Introduction
This paper aims at giving an overview of management in general, as well as risk management, in particular. The main objective is to understand management and how it helps in running an organization.
Some management practices contribute to the failure of organizations given the fact that managers often tend to overlook how prioritizing of the short-term goals may affect the long term goals of the organization in the future. These bad management practices often render the organizations vulnerable to market stresses. The global financial crisis is one of these stresses. It had a great impact on the global economy and may have caused some organizations to become bankrupt.
Proper risk management might have helped these organizations to avert the global financial crisis. The paper looks at some of the gaps that exist in management and why some organizations are not able to fill these gaps. In addition, the paper provides an overview of some of the issues that managers failed to put into consideration prior to the financial crisis. We see that some of these issues could have been avoided if there had been adequate preparation and management.
Importance of management
This section aims at giving an overview of how management works and what role it plays in the organization. It also briefly discusses how to find out whether an organization is managed properly. The main objective is to highlight leadership strategies that can be used to influence the productivity of the employees.
Management plays an important role in the effective functioning of an organization. Sales managers are responsible for maintaining a good sales network for the company’s products. Personnel managers, on the other hand, are responsible for ensuring that the employees are productive and work in a good environment.
Plant managers are responsible for giving us quality products that we use on a daily basis. Our society needs to have mangers for it to be run properly. It is said that effective management is the reason behind developed countries and probably a resource that is required in the developing countries. Either way, our societies and organizations require good managers.
The role of management
Managers play a huge role in the organization because they help the company to attain desired goals. All organizations have certain goals and accomplishments that they wish to achieve and managers play the role of guiding the company to achieve these goals. To begin with, managers assign certain tasks to individuals who are qualified to perform them.
This is just one of the ways that managers may use to help the company achieve its desired goals. Managers ensure that all tasks and activities are designed properly and assigned to the right people. Assigning the tasks properly also ensures that the workers are productive and work towards attaining the company’s goals and objectives.
Management also has the responsibility of ensuring that workers are productive and work in an environment that encourages productivity. It ensures that all activities that hinder productivity are reduced or better yet eliminated.
It is important to remember that management is defined by the company’s goals and objectives (David 2007).
Signs of a well-managed company
In this day and age, companies usually excel as a result of the hard work and effort that their employees put into the job. The performance of the employees determines how well the company performs.
Business ideology dictates that employers should treat their employees as assets that are most valuable. Employees that are happy are the first sign that indicates a well-managed company. Positive business results are also another indicator that a company is being run properly. The following are some of the pointers that indicate a company is well run:
Work life balance
A company that performs well is one that gives its personnel a good work life balance. This is more likely to produce good results. Research shows that companies that give employees a good work life balance are more likely to produce good results just like companies that make their employees work hard. However just making employees work hard will produce results but the employees will not focus on the task. This may result in them resenting the job and finding another better deal somewhere else.
Challenging quantified goals
This is considered to be one of the essentials of an effective management. An organization has both short term and long term goals. Management is responsible for reviewing the short term goals that will eventually lead to the attainment of the long term goals.
Challenging the quantified goals here means that management comes up with reasonable measures to improve areas that need improvement or coming up with better ideas that will help the employees perform better in their tasks. Frequent review of the short term goals helps the mangers to evaluate whether they are on the right track towards achieving the long term organizational goals.
Evaluation
A company has to evaluate regularly the results of the company so as to know whether the company is on the right track. Companies nowadays take advantage of technology and utilize softwares that help analyze the data performance. The software applications also collect performance data and compare them with quantified goals.
A good manager knows the advantage of giving incentives such as bonuses and promotions to high achieving and performance employees. They also use the performance data to analyze employees that are not attaining their goals and thus giving them the necessary training. Through evaluation, a company can be well managed because of the data that is collected and analyzed.
Higher profits
This is evidence that a company is being run properly. A company that utilizes good management practices usually generates better capital returns. A company that is well managed will have a better chance of future growth and better market value than one with poor management. Shareholders are also likely to develop confidence in the company because of its increased returns on capital. In order for a company to attain higher profits, it has to have a strong leadership and an effective internal management.
Risk management
The main aim of this part of the paper is to provide an overview of risk management and its relevance in the organization. A clear understanding of it will help in providing a proper analysis of management practice and some of the shortcomings that were identified as a result of the global recession.
Risk management is defined as the process where risks are identified, assessed and made a priority. It utilizes an economically effective approach to minimizing the threats that may present themselves to an organization. Managers have to keep in mind that not all risks can be avoided or even mitigated due to realistic financial limitations. Therefore organizations need to know that at some point the organization will suffer a certain level of risk residue (Alexander &Sheedy 2005).
At times management of risks tends to be preemptive and therefore, managers can utilize business continuity planning. This approach was invented so as to deal with residual risks. Risk avoidance basically involves avoiding any activities that place your organization at risk. Even though adopting an avoidance approach seems to be practical, it could make a company lose out on some of the gains that come with the risk. The organization should therefore evaluate whether the gains outweigh the risks.
Risk avoidance is just one of the ways that mangers can use to manage risk. Another way that mangers can reduce risks is by using the risk reduction approach. This is an approach that reduces the chances of incurring a loss.
Managers should acknowledge that indeed the risks can have positive results or negative results. The agency or company that is given the responsibility has to show that it is capable of doing the job. This way, the company does not have to worry about incurring risks and will focus more on growing the business (Flyvbjerg 2006).
Risk sharing is another way that mangers can manage risks. In layman’s terms, this is sharing with another company the losses and benefits incurred. Most people however prefer risk transfer and they do this through the use of insurance or outsourcing. If this situation is analyzed from a critical point of view, it will be seen that if the insurance company becomes bankrupt, then the company will still suffer a loss.
Risk retention on the other hand involves the company being responsible for the outcomes of taking the risks. Managers should understand that this is only practical if the risks are small. In clearer terms, the manager should assess whether the risk is worth insuring. Will it bring more benefit to the company if the risk has insurance or will it just result in a further loss?
2007-2012 global financial crises
Having briefly discussed management and risk management, the aim of this part of the paper is to gain a clear understanding of the global financial crisis and how it impacted organizations. It also gives an overview of some of the areas of management especially risk management, that fell short to being analyzed and the measures that should have been taken to avoid the risks involved.
Many economists refer to it as the second great recession. It is believed to be the worst following the great depression. The following are some of the effects of the global financial crisis:
- Financial institutions collapsed
- A fall in the stock markets around the world
- A loss in the housing markets (Lahart 2007).
- Prolonged unemployment
- Failed businesses
- Consumer wealth declined
- Economic activities declined
The global financial crisis was caused by a variety of factors mostly attributed to the risk management system and liquidity issues. A look at the 2008 events shows that most organizations relied heavily on accessing markets that had secure financing. This resulted in managers making unrealistic evaluations of their businesses without considering that perhaps there might be a reduction in the secured funding (Crockford 1986).
Risk management lessons learnt from the global financial crisis
During the global financial crisis some firms adopted a management system that enabled them to withstand the effects of the crisis. This was when most firms faced a possible collapse and great losses. Investors lost confidence in the firms and feared losing their money (Krugman 2009). As a result, they avoided making any significant investments. This made the financial global system unstable and thus led to the financial crisis. The following are some of the key observations that were made during the financial crisis.
Weaknesses that contributed to financial strains
Many firms did not reevaluate their weaknesses even after doing a self-assessment to determine how to cope with such a crisis in future better. However, this was due to a number of issues that posed a challenge to them. First of all, they needed to invest in some form of expertise to help them implement the required changes in addition to the challenges of liquidity risk management. Some of the risk management practices that may have been identified so as to distinguish better performance from the worse ones were:
- Identifying and analyzing the risks by firms
- Frequent application of valuation practices by firms
- Managing effectively factors such as the liquidity of funding, capital and sheet balance
- Making informed risk management measures drafting management reports.
The above tasks require resources and considerable expertise to be implemented. This made many firms become reluctant in making the necessary adjustments. However, the main problem here is poor risk management practices that result in difficult adjusting to stressful situations such as the financial crisis (David 2010).
Funding and market liquidity problems
Some firms had adopted business models that made them rely heavily on secured funding for the achievement of long term illiquid goals. This made firms become vulnerable and unable to stand the pressures of market stresses without support from the central bank.
Borrowers only thought of taking advantage of the market financing to acquire short term funding that would have obviously been more appropriate if they obtained the funding from the long term funding that was more stable. Lenders, on the other hand, became weary of the value of some of the instruments and preferred to have borrowers give them a more substantial cushion for the assets they were going to finance (Dorfman 2007).
Due to poor risk governance and incentives that were misaligned, most firms permitted excessive overreliance on short term financing to grow in time. Management reports failed to capture some of the risk factors.
In addition, they had market discipline that was not effective as well as unforeseen regulatory requirements consequences. Such structural issues affected a number of financial institutions such as investment banks in the U.S, mortgage banks in the U.K and U.S, etc. with the stresses in the market, most financial institutions were significantly affected and needed to find assistance. (Borodzicz 2005).
An example of a company that became bankrupt as a result of over relying on securities as a way of getting funding is the European Lehman Brothers International (LBIE). LBIE counterparties voted to get funds from re-hypothecate securities. Soon after LBIE declared that it was bankrupt, brokerage clients that were prime decided to pull out of the agreed arrangements.
The reason for this was that the creditors were declared to be unsecured creditors. A lot of concern was generated when LBIE collapsed. This was partly due to the fact that some of their assets and credit balances could not be segregated. This led to many customers preferring to withdraw from the arrangements.
Firms’ re-evaluation of existing practices
Most firms have re-assessed their practices. Firms acknowledge that they are in the process of improving the practices of the pricing of funds transfer. This process will also include the broadening of the business scope, especially when it comes to issues such as the transfer of pricing and integration of pricing transfer.
Moreover, most firms are now re-evaluating the need for funding in the future. The heavy reliance of firms on a monthly coverage of funding made them not to reflect on behavioral or contractual demands of a market environment which is stressful and may trigger (Hubbard 2009).
A good example is whereby the metric coverage failed to foresee stresses that occurred in times of the crisis. Some of the stresses that had failed to be captured were the clearing agents’ demands. Now managers understand the need to analyze calculations for stressful situations and needs (Altemeyer 2004).
Corporate structures and how they hindered effective contingency funding
Corporate structures that were complex were the main source of arbitrage tax and capital frameworks that were regulatory. These factors created constraints on funds flowing from firms to legal entities. Firms are now using the bottoms up approach to work towards contingency planning. Contingency planning generally involves planning for contingency funds at a legal level (Calomiris 2009).
Gaps between current practices and those advocated by industrial supervisors
Two factors have been identified. Many of the firms’ infrastructures for information technology is not well equipped to identify, assess and monitor the risk exposures. Such problems take some time to develop but so does coming up with a solution for them. Secondly, failure of firms to reexamine the importance they have unduly given to businesses that generate revenue instead of giving importance to management reports and control functions.
Critical areas that managers needed to improve
Most manages are of the opinion that a lot of work has to be put in certain areas such as governance. Incentives have to be properly aligned and IT infrastructures significantly improved (Cortada 2003). However, these are areas that lack any action. Another challenge that managers and supervisors face is the fact that trying to close these gaps takes a lot of time and resources. Supervisors required consistent oversight while the firms required commitment, as well as discipline if the necessary changes were to be implemented (Michael 2009).
The global financial crisis brought to light the failure of some of the firms’ infrastructures for information technology in supporting financial risk management. Failure to improve systems for risk management was as a result of inadequate data integration due to several acquisitions as well as mergers (Healy &Palepu 2003).
Conclusion
The global financial crisis may have been predicted by some economists and may have been averted should the necessary precautions have been taken. However, it served a major role in highlighting some of the major short comings of managerial practice. A proper understanding of risk management and seeking expert advice may have posed a challenge to some managers. This resulted in bankruptcy and great significant losses.
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