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Numerous studies have been conducted in order to identify the causes of the recent economic downturn. Businesses worldwide have been hit with the impact and the ongoing repercussions which this global recession has caused. This essay aims to uncover the main themes surrounding the causes of the economic downturn, look at ways in which organisations have reviewed the risk management and corporate governance policies. Various tools that have been adopted by organisations will be identified and how changes in the organisational structure and culture can help minimise potential large scale impacts of another downturn. Finally, Siemens; a large global organisation spanning across many sectors will be analysed to address the consequences it had to face during the recession period and what the organisation have done in order to minimise the impact of this threat occurring in the future.
The current recession was preceded by what could be described as the most significant boom in recent history; between the years of 2003-08, international GDP had grown by over one-third (Grigor'ev & Salikhov, 2009). Developing countries can be seen as being worst affected after a 3.8% decline in overall output. They are expected to grow at a rate of 1.2% per annum, significantly lower than the 5.9% they grew in 2008 (Ahearn, 2009). Some authors argue that businesses should have predicted the economic downturn approaching in light of what can be seen as major stages building up to worst state of financial decline since the great depression.
During the early stages leading up to the global recession, a period of thirteen months from July 2007 to August 2008 saw the development of the American mortgage crisis. This resulted in the large write-downs by banks on bad mortgages and caused some of the first bankruptcies. The next stage of decline came in the form of liquidity crisis. This resulted in a period of distrust where banks began to trade using money other than their own. The biggest casualty of this was Lehman Brothers. Following the liquidity crisis came credit paralysis; this was to have a huge impact globally, especially on future capital investments. These high economic growth rates of the early 2000's could not cope with the emergence of savings imbalances resulting in financial meltdown. Shah (2009), argues that in essence what had happened was the result of over-confidence by banks, hedge funds and other financial bodies that thought they had worked out how to control risks in turn making money more effectively.
November 2008, saw a meeting of the G-20 to discuss the new international financial response to this global issue. They stated the main reason for the economic downturn was that, "market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence." It is clear to see that organisations did not have a risk management strategy in place to deal with such crisis. A document published by the Business Continuity Institute (2009), asserted that the problem with risk management is the focus on high-probability events. In this case, the economic downturn was a low probability event with a very high impact. The document goes on to state that businesses should resist the demands for increased risk management, when in fact it is clear corporate governance guidelines that are needed.
Through the appropriate use of corporate governance, an organisation is able to succeed where risk management can be seen to have failed, in assigning accountability and delivering transparency to stakeholders. It can lead to economic growth, investment and financial market stability.
The recession has seen the development of numerous tools and techniques that can be adopted by organisations in order to tackle high impact risks. These are organisation-dependant hence they can vary in detail and structure depending upon the size of the organisation and the industry they belong to. Navarro (2009), suggests the development of a forecasting capability; this can be run by an external company deployed in-house to complement or replace in-house models. This systematic approach can help managers better manage the business cycle.
Navarro also suggests a number of strategies that can reap their benefits if they are applied in time. These include hiring new employees sooner than competitors in anticipation of an upturn; companies that hire employees during recessions are more likely able to keep them. The second of Navarro's strategies is to increase marketing expenditures. A study conducted by Kypriotakis (2002), demonstrated that one of the most effective ways to build brand and increase market share during a recession was to increase the marketing expenditure. Finally, the last of Navarro's major strategies is to increase capital expenditure. This has a big advantage as the costs of construction, labour, equipment and raw materials will be considerably lower compared to a time when there is economic stability and growth. However, this may not apply to small organisations as they may not have the financial muscle to make such investment at a time when their future is in the balance.
For organisations that are more technology-based, they may wish to adopt the IT Innovation Capability (ITIC) approach by Chen et al (2009). This involves the integration of IT with the organisational and managerial processes. However, it allows an organisation to respond to a rapidly changing environment by aligning it with the changing business environments. Following a rigorous study by Chen et al (2009), their findings suggested that "a systematic ITIC strategy leads to value creation and this value creation resists erosion from competitors' actions."
The Business Continuity Institute suggests a more traditional approach in dealing with risk; an enterprise risk management (ERM) framework has been developed that thoroughly covers eight stages:
The internal environment
Information and communication
It is not as simple as defining a framework for use within an organisation. This ERM framework needs to be aligned with an organisations corporate governance strategy. Being able to fully understand the exposure of risks is an internal control issue, failing this, it becomes a corporate governance issue. Therefore, this becomes a top-management responsibility as they need to be able to evaluate, define and ensure that there are appropriate resources in place in order to deal with any risks that occur. Risk management needs to be tackled regularly and exhaustively in order to prove to shareholders and stakeholders alike that appropriate measures are in place to deal with any issues that may arise. The Turnbull Guidance (1999) has assisted in this matter by allowing companies to focus on the broader reasons of why businesses fail other than typical financial matters.
The Business Continuity Institute proposes the development of an Impact Policy that would be managed at board level which would form an integral part of a reformed corporate governance framework taking into account risk management. There would be a number of stages which they have outlined which include; understanding the organisation, understanding the impacts on the business, understanding threats and executing this at the operational level. Once this tool has been executed, it will need to be embedded into the organisation which will effectively support the whole corporate governance framework. This performs an internal control mechanism for risk-taking actions.
As well and the various tools and techniques adopted by certain businesses, the way in which the organisation is structured and the culture of that organisation can play a major role in ensuring that there is compliance with corporate governance policies. If organisations have suffered from a negative impact due to the recession, it may be an opportunity for them to "correct the sins of the past by reshaping associate compensation and revamping the hire process" (DiPietro, 1999). Through careful adjustment of the firm's business model, involving all stakeholders, it may give them a chance to align it with a revised business strategy which would aid future development.
The culture of an organisation is crucial when attempting to embed new methodologies and frameworks. Setting the attitude towards a new approach beginning with the top management can often support its communication and the overall process and procedures. Navarro (1999) supports this by stating that a "facilitative organizational structure" can help to "promote the timely implementation of appropriate strategies and tactics." He stresses the importance of a supportive organisational culture in following all elements of strategic business-cycle management.
Many organisations have suffered as a result of the global recession. It caused organisations to review their business models and implement new procedures to lessen the impact should these be challenged. Siemens is an organisation in which has revised its corporate governance strategy in light of the global economic downturn. Siemens employs over 420,000 people in over 120 countries. Its total revenue for 2009 was â‚¬76.651 billion making it one of the world's largest corporate organisations. The Siemens Group, spans across a number of sectors including; industry, energy, healthcare, equity investment, IT solutions and services and financial services.
As a result of the global economic downturn, Siemens like many other organisations was hit hard. The company had to cut 16,750 jobs worldwide in order to reach savings of approximately â‚¬1.9 billion in light of their share price declining by â‚¬30 over a six month period. Similar to other organisations worldwide - Siemens were not prepared for the huge impact that this recession would bring.
Siemens revamped their risk management policy whilst aligning it with their corporate governance strategy. The risk management policy set by the management board, aims to pursue sustainable growth, create economic value whilst avoiding and managing inappropriate risks. Incorporated within this strategy are; control systems that provide early warnings of developments that could jeopardise the continuity of the business, strategies for planning and reporting as well as having internal auditors regularly review the adequacy and effectiveness of the whole risk management system.
Siemens identify the risks and opportunities that may occur and involve management from all sectors of the organisation to partake in workshops in order to assess the impact and likelihood of each occurring. The risk report which is created, separates risks into various categories, these include: strategic, operational, financial and compliance risks. Each risk is identified in the report, followed by the measures that were put into place to deal with it should it occur.
Although it is not yet clear whether this enterprise risk management strategy has been effective, it may be tested in the coming years. In the meantime, it can be seen that this strategy is proving effective for such a large global organisation. In January 2010, Siemens released a press statement noting that their profits had substantially increased despites their declining revenue.
In conclusion, it is clear to see that the financial markets need to play a more limited but more productive and less dangerous role within the economy (Crotty, 2009). However, organisations need to ensure that they have clear corporate governance procedures in place that align with their risk management strategy. This needs to be robust and easily modified to suit the evolving business environment. Risks and opportunities need to be regularly reviewed in order to ensure they adhere to fluctuations in the market.
More importantly, risks and potential issues need to be "conceived early and communicated convincingly in order to guide expectations and prevent longer-term damage to growth and price stability. Siemens is an ideal example of how an organisation that is one of the world's largest integrated technology companies has dealt with this demanding issue.