Disclosure level of risk management information: the case of Romanian companies.

Blidisel, Rodica ; Popa, Adina ; Farcane, Nicoleta 等

1. INTRODUCTION

Mass media and academic literature are full of examples of organizations recently face "uncertainty". The term "risk" is recurrent (Pennings et al., 2008; Pesaran et al., 2008). Uncertainty and risk are now the usual vocabulary of the managers; stakeholders are also interested about the risk of the business they are connected to. If the first term "uncertainty" is still seen today in a largely negative sense, around the second one "risk" a mythology has been formed, which often leads us away from its first meaning given in management or in political science. Sometimes, these two terms appear to be used interchangeably, especially when we talk about a situation "risky" or "uncertainty". Sometimes, on the contrary, it seems that they can not be confused. In interviews with corporate executives, staff members of the same organizations, we have seen the same ambiguity in their words.

2. THEORETICAL FRAMEWORK AND METHODOLOGY

When one hears the words risk or uncertainty, it usually thinks about negative events that could occur. In some cases, there is advanced knowledge and information of the likely occurrence of some negative event. Economists use the terms "risk" and "uncertainty" to define the level of knowledge and information about an event or occurrence. The importance of this knowledge is that it affects the manager plan, the decisions making, and the tools used (Juniper, 2000; Alcaras et al., 2004). Knight (1935) highlights the difference between uncertainty and risk.

Risk management is becoming an increasingly important activity within firms and organizations. As a part of the management activities, risk management helps an organization to meet its objectives through the allocation of resources to undertake planning, decision making, and carry out productive activities. Risk management is focused on uncertainties that an organization faces: uncertainties in the probability of occurrence of events, uncertainties in the value to the organization of consequences of events, and other uncertainties that fall outside the "normally expected" range of variation. Generally risks are low probability, but high consequence events that can cause major disturbance to the organization.

The criterion for real judging of a risk management policy is whether it increases shareholder value. A systematic and dynamic use of risk management tools significantly increases the value. This is true not only for tools to identify and assess risks, but also for those who provide information to management to decide what it can cover or reduce risk, what risk transfer or sell, and which risks keep.

It should be a clear call for caution for the leaders and regulators are often inclined to prescribe, codify and standardize risk management techniques.

A rigorously analytical approach to risk measurement is only the imperative one of a good internal political risk management. The other elements were necessary in our view, the degree of risk transparency, timeliness and quality of information, the effectiveness of policies and internal controls, the extent of supervision made by management and independent bodies, the importance of diversification and spreading risk and, finally, judgment and experience of staff who knows the limits of models.

There is a discrepancy between the techniques used to measure and aggregate risks in circumstances "normal" and the methods used to assess the risks induced by extreme events.

The days when organizations were content to measure their market risk by the VAR (Value at Risk) are gone. It is admitted to supplement VAR by various forms of "stress tests", professionals are aware and in agreement on how to conduct these tests rather than on how to use them. It is irrational to evaluate the compromise between risk and performance when extreme events and highly improbable (such as those assumed in "stress tests") receive a probability almost equal to that of ordinary events.

This leads to the thought: we are now significantly more sensitive to the value of liquidity and its fragility, but there are no simple way to integrate this value methods of risk management.

Experience shows that deal with shocks in the markets (or the sudden bankruptcy of a significant contribution), the market prices start to be developed in an unusual way, and the liquidity is reduced, and will even up to disappear.

Starting from the presumption that risk management, like other management activities, must be practical, cost effective, and help the organization survive and prosper we survey in this section of our paper risk management disclosure of the Top 15 Bucharest Stock Exchange (BSE) Romanian listed companies. A good corporate governance practice faced company with a better disclosure and become more transparent also in the field of risk management.

The data was collected from Annual Reports of the Top 15 Romanian companies for the years 2006-2007. Also, during January-March 2008 numerous discussions with representatives, corporate executives, staff members of the studied companies took place in order to sustain our hypotheses. The empirical research is based on a comparative case study through content analysis, using a qualitative research methodology.

3. RISK MANAGEMENT FRAMEWORK AND DISCLOSURE: THE CASE OF ROMANIAN LISTED COMPANIES

Starting from the presumption that risk management, like other management activities, must be practical, cost effective, and help the organization survive and prosper we survey in this section of our paper risk management disclosure of the Top 15 Bucharest Stock Exchange (BSE) Romanian listed companies. A good corporate governance practice faced company with a better disclosure and become more transparent also in the field of risk management.

The growth in risk management is directly linked to the increasing number of risks an organization faces due to more complexity and interactions in the world, greater scrutiny by stakeholders and the media, and so forth.

Risk management is an integral part of the corporate governance arrangements and has been built into the management processes as part of the corporate overall framework to deliver continuous improvement.

Risks are usually described by a list of risks, arranged in priority order with the largest risks first.

A risk management framework is a description of an organizational specific set of functional activities and associated definitions that define the risk management system in an organization and the relationship of the risk management organizational system. A risk management framework defines the processes and the order and timing of processes that will be used to manage risks. A good risk management framework should enhance and improve risk management by:

1. Making it more transparent and understandable to stakeholders,

2. Making its processes more efficient,

3. Allowing for cross fertilization of risk controls, risk estimation, risk assessment from others because of standardization of terms, processes, tools etc.

Finally, risk management must produce a net value for the organization. This value is estimated and reviewed and consists of three basic elements: costs, financial benefits, and trust and respect of stakeholders and the public.

Risk is inherent in any decision, at any level in the organization.

Stakeholders need to be better informed regarding the risk and opportunities company is faced with, that's make managers to voluntary or mandatory disclose information regarding risk management, usually as a part of the Annual Report. In this part of our paper we present the results of a survey we conducted on the top 15 BSE listed companies.

Our findings are:

* Only one Romanian company from Top 15 BVB are not disclosing information regarding risk management,

* 8 companies present a synthesis of the risk categories that affects their activity during the reported year,

* 6 companies' presents more detailed information regarding their risk management activity.

4. CONCLUSIONS

Looking back a moment to the presentation of the problem which this article is intended to provide some answers, it seems that the analysis of literature developed here goes beyond the issue of the distinction between uncertainty and risk. Indeed, the preparation of a research on a specific field sometimes raises questions outnumber those originally asked. If the uncertainty, in generic terms, is the ignorance or total or partial failure of events, one can, according to the body of assumptions that we adopt, be seen as irreducible or reduced as a given intangible, or as the result of a more or less off time.

In trying to give advice the enterprise policy makers we can show that the statistical uncertainty is "the stochastic nature or error from various sources, as described by statistical methodology". The technical consultation defines risk as "the probability of the occurrence of something unfortunate". It is noteworthy that in terms of decision-making theory, the risk is defined as the average loss or forecasted loss when something unfortunate happens.

The process of communication the risk to policy makers is in its infancy and represents major challenges for both technicians and managers. In return, managers and participants must find a way to objectively evaluate the potential costs of adverse events, define acceptable levels of risk and quantify the short-term production to waive that to reduce these risks.

There are no standard methods to reflect the uncertainty and risk to policy makers. The statistics provide a basic set of means to account for variability, which can be used to indicate the uncertainty associated with a specific estimate, or the likelihood that an adverse event occurs.

The method choused by managers for measure the probability of uncertainty and risks will depend on their level of technical knowledge. In most developing countries, it will be important to link the uncertainty of environmental characteristics that are well known. For many economically important stocks, it is justified to try to quantify the uncertainty and risk.

Regarding our sample companies we may conclude that the risk management in the majority of Top 15 BSE Romanian listed companies 60% are in an incipient stage of implementation, only 40% of this Top 15 companies have already defined their objectives regarding risk management or already have an integrated system of risk management.

Because our empirical study is limited to a descriptive examination of the level of risk management disclosure in annual reports of the Top 15 BSE companies, some aspects can be mentioned as reason for future research:

* to extent the study to all companies listed on BSE;

* to investigate the level of implementation of risk management by the Romanian listed companies;

* to investigate the association between the risk management disclosure, the investors' behavior and the companies' performance indicators.

5. REFERENCES

Alcaras J.R.; Gianfaldoni P. & Pache G. (2004)., Decision in organizations--Dialogue between economy and administration, L'Harmattan, ISBN 2-7475-6066-X, Paris--Budapest--Torino.

Cooper J.C.& Selto F.H. (1993). Is risk preference induction a reliable method of controlling risk preferences?, Journal of Management Accounting Research, Vol. 5, ISSN 14439905, 109-123.

Juniper J. (2000). Uncertainty, Risk, and Chaos, Cambridge University Press, ISBN 0-521-62030-9, Cambridge, New York and Melbourne, 37-60.

Pennings J.M.E.; Isengildina-Massa O.; Irwin, Sc.H.; Garcia, Ph.& Good, D.L. (2008). Producers' Complex Risk Management Choices, Agribusiness, Vol. 24, No. 1, 2008, 31-54, Available from: http://www3.interscience.wiley. com/cgibin/fulltext/117878732/pdfstart Accessed: 200805-11

Pesaran M.H.; Schleicher Ch.& Zaffaroni P. (2008). Model Averaging in Risk Management with an Application to Futures Markets, Faculty of Economics, University of Cambridge, Cambridge Working Papers in Economics, ISSN (printed): 0951-0079, 24 p.