David Wood: Name the ugly duckling and protect investors

It's been nominated for five academy awards and has been showing to critical acclaim around the world, Black Swan, the film about a tormented ballerina, uncovers the effort and emotion that professional dancers put into reaching the heights of their craft.

For many readers of these pages, there is perhaps a better known Black Swan which has nothing to do with dancing. This Black Swan is the impossible-to-predict event coined by Nassim Nicholas Taleb in his book of the same name. The book has achieved widespread popularity, both inside and outside the world of business, for its message on the nature of risks and human attempts to mitigate them.

Taleb had a successful career in finance as a hedge fund manager and trader. His daily bread was earned by his understanding of the risks facing the companies in which he invested. His general thesis, that companies can't possibly plan for "Black Swans", is important because he encourages the world of business to have the common sense to say to their stakeholders – "we've thought about what can damage our business, here's what we're going to do about it, but there may be something out of the blue that blows us off course"'. That seems fair – how can you address the Rumsfeldian "unknown unknowns"?

But "known" risks must be properly explained, or the income of savers and others is being invested on incomplete or misleading information. This week, the Financial Reporting Council criticised many company boards for failing to describe their principal risks and uncertainties clearly. This is a short-sighted approach from the companies who are coming up short by using generic and boilerplate language to describe their risks. People recognise that business is not infallible.

Restoring trust in how companies operate can be enhanced by frank and clear disclosure of the known risks that they face and the fact that not all risks can be identified and mitigated. That way, investors can tell the difference between a Black Swan and an ugly duckling.

l David Wood is executive director, technical, at ICAS, the Institute of Chartered Accoutants of Scotland