subject of litigation and here it is interesting to look at the guiding principles of the Delaware Court of Chancery. The US State of Delaware is home to many large corporations and so its Court of Chancery has to rule in a large number of corporate disputes. To assist it in this process the Court has developed what is known as ‘The Business Judgement Rule’. This rule acknowledges that directors, in running a business, have to make judgements about the future, and the fact that something different from what they had anticipated actually happened is no measure of culpability. To succeed a claimant has to show that the directors, at the time of making the judgement knew, or should have known, why their judgement was bound to be wrong. And this must be better than a probability. For example it is not good enough to show that it was probable that drug X would not be approved. If, however, approval had already been denied this would be another matter.

We recognise, of course, that GRIT is interested in stakeholder confidence not winning cases but, nevertheless, we think this example interesting as showing how lawyers have come to view the matter of predicting the future. Look again at the business plan. No one will say that it was ‘wrong’ because things turned out different, although, with hindsight, some may talk of optimism or pessimism.

But let us be clear: a business forecast should look to be accurate and it serves no purpose to produce a plan that, for example, is way below what might reasonably be expected. Indeed such an approach can be positively harmful as it can lead to resources being wrongly allocated. We are not suggesting that, because forecasting is difficult, right and wrong does not exist at all. Pension actuaries who failed to provide for falling interest rates and improving mortality have in no sense done a good job, however difficult that job may have been. The change in pension taxation rules is another matter.

Communicating Uncertainty or Managing Expectations?

There is always subjectivity in determining what is right and wrong and much of this has to do with expectations. There may be no such thing as a ‘wrong’ birthday present, for example, but from the standpoint of a child who wanted a train set but gets a bike, the bike is wrong.

This simple understanding seems to be missing from some parts of the GRIT thinking. For example, at 310 (b) (p32) we read the almost Orwellian statement that ‘Some stakeholders believe that deterioration [in loss reserves] means that the original reserve estimate must have been wrong, rather than seeing it as just one realization from a distribution which happened to be above the mean’ Well the reason why someone who thought that the original reserve estimate was going to be adequate and now, seeing it increased, thinks that it was wrong is because, in plain English, it was wrong. Let the CEO try trotting out the above quote to sceptical analysts and disappointed shareholders and we will see how well it goes down.