Introduction: Risk management refers to choosing the most effective way to proactively, purposefully and plannedly handle risks through understanding, measuring and analyzing risks, and striving to obtain maximum safety guarantee at minimum cost. management methods. When enterprises face market opening, regulatory lifting, and product innovation, the degree of change and volatility will increase, which will also increase the risk of operations. Good risk management can help reduce the probability of decision-making errors, avoid the possibility of losses, and relatively increase the added value of the enterprise itself.

Risk management case sharing

A Hong Kong listed company

A state-controlled company listed in Hong Kong (referred to as "State-owned Enterprise C") failed to comply with the requirements of the listing rules , without shareholder approval, provided a loan of HK$160 million and a bank letter of credit guarantee of HK$196 million to an affiliated company of a director. The total amount of the loan and letter of credit guarantee accounted for 10% of the capital of the listed company. About 30%. After the loan was lent, the affiliated company has not repaid the loan, and the bank credit guarantee of HK$95 million provided by state-owned enterprise C to the affiliated company has been claimed by the relevant bank.

The investigation found that: First, the corporate governance structure of state-owned enterprise C was not standardized, with a small group of people monopolizing power, lacking a power check and balance mechanism in management, and allowing the company's directors to illegally occupy the funds of the listed company. The second problem is that state-owned enterprise C did not establish a compliance risk management mechanism to ensure that the company would not suffer any violations that would affect its reputation and suffer serious losses. The third problem is that state-owned enterprise C’s financial reporting system neither made appropriate disclosures for the above-mentioned related-party transactions nor made bad debt provisions for defaulted loans.

Reflection and thinking: How Chinese companies should set up risk firewalls

As the saying goes: wise people learn from other people’s failure experiences, smart people learn from their own failure experiences, and fools always Don't know how to learn from experience. The recent CAO incident has prompted the market to re-evaluate China's economy and its companies, just as the collapse of Enron did for the United States. It once again warns us that we must learn from experience, draw lessons, and establish a good risk management system.

So, what lessons should Chinese companies learn from the CAO incident and the eight cases mentioned above, and what kind of risk defense lines should they establish?

Line of Defense 1: Companies must be familiar with their own business and Related risks

First of all, the company's board of directors, management and front-line employees must be familiar with the company's business and the risks associated with it. Only in this way can losses caused by ignorance or deception be reduced. The communication between the company's business department and the accounting department must be strengthened to ensure that all employees understand the impact of various businesses or transactions on the company's finances. At the same time, it is also necessary to avoid employees lacking an overall understanding of the company's business due to too detailed division of labor.

Secondly, companies must avoid setting unrealistic goals or blindly expanding investments, which exposes them to unnecessary risks.

In addition, before making major investments, companies need to comprehensively consider various risks, including whether the market will reverse after the investment, whether the product will be eliminated by new technologies, and whether the market will emerge. New competition affects product prices, etc.

Line of Defense 2: Establish a mechanism of internal control and mutual checks and balances

Enterprises establishing a mechanism of checks and balances and clarifying rights and responsibilities can not only reduce errors caused by human beings, business processes and systems, but also It can improve the foundation of company business management.

We must be clearly aware that the prerequisite for effective risk management is to prevent individual departments or individuals from having too much power and making high-risk decisions without restriction. At the same time, an early warning system should be set up, including encouraging employees to make reports before they become aware of possible accidents, and establishing channels and procedures for employees to complain and express their opinions.

At the same time, enterprises must set risk boundaries and limits. "Business plan" guides the future development direction of the company, while "risk boundaries" guide where "stop" is needed.

Line of defense 3: Keep an eye on cash

We all know that all crimes, embezzlement and theft are related to cash. Therefore, enterprises need to pay special attention to cash and cash flow. This includes basic internal control measures, such as authorizing and signing the receipt, approval and transfer of cash. They should also establish appropriate internal procedures to check, monitor and prepare reconciliations for cash. surface.

As the saying goes: "Accounting numbers are just for reference, cash is what really makes you feel secure."

Line of defense 4: Reasonably formulate performance evaluation and incentive mechanisms

Improvement Performance evaluation combined with appropriate incentives is the most effective measure to promote corporate reform and change employee behavior. But how this measure is used can have different positive or negative impacts on an enterprise's risk management. In order to avoid negative effects, we must pay attention to the following issues:

1. Blindly pursuing growth at any cost and ignoring risks will most likely lead to serious losses for the enterprise.

2. If you find smart employees doing stupid things, you should realize that this may be the result of them being induced by the company's performance and incentive system.

3. When setting performance indicators, management must ask: "Are the indicators reasonable? What pressure will it bring to business departments and employees' personal behaviors?"

Line of defense 5: Deepen the enterprise Risk Management Culture

Risk management culture involves employees' personal values ??and their attitude toward risk acceptance. Risk management will not be successful unless employees respect and comply with company rules, regulations and internal controls.

To establish a healthy corporate culture and values, the company must practice it from top to bottom and establish a rigorous "party style" so that employees can act effectively. The company must establish management principles and behavioral norms and implement performance management through performance management. methods to encourage correct behaviors and attitudes among employees.

Strengthen training and communication, and establish an effective mechanism so that employees can learn from the mistakes or near-mistakes made by the company itself. What's more important is that company executives must hold regular meetings to discuss and accept lessons from serious mistakes made by other companies, including: understanding what happened; figuring out the reasons for the mistakes and the losses caused to the company's finances and business; and finally Ask how you can prevent similar incidents from happening to your company.

Risk management case sharing

Why did Hong Kong Peregrine suddenly fail to make ends meet

Peregrine was originally just a small local investment bank with a capital of HK$300 million. , due to its rapid business development, in just 10 years, it developed into a multinational financial group with assets of 24 billion Hong Kong dollars, becoming the largest investment bank in Asia outside Japan.

However, this financial miracle was also affected by the financial crisis, causing Peregrine to be unable to make ends meet in just one year, causing it to declare bankruptcy in January 1999. On the day the news broke, Hong Kong’s Hang Seng Index fell 8.7%.

The Hong Kong government stated in its report investigating Peregrine that there was no evidence that Peregrine’s collapse involved any fraud. The main reason for its collapse was Due to the lack of effective risk management, internal control system and complete financial reporting system.

Although Peregrine established a credit committee and risk management department, it failed to check and balance the powerful power of the business departments. Especially during the economic downturn, the goal of pursuing performance completely overshadowed the prevention of risks. Awareness of this fragile enterprise risk management culture ultimately cost Peregrine shareholders and employees a heavy price.

The investigation also found that Peregrine failed to control the risks in the financial market. It developed business in the Asia-Pacific region, mainly targeting the Indonesian and Thai markets. Its turnover in these two markets accounted for the group's turnover. More than 50% of the total, but Peregrine ignored the risks of developing emerging markets. Thailand was the first to bear the brunt of the financial turmoil, with the Thai baht devaluing sharply. During this period, the Indonesian rupiah also fell sharply by 70%. In addition, due to soaring interest rates, the prices of bonds and stocks invested by Peregrine in the region plummeted. In just a few months, During the period, Peregrine's business in the region lost hundreds of millions of dollars. In order to win business, Peregrine provided a bridging short-term loan of HK$260 million to Indonesia's Steady Safe Taxi Company. The amount of this loan was equivalent to 15% of Peregrine's capital, but Steady Safe's revenue was all With the rupiah exchange rate plummeting and the government imposing foreign exchange controls, Steady Safe was simply unable to repay the loan. Coupled with losses in bonds and stocks, Peregrine's financial situation took a turn for the worse in a short period of time, which reflected Peregrine's Qin underestimated the risk of interest rate and exchange rate fluctuations, which ultimately led to bankruptcy.

Risk management case sharing

Why did Worldcom collapse

Worldcom is the second largest telecommunications company in the United States. Before the incident, he was Ranked among the top 100 in the U.S. Fortune 500.

However, in 2002, WorldCom was found to have used fraudulent methods such as reflecting operating expenses as capital expenditures to falsely report profits of US$11 billion between 1998 and 2002.

After the incident, WorldCom's stock price plummeted from a high of $96 to 90 cents. WorldCom filed for bankruptcy protection at the end of 2002, becoming the largest bankruptcy case in U.S. history. The company completed its reorganization at the end of 2003. Four WorldCom executives (including the company's CEO and CFO) pleaded guilty to conspiracy to commit blackmail and were criminally indicted in federal court.

This is the largest case in the United States. The US Securities Regulatory Commission and the court found in the investigation: WorldCom’s board of directors continued to give absolute power to the company’s CEO (Bernard Ebbers), allowing him to monopolize power, while Ebbers Lack of sufficient experience and ability to lead WorldCom. The U.S. Securities and Exchange Commission's investigation report pointed out: WorldCom's checks and balances mechanism is not weak, but that it has no checks and balances mechanism at all. WorldCom's board of directors has not assumed the responsibility of supervising the management. The company's audit committee only spends 3 to 5 hours in meetings every year, and the minutes of the meetings are hasty. It only reviews the final audit report or report summary of the internal audit department every year. For many years, There have never been any suggestions for changes to the internal audit work plan.

Since WorldCom provides generous salaries and bonuses to the company's senior management, which is far more than their contribution to the company, this allows them to form a small circle of vested interests.

This vicious cycle eventually led to the collapse of WorldCom.

Risk management case sharing

Where did Japan’s Yohan fail?

Yohan is one of the largest department stores in Japan. In the 20th century, In its heyday in the 1990s, Yabaiban owned more than 400 department stores in 16 countries around the world and became famous for being the number one retail company in the world.

In September 1997, Yaohan declared bankruptcy and applied to the court for protection under the "Company Reorganization Act". At that time, Yaohan's liabilities reached 161.3 billion yen, which was Japan's largest post-war debt. A corporate bankruptcy case.

During the investigation, it was found that there were three fatal reasons that led to Yaohan’s bankruptcy: First, Yaohan underestimated the risks of operating non-core businesses. In the process of rapid growth, Yaohan gradually deviated from the business of department stores and supermarkets. The main business is to develop auxiliary industries such as real estate, catering, food processing and entertainment. However, with the impact of the financial turmoil, these auxiliary businesses of the group have turned into negative assets. These auxiliary businesses have brought a heavy burden to 800 Ban.

Second, Babaiban underestimated the risks of business expansion. In just 6 years from 1990 to 1996, Babaiban’s retail outlets in mainland China expanded from zero to more than 50. During the expansion, In the process, it obviously underestimated the risks of business expansion. In addition, Babaiban encountered national macro-control at the time. In order to realize the dream of the group chairman, it had no choice but to maintain expansion through credit. Faced with worse-than-expected returns and ever-expanding capital needs, Eight Hundred Banner eventually fell into a predicament that it was difficult to extricate itself from.

Thirdly, Babaiban also underestimated the risks of developing overseas emerging markets. As the retail industry in the Japanese market was saturated and there were many strong competitors, Yabaihan adopted a strategy of actively developing overseas markets, but underestimated the risks of developing emerging markets. In 1972, Babaiban regarded Brazil as its first overseas market. However, the Brazilian economy was in turmoil at that time, and in the end he ended badly. In the early 1990s, Babaiban began to enter the Chinese market and even moved its headquarters to Shanghai. However, because Chinese consumers had not fully accepted the sales model of supermarkets and department stores at that time, China's consumption power was still at a relatively low level. In addition, it encountered problems such as China's macroeconomic control and the failure of approved funds from domestic joint venture partners to be received as scheduled, which led to The rate of return on capital continued to decline, and Babaiban, which had worked hard for more than ten years, finally ended its business in liquidation.

Risk management case sharing

Why did the British Barings Bank go bankrupt in 200 years?

Barings Bank was one of the largest banks in the UK before the 1990s. , with a history of more than 200 years.

From 1992 to 1994, Nick Lesson, general manager of Barings Bank Singapore Branch, was engaged in Nikkei futures hedging and bond trading activities between Osaka, Japan and the Singapore Exchange, with accumulated losses exceeding 1 billion, which led to the bankruptcy of Barings Bank in February 1995 and was eventually acquired by ING of the Netherlands.

The investigation found that the senior management of Barings Bank did not understand Leeson’s business in Singapore, and no one noticed Leeson’s problem within three years of the incident. In fact, Barings Bank had already discovered that Leeson had a balance of more than 50 million pounds in his account in 1994, and conducted several investigations into this, but was deceived by Leeson with very easy explanations.

The reason for the disastrous misfortune of Barings Bank was the lack of a mechanism for segregation of responsibilities at Barings Bank. Leeson was a trader and settlement clerk at Bahrain's Singapore branch, which gave him the opportunity to forge deposits and other documents. The losses caused by futures trading were concealed from the public, which eventually led to an uncontrollable situation.

Another fatal problem is that the senior management of Barings Bank does not pay attention to financial reporting. Peter Barings, chairman of Barings Bank, said in 1994: It is naive to think that looking at more balance sheet data can increase understanding of a group. But if anyone took a careful look at the balance sheet of Barings Bank on any day before February 1995, there are obvious records in it, which can see Leeson's problem. Unfortunately, Barings Bank's senior management paid a high price for their lack of attention to financial statements.

The Singapore government has this paragraph in the conclusion of the Barings Bank investigation report: "If the Bahrain Group can take timely action before February 1995, then they may still avoid collapse. As of the end of January 1995, Even if major losses have occurred, these losses are only 1/4 of the final losses. If Bahrain's management knew nothing about this matter until the bankruptcy, we can only say that they have been avoiding the facts.

Leeson also said in his autobiography: "There was a group of people who could have exposed and stopped my trick, but they didn't. I don't know the line between their negligence in supervision and criminal-level negligence. I don't know if they have any responsibility for me.

”