The effectiveness of risk management system and firm performance in the European context.
| Autor | Ghazieh, Louai |
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Introduction
Following the financial crisis of 2008, the financial system was mistreated, as governments took on the role of providing "cash bailouts." Since then, the recovery has been confirmed and governments have played this role less and less. Exceptional measures, such as regulatory laws, are no longer sufficient. Nevertheless, structural reforms to the organization of the governance system remain relevant in gaining the trust of stakeholders. Consequently, the capital markets have been modified in terms of their structure (Yamanaka, 2018); thus, if these capital markets remain private, the role of the state remains indispensable. For this reason, it is important to ensure the smooth running of all organizational structures (OCDE, 2010).
This crisis has led to collective awareness, while more controlled and restrictive procedures have been implemented. In 2015, the Organization for Economic Co-operation and Development (OECD) Management Group presented its main recommendations regarding the responsibility for risk management within firms. According to these recommendations, the internal and external auditors should report to the audit committee; the same approach should be taken in the risk management of financial institutions. Thus, in financial firms, a risk manager must be present who reports both directly to the board of directors and via the audit committee. This risk manager must be totally independent, and his/her mission is to be similar to that of the mediator. His/her main role is to draw the attention of the board of directors. In addition, the board of directors must fulfill its functions by ensuring the accuracy of financial and accounting documents, the independence of accounts and the effectiveness of control systems, including risk mechanisms within the firm.
In its 2011 Green Paper, the European Commission defines governance as the management and control system of firms and as "the set of relationships" between the management of the firm and its stakeholders. Thus, corporate governance ensures through its control mechanisms the responsible behavior of all agents, and in particular, the manager. Corporate governance includes a system of risk management and internal control, which must be robust, comprehensive and efficient to ensure the effective implementation of the risk management strategy.
The proper functioning of the risk management system implemented by a firm plays an important role in ensuring the firm's effective management (Mayer et al, 2019). We consider that the presence of a risk management committee, a high level of debt, environmental uncertainty and the publication of a report on the social and environmental context can influence firm performance. However, our goal is to analyze the effectiveness of risk management committees and their attitude in dealing with the uncertainty of the environment. In the course of this work, we return more specifically to the effectiveness of the risk management system, particularly in the European context.
The research in the European context is based on extensive research that has been conducted in the USA. In general, this research is essentially based on the mechanisms of risk management. The related studies have focused on two main issues. First, they question whether these mechanisms protect the firm performance, and second, whether these mechanisms influence the specific decisions made within the firm's framework. This research analyzes the risk management systems in different countries.
Existing studies analyze the relationship between a mechanism or theory and a second variable. No study so far has analyzed a larger number of mechanisms in combination with firm performance, which this study will do. Also, our study realizes this approach at the level of three countries: France, the United Kingdom and Germany.
To carry out our research, we used the quantified analysis of the annual reports of firms listed on the stock exchange in the three study countries (SBF120 for France, HADAX 110 for Germany and FTSE100 for the United Kingdom). In addition, the period of our study extends from 2005 to 2012 for all three countries. We specifically selected this period because it is eight years (with the experience of a financial crisis) that allows for the relationship to be better evaluated.
Finally, we adopted a coding approach using the statistical software R studio that allowed us to specify the nature of our variables and master their design. Most studies that measure one of the relationships use Statistical Package for the Social Sciences (SPSS) as an analytical tool.
This approach was relevant for the analysis of our results. To achieve this, we retained the simple regression with the data of firm performance. Given the results obtained and our study's conclusions, it seems to us that this approach was adapted to this study's field and hypotheses. For our sample, we built a database. This process was necessary because, to our knowledge, there was no existing database basis on our variables for the three countries studied. Consequently, we studied annual reports and reference documents. From these reports, we manually recorded each firm's data and this protocol was repeated for all of our variables for each year.
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Theoretical framework
Several theoretical currents contribute to the understanding of risk management systems infirm. We find that the works are bound to the classical approach (financial theory and agency theory) and stakeholder theory, the theory of the dependence of resources in complement with the institutional neo-theory.
The work on corporate risk management starts from the hypotheses within the framework of agency theory. In this theory, there is a contractual relationship that places the managerial executives, who have the power and capacity to make decisions on one side and the shareholders on the other side (Jensen, 1983). This traditional approach limits the objective of explaining the firm's financial structure. This agency relationship leads to a conflict of interest and differences of the points seen, especially where there are many asymmetries of information between both parties.
According to Jensen (1986), various mechanisms are necessary to align the interests of mandates, reduce the risks associated with management and make the manager more responsible. On the one hand, there are mechanisms internal to a firm that are generally imposed by the law (e.g. the board of directors and the general shareholders' assembly), and on the other hand, there are external mechanisms that are mainly based on market power (e.g. the market recovery and the auditors' market).
The stakeholder theory exceeds and views it a classic - of a firm. It looks for the interests of the stakeholders, not shareholders, and widens the field of the manager's responsibility (Mercier, 2001). It is also the theory most frequently cited in the academic literature, it presents the firm as a group of collective interests, and it helps the manager to use their skills to make more useful, effective and strategic decisions (Freeman, 1984). Consequently, stakeholder theory provides new insights into the possible reasons for risk management.
According to Donalson and Preston (1995), this theory has three main visions: descriptive, instrumental and normative visions. According to the normative vision, this theory legitimizes the interests of actors who are not firm shareholders and allows escaping the classical theory. This vision also identifies the values and obligations where the manager can guide the firm strategically, thus providing an ethical foundation to the theory. The social firm performance is critical to this vision.
According to the instrumental vision, this theory demonstrates that the manager must manage his or her relationships with the stakeholders in a way that allows him or her to realize the firm's goals and report the responsibilities to the firm's owners (Jones and Wicks, 1999). From the descriptive vision, this model explains the firm's behavior and relationships with sound aggravation and how the manager must be responsible for the interests of the various stakeholders. Finally, it allows taking advantage of the firm's history to obtain opportunities in the future (Donalson and Preston, 1995).
We can conclude that stakeholder theory reformulates the role of the manager and firm, and it also widens the vision of agency. In this context, and from a responsible perspective, the manager must try to reduce the risks that can influence the interests of all the actors, created by the pensions for the various partners with an optimal balance of all interests, and develop his or her firm.
Finally, the new institutional economic theory offers a different perspective on risk management. This theory provides the most understanding of certain behaviors in a firm. It demonstrates that the manager tries to engage in behavior that is legally acceptable and competitive. Firms try to acquire legitimacy, because it is culturally and socially required. According to Suchman (1995), this legitimacy is a generalized perception that the actions of an entity are desirable, suitable and corresponding to a system of standards, values, faiths and definitions that are socially constructed.
At the level of managerial decisions, legitimacy is obtained by acceptable decisions. Managers try to legitimize their investment, financing or governance decisions like reducing or increasing the size of the board of directors. This attempt can be described as search legitimacy. Therefore, questioning legitimacy can have a positive influence, where it urges managers to emphasize the necessity of managing the social and environmental risks well, thereby encouraging the manager to engage inresponsible reflection. A critical implication of this theory is that shareholders may be interested in attracting block ownership by reducing the risks in a firm.
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