Special issue on: risk management for SMEs and corporations

Citation

Mihai-Yiannaki, S. and Stokes, P. (2012), "Special issue on: risk management for SMEs and corporations", International Journal of Organizational Analysis, Vol. 20 No. 4. https://doi.org/10.1108/ijoa.2012.34520daa.001

Special issue on: risk management for SMEs and corporations

Article Type: Guest editorial From: International Journal of Organizational Analysis, Volume 20, Issue 4

Introduction

In the latter part of the twentieth century, leading into the beginning of the twenty-first, the topic of risk and the management of risk has become a central and unavoidable issue on the organizational agenda. This is not to say that risk is new – it is of course for eons been an integral and implicit part of the world, the human condition and society in general. However, the context surrounding risk has shifted significantly in recent times and as globalized markets, combined with sophisticated organizational and managerial forms and processes, become increasingly interactive and intertwined in the contemporary era so too the challenges of risk management heightened complexity. The potential consequences and problems that may arise when these novel forms of market and organization are allowed to spin out of control are starkly evident in the, for example, experience of the ongoing fallout from the 2008 financial crisis. This poignant and painful episode is a timely reminder that the issue of risk management remains a topic that merits continued attention.

It is in this pressing spirit that the current special issue has been assembled. In embarking on such an endeavour, there are a range of potential approaches and factors that might be engaged and relevant and potential issues that might be encompassed in such a discussion are multifarious. Much of the debate hitherto conducted around risk has been primarily at the corporate level. The present collection of papers respects this with partial foci on the airline industry and the banking sector; however, equally it also turns substantive attention to the small to medium sized enterprise (SME) sector where perhaps less analysis has been conducted. This research draws into relief a range of issues including: the drive towards, and the desirability of, harmonization in risk management processes within and across different industrial sectors; the important matter of disclosure or risk factors identified and at play (especially in relation to financial sectors and processes); the capacity of risk management mechanisms to predict failure as a risk factor; the role of performance and adaption in the face of risk assessment; the function of motive and the consideration of what drives risk; and finally, the imperative questions of governance and regulation across large breadths of industrial and commercial activity that span national, regional and global boundaries.

The first paper in the special issue considers “Market risk disclosures of banks: a cross-country study”. The purpose of this paper is to investigate, using empirical approaches, the disclosure practices of market risk by 30 banks across ten countries of varying size and geographic distribution (including USA, Canada, UK, Germany, Japan, Italy, The Netherlands, France, Greece and Cyprus). The methodology employed is content, regression and correlation analyses which produced qualitative and quantitative indicators of the degree of market risk disclosure in order to ascertain the extent to which differences exist across countries and across banks of different size. The findings validate the testing hypotheses, namely:

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  that there are still significant differences across banks in different countries, meaning that there is little harmonization in disclosure practices;

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  that the banks in Anglo-Saxon countries (UK and USA) are consistently better in their overall risk reporting practices;

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  that the banks that are “good” in reporting qualitative information are also “good” in reporting quantitative information on risk types; and

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  OLS regression analysis and correlation analysis point to a positive association between bank size (as measured by the market capitalization) and the level of risk reporting.

The second paper in the special issue develops a systemic approach to examining a comparative case-study analyzing the “business-risk” relationship across countries. The paper: “A systemic risk management model for SMEs under financial crisis” designs a new tailored model of a balance scorecard (BS). The risk and crisis management model aims at improving both SMEs management adaptation and performance across all of the stages of a given crisis – something not attempted so far in the literature. The application of such a BS comes from the author’s experience as a banker financing various SMEs industries in the role of bank consultant on risk management, yet primarily from the results of a survey performed on a set of Romanian and Cypriot SMEs, equally proportionally selected from the area of trading, manufacturing, and services. The data collection covers a period spanning 2008 to 2011 and therefore offers something of an insight into aspects of the current financial crisis affecting the entire European Union region. The study’s results appear to show a significant improvement of the financial performance for the SMEs who employed this model compared to those enterprises that did not. The model’s simplicity is a factor that appeals to managers and regulators in enabling them to understand important business risks and crisis-related phenomena.

The third paper in the collection focuses on the development of a failure prediction model for a sample of small and medium-sized firms with head offices located in the region of Castilla y León (Spain). The paper is entitled “On the non-financial information’s significance in the business failure models: a Spanish cash study” and the authors employed two predictive statistical methods (discriminant analysis and logistic regression) and considered financial ratios and non-financial information as potential variables to predict failure together with an initial principal components analysis (PCA). Then, the results obtained with this analysis were used in the prediction step so as to estimate the respective models. The results of the predictive methods show that non-financial information, which becomes significant in the developed models, helps financial ratios to improve the ability to predict failure. Both methods are appropriate for predict financial distress, but logistic regression analysis turns out to be somewhat better. Most of the developed business failure prediction models have used a paired sample with the same number of failed and non-failed firms. This has the drawback of not being representative of the population from which it is chosen. Therefore, in order to obtain a representative sample a random sampling method is applied on the basis of the population size and composition. The selected sample assures that parameter estimates are not inconsistent and biased, as the statistical methods assume.

The fourth paper researches mergers and acquisitions in the airline industry and considers issues of motive and systematic risk. It identifies the motives for mergers and, second, examines the effect of mergers on the systematic risk of bidder firms in the airline industry. In order to evaluate the effect of mergers in relation to systematic risk, two different market models are estimated for each company in the sample – one with pre-merger data and one with post-merger data. Following this stage, the two market models are compared to identify any differences between them. The study has identified three diving motives behind the mergers, namely: cost efficiency, economies of scale, and market power. All of these synergistic motives are expected to affect the new firm’s earnings stream and in turn will affect its systematic risk. With the use of the market model the individual merger results are in line the prior literature. Part of the sample firms displayed an increase in their beta as opposed to the other companies that exhibit a decrease after the merger. Nevertheless, overall the average results showed a decrease in the post-merger systematic risk. Furthermore, a reduced post-merger systematic risk indicates that the primary motives behind those mergers are synergetic and second that they manage to increase shareholders value.

Last, but not least is a paper that looks at “Importing international corporate governance codes in Greek publicly listed enterprises: a case study analysis”. This research describes a gap-analysis in the application of International Governance Codes in the areas of corporate governance, internal and external auditing in relevant local laws and regulations, as well as the adoption of best practices. The regulators therefore make it easier to identify potential areas for improvement. This study focuses on the evaluation of the introduction of International Corporate Governance codes such as Combined Code (UK) and King Report III (SA) in Greek publicly listed enterprises. The research is based on a case study analysis of six publicly listed enterprises (three of which are traded in the high capitalization index and another three in the medium-low capitalization index of the Athens Stock Exchange). Qualitative research was carried out to address the research topic, using primary and secondary data. The primary source of this study was the participant observation available through the author’s professional experience in the field of corporate governance with publicly listed enterprises, whereas secondary sources were grounded on international corporate governance codes, Greek corporate governance laws, regulations and best practices, in combination with the academic literature. Although certain parts of International Governance Codes requirements have been applied by a number of Greek publicly listed enterprises, there is a long way to go to achieve best practice. The reason for this is the typical partial application of International Governance Codes requirements.

In summary, the special issue thus delivers an interesting collection of contexts, models and responses in relation to risk management. Substantial light is cast over the SME sector in a range of geographical settings and this is considered against the backdrop of a wider corporate and global environment. We believe that the insights and pathways provided herein will make a valuable contribution to the ongoing debate and exploration of risk management.

Simona Mihai-Yiannaki, Peter StokesGuest Editors