1.2 The importance of risk management: a stakeholder approach Flashcards
Risk management is essential to help businesses create and preserve value for s____________.
stakeholders.
Organisations must find balance between taking risks that offer p_________ outcomes ad reducing risks that cause h___.
positive
harm
What is a “risk event”?
A random, discrete occurrence which may affect an organisation positively or negatively.
What is meant by a “nexus or global stakeholders”?
Modern organizations exist to serve the needs of multiple different stakeholder groups, often from a variety of different countries.
What is a “compliance risk”?
The risk of sanctions or financial and reputational loss as a results of non-compliance with the law, standards, guidelines or codes of conduct.
Using employees as an example, explain how stakeholders both invest into and expect a return from an organisation.
Employees invest time and their health and expect a salary and other benefits in return, as well as protection from harm.
List 7 types of external stakeholder.
Regulators Creditors Owners (if distant from management) General public Customers Rating agencies Suppliers
List 3 types of internal stakeholder.
Employees
Directors
Owners (if involved in management)
Most stakeholders are inherently risk averse. What is meant by this?
A reluctance to take or be exposed to risk.
For what three reasons may a shareholder be risk-preferring?
Asymmetric returns - the possibility of receiving dividends and selling shares for profit and gaining more money than was put in.
Limited liability - no extra payments to be made on insolvency
Diversification - shareholders usually hold a portfolio and therefore have a lower risk exposure.
How did the 2008 financial crisis demonstrate irresponsible shareholder risk tolerance?
Shareholder risk seeking led to major institutions such as Northern Rock and Lehman Brothers to exploit high risk investment opportunities, such as subprime lending and mortgage backed derivatives. This led to bankruptcy once market growth slowed down.
For what three reasons might shareholders not be risk-seeking?
Ethical concerns over protecting employees and others from harm.
The threat of bankruptcy costs
The effect of cash flow fluctuations on growth opportunities
Why does bankruptcy reduce the likelihood of shareholders receiving a return?
Usually there is insufficient cash to pay shareholders
There may be additional costs such as legal and administration costs
Loss of brand value in goodwill
Need to sell assets below market value at short notice
Why are organizational cash flow issues problematic for shareholders?
Low cash flow prevents opportunistic investment in important projects and investment in infrastructure for the future.
