Risk management practices have been a part of major discussions in news for several years because of the failures of major corporations. Many of these failures have been facilitated by the failure of the corporate governance practices such as accounting frauds like Enron, Olympus, and WorldCom. The importance of governance for risk management has been highlighted in the committee report of OECD that drew attention of people to the lessons in area of corporate governance including its principles, practices, and guidelines.
The aim of this research is to explore the impact of corporate governance on the risk management practices of Nuclear Energy Sector for which a case of ENEC would be taken. This aim would be achieved by answering following research questions –
Corporate Governance
Corporate governance is a framework that works to ensure that an investor has an assurance of getting returns as per Shleifer and Vishny (1997). It involves defining of roles and goals for suppliers, company and its stakeholders such that resources can be efficiently allocated, performances are monitored, and profits are evenly distributed. Corporate governance influences the performance of an organization in the times of crises. When controlling shareholders have strong incentives to expropriate company’s resources, it can have a negative impact on the company’s performance and thus, it is crucial to have governance mechanisms to avoid this (AFG, 2010).
Corporate governance mechanisms need creation of a board of directors consisting of shareholders, chairman and some others working in the organization. This board can be large or small. Larger boards have low cost of debt because of effective monitoring of financial accounting but at the same time can have poor decision making and asset utilization. When more directors are hired from outside, the board has more independence for making decisions and such boards can get higher returns on equity, greater profit margins, more dividends and larger stock purchases. Corporate governance plays a significant role in countries where legislative systems that protect investors are weak (Pearl-Kumah, Sare, & Bernard, 2014).
Organizations today work in dynamic environments that expose them to a variety of risks and thus risk management has become an important component to analyse for any organization. Risk measures the probability and impacts of events that cannot be anticipated in advanced. Several authors have suggested different types of risks such as:
Credit Risk: When a party in a business contract is not ready to hour any of the obligations defined in the contract as per the agreed terms then it can result into a credit risk.
Market Risk: Changes happening in interest rates, exchange rates, market rates, equity prices, etc., can be counted as market risks.
Liquidity or Funding Risk: When an organization is unable to provide funds for meeting the obligations with reasonable costs in the times of problems like market disruptions, the company can be said to face a liquidity risk.
Reputation Risk: When the business practices of an organization would incur losses due to negative publicity of the brand, it would be termed as a reputation risk.
Figure 1: categories of Operational Risk (KOOMSON, 2011)
Operational Risk: When direct or indirect losses happen because of failure of internal business processes or systems, an operational risk is observed. Operational risks can also be caused by external factors that cannot be controlled such as natural disasters, war, or a terrorism attack that cause damage to the nuclear power plant causing losses for the business
Commodity Risk: When prices of the energy would change, it can result into a commodity risk for the nuclear energy organization.
Interest Rate Risk: When there are mismatches in the balance sheet due to interest rate differentials then it can pose a risk for the organization (Aziz, Manab, & Othman, 2015).
Compliance Risk: When regulatory and legal requirements are not complied with and it results into a loss for an organization, it can be termed as a compliance risk
As per Modern Portfolio Theory, risk can be seen both as a problem and as an opportunity that needs to be avoided, reduced or worked upon to get acceptable or optimum returns for an organization. Risks can be Systematic or idiosyncratic risks. This theory can be useful for reducing unsystematic risks but systematic risks remain unaffected. The theory further says that all types of risks are actually correlated in some manner as there is a portfolio effect that brings both financial and non-financial dimensions of the risk together. For instance, a positive correlation has been found between economic and social dimensions of risks.
Stakeholder Theory support the ethical conducts in a business suggesting that social responsibility is crucial to guild good relationships with project stakeholders and it can help improved the performance of the business as well as integrated the environmental, social, and economic elements of business performance. Decisions taken in a business can affect stakeholders in different ways. For one, it may bring in revenues and for others the same may be an expense. The ethical responsibility of an organization is to serve the interests of stakeholders predominantly. As per this theory, if stakeholder needs are ignored then, value cannot be maximized for an organization. However, trade-offs have to be made among the stakeholder needs and objectives of the organization. In the long run, taking care of stakeholder needs would maximize the financial value for the firm which is required for the survival of the organization. The theory covers the significance of economic, social and environmental values for stakeholders that can be achieved with the use of corporate governance. Stakeholder engagement can also help rescue risks that can be political, reputational and financial. Stakeholder interests can play a significant role while assessing risks that an organization may face in its operations. The stakeholder based view of systematic risks can also bring more investments from stakeholders (Raban, 2012).
Another relevant theory that can be used for risk management is legitimacy theory which suggests that an organization needs to drive the legitimacy in order to reduce environmental and social risks. It would help organization build strong stakeholder relationships. Legitimacy involves creation of perceptions or assumptions that are considered desirable and proper with the use of a system of norms, beliefs, and values. Companies can achieve legitimacy by doing things right and avoid wrong things (Rezaee & Zhang, 2016).
Figure 2: Risk management environment model
A nuclear power plants use risk management environmental model which identifies three sectors that intersect within the strategic environment and thus, are important to be considered while planning risk management. These include safety, production, and financial.
The risk management framework defined in the model proposes an action plan for the risk management which begins with identification of risks that are listed, measured, and ranked based on their probability of occurrence and impacts. Next, techniques that can be used for reducing, retaining or transferring risks are identified. Identified risk management strategies are then implemented. After implementation, the operations would be monitored to understand the effectiveness of the risk mitigation strategies that were used.
In a nuclear power plant, risks are majorly divided into following categories:
Safety: This includes risks due to nuclear emissions, radiological implications, industrial and environmental problems.
Operations: Operational risks can include personal qualification issues, lack of personnel training, power outages, inventory management challenges, documentation of procedure related issues, improper organizational structure, lack of physical security, human factors causing risk, spare parts inventory issues, obsolescence, and ageing effects of plant equipments or machines (IAEA, 2001).
Commercial: Risks can occur due to fluctuations in interest rates, exchange rates, supply demand fluctuations, supplier base problems, cash flows, and return on investments.
Strategic: Strategic risk areas include political environment, ownership patters, and level of competition, public sentiments, market regulation, legal environment, and safety regulation (Raban, 2012).
Typical strategies that are used for risk management include:
Reduction of risks: Risks can be reduced using several methods like engineering changes, managing organizational changes, enforcing standards, personnel changes, and cost management changes that can include changes in spending patterns to increase efficiency.
Transfer Risks: Risk can be transferred to contractors, to insurers, can be pooled between different partners to contract, or can be managed as per the regulatory compliance needs
Retain risks: Risks can also be retained on the basis of different criteria’s including choice, default setting, or if they are not recognized then they are already retained (IAEA, 2001).
Risk management and corporate governance are interrelated as their emphasis is on the strategies that are targeted to meet the corporate goals. Corporate governance can increase the potential of the organization to create a sustainable value through risk management while achieving organizational goals (ASX, 2007).
Good corporate governance can help achieve a balance between the economic, social and environmental areas of management. It helps companies sustain for a longer time. For corporate survival, both corporate governance and risk management are crucial. Good governance plays a critical role in risk management as it allows monitoring company strategies. As per De Lacy, corporate governance rides on the complexities involved in risks faced by the organization. With good governance, companies can cope with risks well (Aziz, Manab, & Othman, 2015).
Recent evolutions happened in the legislative frameworks have brought in the new scenario for risk management practices as regulations have become more stringent across the world. Sarbanes-Oxley Act, 2002 of U.S. demand accuracy and reliability in the corporate information for the protection of investors of the public organizations. Turnbull guidance, 1999 of UK also defines laws for corporate governance with an aim to introduce the best practices on implementation of the audit system in organizations (Bank Muscat, 2016).
COSO report is a governance framework that is used for implementation of corporate governance. As per this framework, both risk management and internal control must exist together in an organization. Internal control can be established by following certain rules and procedures that must ensure the following:
A principle called VI.D. States that a board in any organization must ensure to execute some key governance functions such as preparation, review and guidance of corporate risk policy. A risk policy made by an organization must specify the risk types that the company is willing to accept the responsibility for. It should also identify the monitoring and reporting system as well as clearly highlight the roles or people who would be made responsible for managing specific types of risks. According to the principle, a special committee must be set for managing functions like risk management, remuneration, and audit (Pearl-Kumah, Sare, & Bernard, 2014).
For effective risk management practices, OECD recommends some good governance practices that organizations must take including (Rezaee & Zhang, 2016):
Nuclear Energy sector can face a variety of risks that may be explored and governance practices can be applied for the management of these such as:
Radiation: A key impact of nuclear power generation is the effect of radiation on the health of people. The radiation can damage the human body and cause major diseases like cancer as well as generic disease may sustain for longer time for subsequent generations living in the areas where nuclear tests are done (Cohen, 2016).
Reactor Accidents: Accidents can happen in reactor plants causing damage to the workers as well as cause monetary and reputational implications on the company. Any failure of any system within the nuclear power plant can lead to such damage and thus, it is important that organizations use back-up systems to mitigate for such failures. A probabilistic risk analysis can be done for each plant to identify the likelihood of damage such that plan for its prevention or mitigation can be made (Maher & Andersson, 1999).
Radioactive Waste: Nuclear production can lead a lot of radioactive wastage that can be harmful to the environment and to the public health. Radioactivity can reduce life expectancy of people by 15 minutes with an exposure. The impact of radiation is usually neutralized using elaborate packaging of materials while they are transported to long distances (Cohen, 2016).
This research aims to examine the degree of importance and application of corporate governance for risk management in the Nuclear energy sector considering the case of ENEC. The research would make use of a questionnaire as an investigation instrument through which the employees of the organization would be reached and asked to respond with their perspectives. The questionnaire would be self administered and would have questions on the use of corporate governance practices and risk management practices in the organization. The responses would be coded in SPSS and would be statistically analysed to understand the extent to which the corporate governance plays a role in risk management practices including risk identification, assessment, monitoring and analysis. The staff would be inquired on the types of risks they have faced or generally face in the industry including credit, operation, solvency, interest rate, and liquidity, environmental, social, and economic and other types of risks. The questionnaire would also make an attempt to assess how efficient the company practices are in incorporating corporate governance practices for the risk management.
This research would lead to the following outcomes:
References
AFG. (2010). Recommendations on corporate governance. AFG.
Anderson, R. C. (2010). Risk Management and Corporate Governance. OECD.
ASX. (2007). Corporate Governance Principles and Recommendations. ASX Corporate Governance Council .
Aziz, N. A., Manab, N. A., & Othman, S. N. (2015). EXPLORING THE PERSPECTIVES OF CORPORATE GOVERNANCE AND THEORIES ON SUSTAINABILITY RISK MANAGEMENT (SRM). Asian Economic and Financial Review, 1148-1158.
Bank Muscat. (2016). Corporate Governance Statement. Retrieved December 14, 2016, from https://www.bankmuscat.com/en-us/InvestorRelation/aboutus/Pages/CorporateGovernance.aspx
bertin, M. E. (2005). The Impact of Corporate Governance on the Quality of Management. International Academy for Quality.
Cohen, B. L. (2016). RISKS OF NUCLEAR POWER. University of Pittsburgh.
IAEA. (2001). Risk management:A tool for improving nuclear power plant performance. Vienna, Austria: IAEA.
KOOMSON, A. (2011). OPERATIONAL RISK MANAGEMENT AND COMPETITIVE ADVANTAGE IN THE GHANAIAN BANKING INDUSTRY. Commonwealth Executive Masters in Business Administration .
Maher, M., & Andersson, T. (1999). CORPORATE GOVERNANCE: EFFECTS ON FIRM PERFORMANCE AND ECONOMIC GROWTH. OECD.
Pearl-Kumah, S., Sare, Y. A., & Bernard, B. (2014). CORPORATE GOVERNANCE AND RISK MANAGEMENT IN THE BANKING SECTOR OF GHANA. European Journal of Accounting Auditing and Finance Research , 1-17.
Raban, C. (2012). RISK MANAGEMENT: THE THEORY. A3ES.
Rezaee, Z., & Zhang, J. H. (2016). CORPORATE GOVERNANCE EFFECTIVENESS AND CYBER SECURITY RISK ASSESSMENT AND MANAGEMENT. The University of Memphis.
Tenev, S., Zhang, C., & Brefort, L. (2002). Corporate Governance and Enterprise Reform in China. washington, d.c.: International Finance Corporation.
Youzhi, X., & Yongfeng, G. (2011). Corporate Governance Effects of Strategy-making Process. Tianjin, China: M & D FORUM .
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