COVER STORY • Anxious Individuals & Governments at a Standstill — METI Envisages How to Live a Proactive Life in an Uncharted Era • 10

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oundtable on the Significanceof the Scenario Approach inan “Age of Anxiety”

By Japan SPOTLIGHT

Structural shifts in the international order and an aging society that is only getting older: our May-June
2018 issue “Anxious Individuals & Governments at a Standstill” covers many topics that require analysis
from a long-term perspective.
It is always difficult to have an accurate take on the long-term prospects for the economy andgovernance on a global scale or the social structure at home. We are at a point in history of economic andsocial transformation that makes this an even more daunting task.
The scenario approach by Royal Dutch Shell suggests a way for governments and businesses tograpple with a wide variety of unexpected long-term risks. Masahiro Kakuwa was the chief economist at
Showa Shell Sekiyu Kabushiki Kaisha until June 2017. Before that, in his early 40s, he spent three and ahalf years on the Shell scenario team at its London headquarters, where he immersed himself in the
scenario approach. Kazumasa Kusaka, former vice minister for International Affairs at the Ministry of
Economy, Trade and Industry (METI), has been a forceful voice for the importance of risk management aschairman of the Japan Economic Foundation (JEF). The following dialogue brings the thoughts of the two
men together around the significance of the scenario approach in the “Age of Anxiety”. The two are alsocolleagues as visiting professors at the Graduate School of Public Policy, University of Tokyo.
(Roundtable on March 7, 2018)

Kazumasa Kusaka

Material for the Scenario Approach
Kusaka: It is my great pleasure to have the opportunity for this
dialogue with Mr. Kakuwa, who has long been associated with thescenario approach in Shell.
I am aware of the major contributions that Shell has made in oil
and gas development, but personally I believe that creating the
scenario approach and making it available to the rest of the world
has also been a major contribution to humankind from Shell.
At JEF, our concern is that even as awareness of global risk grows,
it has become difficult if not impossible to prepare against risks or tosecure resiliency in our responses at the national, corporate, andhttps://www.jef.or.jp/journal/

Masahiro Kakuwa

individual levels with linear forecasts. We at JEF brought together
corporate professionals in management and planning to set up a
study group on global risk. Meeting once a month, we held the firstannual symposium on the findings of the group in 2017.
The subject of this dialogue is to hear from Mr. Kakuwa how the
scenario approach can help us handle global risk. With this in mind,
I would like to take up the matter of “risks beyond our expectations”.
This is a favorite phrase of corporate management in the face of “tailrisks” that they failed to respond to. But what does that mean?
Whose “expectations” are we talking about here? Sometimes, they
are the experts in a particular field. They could be in-house, or
outside sources expressing their opinions. But it’s necessary toJapan SPOTLIGHT • May / June 201847

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verify if something really was “beyond expectations”. After all, an
organization has its own mindset, its biases. In considering theability to respond to risk, it appears that it is important to consider
how specific organizations respond to specific risks.
There is also the question of the typical asymmetry between our
knowledge of the past and our expectations for the future. We know
what’s in the past, but we don’t know what the future holds. Thatsaid, we can learn from the past, and the extent to which that is
possible is one perspective in dealing with risk.
Let’s begin by looking at the national level. One example of anissue to which the scenario approach can be applied is climatechange. The active participation of environmental NGOs, the media,
and other players has led to some scenario approach-like efforts in
the IPCC process, for instance.
Low birth rates and aging is another issue of relevance here. Here,it’s not a matter of a tail risk that may or may not emerge, since weknow for certain that it is going to happen.
Turning our eyes to politics, if politicians can only think about
future issues against a two- or four-year horizon, well, low birth rates
in an aging society are not a clear and present danger to them.
The scenario approach as it was originally conceived dealt withwhat to do if something that we thought of only as a tail risk actually
happened. Will this approach be effective in dealing with issues that
we know will happen, like the consequences of an aging society withlow birth rates?
Another problem to consider is the fiscal debt. Here, the problem
lies in the structure of the risk. The overarching point is that there isa risk that Japan may be headed for catastrophe as the consequenceof a massive fiscal debt. On the other hand, if we levy onerous taxes
on a fragile economy, the economy itself may suffer severe damage.
There’s a tradeoff here between two different risks. How can we getpast this dilemma?
There’s also the matter of the intergenerational tradeoff. If thecurrent generation kicks the fiscal deficit down the timeline, it will betransferring the risk to people who do not yet have the right to vote,people who are not part of the current political process.
Another case of risk transfer occurs when instead of having thebeneficiaries bear the cost, other groups are taxed so that they bear
the burden instead. Foreigners do not have the right to vote, so
tariffs are being used to make groups that are not part of thedomestic political process bear the burden.
48 Japan SPOTLIGHT • May / June 2018

Going back to the issue of fiscal debts, even if raising theconsumption tax rate in order to narrow the fiscal gap and sustain“high-level welfare with a high-level burden” is the better choice as aquestion of national governance, that would cause politicians to loseelections. Is it possible to create an environment in which politicians
will not lose office when they make the better choice? For that tohappen, it is necessary for voters to understand that “high-level
welfare with a low-level burden” is not sustainable. Would thescenario approach be useful in convincing voters?
There are many other examples of tail risk, including security inNortheast Asia and the response to a massive flow of refugees fromthe continent.
In short, things went smoothly in a stable world just by having the
economic players look to optimize outcomes in their respective
circumstances. But when the assumptions for the long-term outlook
shift, can Japan really respond appropriately like this?
Let’s look at the corporate, organizational level. Things were thesame in the world of business when the framework of the Cold War
was firmly in place; management that sought to optimize outcomes
within its own corner of the world as the logic of economics dictated
was the best way to ensure survival. But today, the relationshipbetween sovereign states has reverted to a classic, survival-of-thefittest mode.
If that is the case, shouldn’t people in business and finance berequired to have true risk literacy, in geopolitical risk, in the country
risk that comes with their investments? It is my view that it has
become necessary for businessmen and businesswomen andbankers as well as public policy experts to come out of theirstovepiped niches of expertise and adopt a holistic approach, to see
the big picture.
Now the energy game has historically forced its players to take aholistic approach to international politics, security, domestic politics,
and so on, and deal with a wide variety of risks. How does Shell view
the areas that form the boundaries of the scenario approach? How
does it consider the economics, the politics surrounding
management analysis? Is the situation in the Middle East a
consequence of those politics and security, for instance?
Or take the 2010 oil spill in the Gulf of Mexico caused by BP’s
offshore drilling rig Deepwater Horizon. It is said that the accident
had its origins in a management decision. But how do you forecast
risk and make choices when you adopt such a massive, complex

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technological system? Is the scenario approach useful here?
My final example addresses an issue at the individual level. Thereis a group of occupations that require elevated levels of investment
in education yet will be lost with the progress in artificial intelligence(AI). Software programmers and financial analysts are two such
examples.
Previous industrial revolutions replaced unskilled labor withenergy and machines. People were happy to be relieved of the
backbreaking workload. Some low-skill jobs were lost, but theeconomy as a whole grew more quickly. When this process unfolded
over, say, 30 years, whatever pockets of friction that arose could be
handled by the next generation.
However, AI, being a creature of digital science, will come after theindividual without giving him/her the time to respond, to adapt. How
should we educate the next generation to prepare for this? This iswhere the scenario approach can make its greatest contributions in
my view.
From the perspective of the individual, or educators, it will bedifficult to deal with the rise of AI unless we change the lifetime
employment mindset. Unless there’s a human resources market for
midcareer workers, people who fail in getting a startup off theground will be unable to work as professionals until the next
opportunity, when he/she can make another stab at a startup. One
failure means that you can no longer find a bank to lend you moneyor investors to put up equity. My impression is that the reason thatstartups don’t work so well in Japan is that handling risk is not wellintegrated into a world of lifetime employment, that we have notbeen trained properly for a multilinear world at the individual level aswell as society as a whole. I also hear that the Shell scenario team isa vibrant team, engaged in lively debate, anywhere, any time. I would
appreciate it if you could talk about that a little as well.

Scenario Planning & Environmental Issues
Kakuwa: I thought it would be interesting to look at what Shell’s
scenario planning actually looks like by talking about it in relation to
global environmental issues. Shell first became aware of global
warming as a major issue impacting management strategy around1988. Shell came across it while they were analyzing risks regarding
the Troll natural gas and oil fields, a major project that they were
undertaking in Norway’s territorial waters. I want to use this specificexample in order to address JEF’s concern that one-track forecasts
may be insufficient in preparing for risks and responding to them.
First, let me talk about scenario planning. At that time, Shell had alarge-scale scenario work entitled “Global Scenarios 1989”, which
addressed the socio-political and economic development of theworld in the future. This was an internal work, never made public.
One of the scenario worlds was entitled “Sustainable World”, inwhich all countries, developed and developing alike, were beset with
pollution. The entire world would come together, developed anddeveloping, the Soviets and their allies, the “Free World”, they would
all come together to clean up the Earth. This would draw thedeveloping economies towards the industrialized economies,
accelerating growth. Concern over the impact that burninghydrocarbon energy would have on the atmosphere would lead theworld to shift towards the cleaner natural gas. What should Shell bedoing then? That was the scenario story drawn up here.
“Global Scenario 1989” also included a narrative that stood instark contrast to the “Sustainable World”. This was the “Global
Mercantilism” scenario, a survival-of-the-fittest world of international
relations steeped in tension. This was a world where OPEC wielded
power, nations struggled over resources, developed countries
formed economic blocs, the economy and public finances ofdeveloping economies remained weak, and the North-South gap
would only grow.
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In this manner, you always develop multiple, different, futureworlds with social, economic, and international systems constructedbased on different sets of assumptions and logic. The Shell scenario
team introduces the vivid simulated experience of different futures tothe decision-makers to imagine as broadly as possible the various
risks that may arise going forward. Different plural futures: that is
the most important rule in scenario planning, be it Shell or anyone
else; that is the basic rule.
Today, I want to focus on the “Sustainable World” scenario from
“Global Scenarios 1989”. The debate on sustainability began with theBrundtland Commission. Gro Harlem Brundtland, former prime
minister of Norway, was commissioned by the United Nations tochair the commission, which launched a campaign on sustainability.
Our Common Future, published in 1987 by the United Nations
through the Oxford University Press, defines sustainability as“development that meets the needs of the present withoutcompromising the ability of future generations to meet their own
needs”. Here, the discussion is about intergenerational equity, or theissue of risk transfer to unborn generations.
Now, to change the subject, at the time Shell was responsible fordesigning the development and production facilities for the Troll
natural gas and oil field in Norwegian waters. The Troll field is
located in Norway’s territorial waters in the North Sea. It was
discovered in August 1979, 100 kilometers off the coast of Bergen at
50 Japan SPOTLIGHT • May / June 2018

a depth of 300 meters below sea level. The supersized reserves wereenough to sustain natural gas production for 50 years. In 1986, theNorwegian government and Shell entered into an agreement on adevelopment and production plan.
Now, the “Sustainable World” scenario that was developed
between 1988 and 1989 appeared and started giving a narrative ofenvironmental degradation and pollution. Just about then, global
warming was beginning to attract attention. They were the earlyyears of the activities of the Intergovernmental Panel on Climate
Change (IPCC). The first output of the IPCC was the publication of
the first IPCC report in 1990.
Let’s go back to the Troll project. By 1986, the specific designs forthe vast production facilities on the sea bottom and the surface
platform had been fixed, and production and budget plans had been
agreed to with the Norwegian government. In particular, theconstruction of the surface platform at an astonishing cost had all
but been contracted out when discussion over “Global Scenarios
1989” and how they should be reflected in the Troll project unfolded.
There, it was decided that the project would be reviewed once again,
employing the scenario approach.
That was when the issue raised by IPCC came within Shell’spurview. The problem was that according to the draft of the first
IPPC report, there was a case where the global sea level would riseby an average of one meter by the end of the 21st century. The
production facilities of the Troll natural gas and oil field would beinstalled on the seabed 300 meters below sea level. The design
called for the construction of a massive concrete structure weighing
approximately 660,000 tons that would be affixed to the seabed,
where it would withstand the powerful waves of the North Sea. The
tension leg platform design that we use today was not applicable to
the Troll project. So the platform would not float on the ocean
surface. It would rise up from the seabed and tower over the sea
surface.
The gas reserves were sufficient to sustain 50 years of production.
In fact, last year, 22 years after the commencement of production,
experts estimated that 50 more years of production would bepossible. So the heart of the problem was this: since the platform
would be fixed to the seabed, the distance between the sea surface
and the seabed became an issue. Shell conducted a thorough reviewof the design. A one-meter rise of the sea surface might render theplatform unusable, so they gave serious consideration to the risk ofCOVER STORY 10

global warming and a rising sea surface 50, 100 years in the future.
Ultimately, the Shell subsidiary in Norway began negotiating with
headquarters to change the design. They knew that changing thedesign after placing orders would entail significant additional costs.
Strength calculations, everything had to be repeated all over again,
but the design had to be changed now to make the projectsustainable for a long-term future. One of the most important
sayings in Shell’s management philosophy calls for “minimizing
maximum regret”. Shell might regret it 50 years later, so must takecare of it now — and that was that.
Kusaka: The things environmental NGOs are saying today, Shell, on
the business side, was saying 28 years ago. The North Sea is atumultuous sea, so reinforcements cannot be made later; you had tomake it robust enough from the beginning, correct?
Kakuwa: Yes. I was told by alumni of the scenario team that there
was a ferocious internal debate. Shell is essentially a massive groupof scientists and engineers, who want to see the evidence. To them,the scientific basis for the inference by the IPCC scientists seemed
inadequate.
However, doubts regarding what could be done if the IPCC casecame true prevailed, and headquarters approved the additional
budget required. My understanding is that the design was altered toincorporate sort of jacking up systems into the core of the platform
so that it would not be affected even by a significant rise in the sea
level. That was their experience. Shell has been doing scenario
planning since 1972, so they are very much used to handling
unthinkable contingencies, I think.
Kusaka: One of the things that impressed me in what you just talked
about is that even though Shell has superb inhouse humanresources, it doesn’t underestimate or disqualify analysis andinformation from external sources. Even though the work of thescientists gathered around IPCC may be at the initial stages and it
appears that it is backed up by insufficient data, Shell still had thecapacity to listen to those outside voices and take them on board as
options for management decisions. I felt that this was one of thestrengths of the Shell management and one of the keys to making
the most of the scenario approach.

Kakuwa: It was in 1992 that Shell began releasing its scenario works
to the public. Until then, it was an internal process undertaken mainly
as scenario planning to examine projects such as Troll. My story is
about that period.
This specific example is related to the challenge of the“unexpected”. The “unexpected” is quite tricky because the utmost
bounds of “expectation” is yet subject to Shell’s inhouserecongnition. Some contingencies may well be counted even when
there is little scientific evidence behind them. I believe that it is when
you consider the extent to which you will be willing to prepare
against them. In that case, it is meaningful to listen to external
voices, or, say, to capture weak signals flickering outside.
Let me raise another issue. The low-carbon movement has grown
dramatically in recent years. In the financial sector, the Task Force on
Climate-related Financial Disclosures (TCFD) is calling on businesses
to commit to an ambitious scenario in which global warming islimited to 2C° or less from pre-industrial revolution levels andsuggests that businesses that do not make this commitment,
particularly energy producers and high-energy consumption
businesses, may become ineligible for loans and equity investments.
The Task Force is questioning the management strategy for thetransition process to a low-carbon society. The financial sector saysthat the 2°C, even the 1.5°C that was adopted at the COP Paris
Conference, should be achieved, that the transition to a low-carbon
society should be quick, and that businesses receiving loans andequity investments should make the commitment to aim at a lowcarbon society. Looking back on the Paris Conference, was theinternational decision made there based on a common super-longterm perspective for our planet shared by each of the participating
countries? Or could it have been politics and diplomacy converging
towards a somewhat unsustainable option, like the “high-level
welfare with a low-level burden” option that you pointed to regarding
Japan’s fiscal woes? There is no denying that political and diplomaticnegotiations can emphasize process over substance.
But this is not how risk management works. It would be truly
wonderful if a low-carbon society can be achieved by 2050, but even
if that does not turn out to be true, individuals, businesses,
households and their livelihoods must be sustained. It is wrong tolook at the 2°C scenario, see the 30-centimeter to 60-cm rise in thesea level calculated there, and use that as the sole assumption for
calculating business risk. If we fail to contain the rise in Earth’s
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temperature to 2°C and the IPCC’s so-called “baseline” scenario
comes true, the sea level rise will be greater. For example, when you
are now contemplating a large-scale infrastructure project in the
Mekong Delta, is it sufficient to consider only the 2°C scenario?
I think that it is wrong to make the ideal transition process
towards a low-carbon society as the only working assumption for thebusiness environment. I believe that it is necessary to conduct
scenario planning where other possibilities can be recognized toundertake a realistic consideration of the risks involved.
Being scientists, the IPCC scientists try to provide objective
analysis. But the IPCC stands at the junction of politics and science.
As such, when the IPCC message is distilled or summarized, it
inevitably winds up being a message for the low-carbon movement,
which leans towards the environmentalist movement.
Kusaka: There’s a great gap between the IPCC reports and theirsummaries, isn’t there?
Kakuwa: That’s a matter of regret for the IPCC scientists. I believethat the role of the IPCC is to issue objective messages to make iteasier for the general public to debate the issue.
Going back to the subject of our discussions, scenario planning isa valuable tool for risk assessment, a tool to facilitate decisionmaking by top management. My story of the Troll project is a story
about putting a risk 50 years in the future into perspective. It was
about how decision-makers placed their trust in the imaginative
analysis of scenario planning and how this approach depicted
detailed futures by using that imagination in the face of weakscientific evidence. I do believe that the decision-making processfunctioned as it should. The revision of the platform design wasmade on the basis of the best available albeit incomplete evidence.
Kusaka: This reminds me of how some members of the media seizeon the 2% inflation rate that the Bank of Japan and the Japanese
government aim to achieve and publicly question whether
businesses are managing their affairs, raising wages to meet thisgoal. Some academics and businesses criticize this, and rightly so.
Here, an honest debate is taking place. But when it comes toenvironmental issues, it is very difficult to challenge “the future as itshould be”.

52 Japan SPOTLIGHT • May / June 2018

Kakuwa: I agree. It’s the same structure. Scenario planning isbasically value-neutral. I think that it’s not right to assume that asociety has a specific purpose. We would rather take as the starting
point the somewhat conservative but dispassionate analysis andaccount to the effect that the society that exists today is logically andcompletely coherent. Politics comes into play when you assume thatsociety should have a specific purpose. The scenario approach canyield a phenomenological description of how the existing systems ina society function logically. A team of researchers from diverse
backgrounds who have the insight to penetrate the world around us
conducts an intensive investigation, and engages in deep dialogue to
produce the scenarios.
To repeat, scenario planning does not assume that society has apurpose. It does not start from a critical approach to the status quo,
where the future shape of society should be such and such and these
are the areas where the shortcomings of the status quo lie.

The Ethos of the Shell Scenario Team
Kusaka: What is so fascinating about Shell is that the company is thechild of Britain as the mother and the Netherlands as the father.
Which parent’s genes have the greater influence on scenario
planning? Or could it be that the scenario team may be multinational
but the people trained at Oxford and Cambridge, regardless of theirgeographical origins, serve as the key support for this method?
Kakuwa: It was a Frenchman who introduced the core ethos of the
scenario approach. Pierre Wack was a mystic who did a lot of
meditation, someone who had personally developed the ability tounderstand the essence of things intuitively. Wack was chief
economist in Shell Francaise. He was called up to headquarters toestablish the scenario team.
His writings never fail to inspire. His library is preserved at Oxford
University. It is an important font of inspiration for scenario
practitioners. Last year, Professor Thomas Chermack published astudy on Wack entitled Foundation of Scenario Planning: The Storyof Pierre Wack (Routledge, 2017).
I joined the scenario team at the Shell headquarters in London in
1992. As a multinational company, Shell pays great attention tobalance, be it careerwise or race, age, gender... Half of us had
academic backgrounds. The members were all highly committed,

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and I was fortunate to be able to learn from so many different
people. Before I was called to join the scenario team, I had started off
my career on a day and night shift at an oil refinery for 10 months,
then I engaged in purchasing crude oil for refineries, handling oiltankers, and international oil trading, so, frankly I knew nothing
about scenario planning. I suppose that everything just happened tocome together at the right time for me as my aptitude, namely myhome country, major in studies, and business experience happened
to be what the scenario team had been looking for. After I left theteam, no Japanese was added for 20 years. Finally, three years ago, aJapanese was chosen. Now, I will be able to pass along my skills andexperience to the next generation.
Every few years since 1992, Shell has been publishing global
scenarios however; the primary task of the scenario team is toprovide risk analyses for individual projects. Projects that are
expected to require large amounts of financing or are likely to
encounter difficulties in reconciling the interests of the stakeholders,present and future, are appropriate for scenario planning. Every few
years, the Shell scenario team takes the experience gained from theconsiderable numbers of researches and project scenarios, anddistills the different views from around the world, newly emerging
circumstances, and the spirit of the times into a Global Scenario that
Shell presents to the public.
Jeremy Bentham, the current head of the scenario team, has said
something like the following about Shell’s scenario planning:
Other organizations also do scenario planning, and the Shell
method can be copied. If they like, they can hire consultants andhave them write scenarios according to the formula. But theShell scenario planners have been working on the latest ideas
worldwide for the last 40 years, engaged top management bydiscussing “what if” possibilities, issuing papers, seeking out
occasions for presentations, and otherwise continue tostimulate decision-makers subtly and quietly. Shell management
has also recognized this challenge as a valuable activity and has
invested in this approach to this day. This “learningorganization”, scenario planning supported by a liberal openminded corporate culture, can never be copied by others.
Jeremy is stressing the importance of a liberal, strongly
committed, highly inquisitive scenario team and the soundrelationship between the team and decision-makers.
Finally, I am seeing the sustainability movement as a normative
movement, one that seeks the convergence of all the potential paths
that society may take going forward. Of course, I agree with thephilosophy behind it. There’s no way I could object. But everyone ison board for sustainability: CEOs, employees, politicians,bureaucrats, NGOs, academics and researchers, schoolteachers andstudents, the mass media, everyone. There’s no competition here, noroom for innovative ideas. People working on innovation andstartups should compete in a more competitive environment. Only
then will interesting things happen; only then will society be
invigorated.

The Importance of Scenarios from Multiple
Perspectives
Kusaka: It is true that the main strength of the IPCC process is that it
is based on academics, on refereed research papers. But there aremany papers that have shortcomings because they reflect the biases
of people who lean towards environmental activism. Still, the IPCC
subcommittees are run objectively and neutrally. But as you
mentioned, the summaries have become the subject of politicalgamesmanship. Then there’s the further bias imposed through media
coverage. So your suggestion that we should go back to the original
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source, the original analysis, makes sense. We shouldn’t start withthe summary, correct?
Kakuwa: I think so. But, businessmen and businesswomen are toobusy to look to them for this, so this is where the intellectuals comein. There, in contrast to talk shows, the intellectuals put forthreasoned arguments in areas they are familiar with, exercising selfrestraint and courage. The only rule there is that you must air yourviews accurately and responsibly. On the other hand, you arerequired to listen to the experts in fields that are unfamiliar to you,carefully, without prejudice. I hope that such a healthy world of
public intellectuals exists in Japan.
I believe that the scenario approach is a useful platform for this.
There are no statistical data on the future that can be referenced, so
it’s only fair to place the knowledge and insights of a wide range of
people against multiple visons of the future and treat them equally.
For example, if there are three very different visions of the future, therule of scenario planning requires the construction of three different
future worlds that can provide the subjective psychologicalexperience of equal probability. This enables us to write down thethoughts of a wide variety of people in parallel and present them as
narratives. I believe that this is a particularly effective framework forparticipation by civil society in the debate over public policy.

The Significance of the Scenario Approachfor Business Management in Japan
Kusaka: In his book The Black Swan: The Impact of the Highly
Improbable (Random House, 2017), Nassim Taleb talks about eventsin the world of financial markets that cannot be predicted but have anenormous impact when they do occur. Still, governments andbusiness management must construct business plans based on themost likely future events.
With regard to today’s keywords “minimize maximunm regrets”,
the average Japanese business faces institutional constraints fromthe need to draft management plans and produce results within a
specific timeframe: quarterly numbers, a mid-term plan covering aminimum of three years, and the regular turnover of corporatepresidents. A tail risk by contrast is a time bomb: in the case of theTroll offshore platform, a one-meter rise in the sea level over the next
100 years, an analysis warning that was not publicly shared at the
54 Japan SPOTLIGHT • May / June 2018

time. It’s not going to happen under the current CEO; it may nothappen under the next one either. How does top management, under
the pressure of being expected to continuously produce results, andin the short-run at that, grapple with this tail risk?
Another thing. If the scenario approach becomes part of corporate
culture, part of the culture of society at large shared by everyone, theissue of tail risks will be raised as a matter of course by institutional
investors. The question is when once this kind of culture has evolved
in institutional investors, all might start asking business entities
whether they are conducting the proper scenario-type exercises tominimize potential regrets.
Of course, progressive business organizations will undertake to do
this even when such a culture has yet to widely develop. Is dealing
with tail risks a feature of the corporate culture at Shell? Are there
differences among businesses? Is this thought process alreadyadopted in the business world, or is it work in progress? What are
your views about this?
Kakuwa: That’s a very important question. There are certain strategic
decisions made now that will cause people to look back 20, 30 years
from now and question the accountability, at that time, for theoriginal decision-making process by the business or government.
I think that in the world of money, money moves quickly, hence thatkind of protoracted review of decision making in the past may not bequite appropriate. In any case, there’s the idea of “path dependency”,
which means that a decision made today binds management for along time, that it is difficult to shift from a predetermined trajectory.
There is a clan of businesses for whom path dependency is a matterof significance. They must take long-term uncertainty and risks into
consideration.
For example, if you are building a power plant, you want it to be inoperation for at least 30 years. You are making a major decision
about something that you expect will be earning money for the next
30 years even though there could be many changes in Japan’s
energy policy. If you are in that kind of business, you must be
particularly mindful of changes in the long-term businessenvironment.
To take another example, Hitachi is committed to the British
railway market. It is even committed through the operation stage. So,
it will have to make money over the long-run there even if there
could be many changes over the course of the future. Recently,

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Japanese businesses are going out to seek their future in theoverseas infrastructure market. To make money over the next 20, 30
years, they must take a close look at the country risks out there.
Scenario planning should be effective for such businesses. Actually,
the Shell scenario team has undertaken many projects to look atcountry risk on the ground. In fact, they are the most numerous
projects that it has. The team has much experience in this field,
although I was unable to touch on them today.
Now, Nassim Taleb was a trader. I used to be trader myself, so
I know how it was like. A trader in his heyday engaged in endless,super-short-term, scenario analysis. We had no AI-enhanced
computer programs to determine the direction of the market thefollowing day. Instead, it was the intuition of the trader that
performed the task. That trader would compose a narrative that was
based on his/her conclusion from a set of assumptions about factors
and cause and effect, and that would lead to conviction about thedirection of the market. Of course, the trader, self-satisfied in his/heranalysis and world view, could think twice, and just as easily decideto go in the other direction and bet on a market downturn. To put it
another way, traders looked at the market as possible causal stories,
passing by, coming to the front, and they weaved their own opinionsfrom multiple directions.
But The Black Swan tells a story that is actually quite troubling forpractitioners of scenario planning. Specifically, the book makes apowerful argument that the systems of the world are connected in
unpredictable and complicated webs of cause and effect so thatwhen an event occurs, it is impossible to foresee what will happen
next, to see what risks will be generated as a result of the event. Thisis an argument that has been put forth from complexity science, adaunting challenge.
However, if we throw up our hands and say, “It’s a conundrum, we
can’t form any expectations,” all we’ll have left to deal with inhandling risks will be “resiliency” or “adaptation”. But that’s not how
the decision-making process in governments and businesses works
in the real world. If you don’t have a narrative that goes something
like, “these changes should occur, which should lead to this, weshould place our bets on this window of opportunity, but if we’rewrong, we’ll be exposed to risk here, which we’ll make provisionsfor”, a powerful story explained through causal relationships, there’s
no other way that they can discuss in management committees. The
people sitting in on these meetings are all self-assured successful
people with healthy intellects, ample experience, and the ability to
use the power of logic and intuition to think through issues. If all we
can say is that “to be honest, complexity science tells us that there is
no way of knowing how widely future risks will spread in thisproject” or that “this is the outlook, or so AI tells us, now mycolleague, the ball is in your court”, it will be by no means difficult
for top management to make strategic decisions through earnest
discussion.
Kusaka: It’s often said that generals are always fighting the last war.
They seek the equipment, the troops, and the tactics that will enable
them to further refine the war that succeeded the last time. There is acertain logic to this, but it lacks the imagination to consider the
possibility that they could be fighting a different war the next timearound.
We learn from existing knowledge and expertise and apply it toexisting problems. But new problems can always arise, as well as
new risks. The scenario approach is valuable because it enables us
to determine whether these often low-probability risks could leave us
with serious regrets regarding our businesses, projects, and evensovereign states if they actually come true.

Written with the assistance of TapeRewrite Corporation.

Japan SPOTLIGHT • May / June 201855