Risk Management

Lever for SME Development and Stakeholder Value Creation

Céline Bérard, Christine Teyssier

• Publisher: Wiley-ISTE
• Year: 2017
• ISBN:
  9781119475019
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

Risk management practices are growing both in number and complexity in businesses, notably driven by new regulatory standards that feature risk management at their core. Although large businesses are more likely to adopt a formal, holistic approach to risk management, the stakes are just as high for SMEs. Risk management in SMEs can contribute to a certain organizational, entrepreneurial and partnership dynamic which constitutes a real opportunity to evolve practices and improve performance. This book offers varied responses to this question by combining conceptual approaches, empirical illustrations and the associated managerial implications.

Part 1
Risk Management, Governance and Stakeholder Value Creation

1
Role of the Governance System in Strategic Risk Management

1.1. Introduction

It is often argued that risk management does not exist in SMEs or that it is at the sole discretion of their manager. However, for some years now, it has had a strategic and global dimension: strategic, because it is crucial for companies’ development and sustainability [LIE 03, COS 04, HOY 11, FAR 15]; global, since it is now accepted that the risk management process must start upstream of the strictly understood risk treatment phase and continue downstream in order to learn from the experience gathered [MCC 00, AIC 08]. This global and strategic process is broken down into different phases, during which the manager must be able to do the following: (1) select the appropriate type and level of risk that the company is capable of supporting; (2) identify the risks incurred by their company and evaluate them in terms of likelihood of occurrence and severity in order to prioritize them; (3) plan and implement appropriate risk management mechanisms and (4) communicate about these different phases within the organization and with its external stakeholders. This set of tasks implies the implementation of both informational and policy processes: informational through the nature, quality and volume of information used and exchanged to identify risks and assess their impacts; policy through power relations between the groups of actors with different roles and interests that will intervene in the prioritization and implementation of the treatment mechanisms.

The strategic risk management process implies, therefore, that a large number of actors are involved and that the action or reflection that managers alone can have in this subject is overlooked. They must be able to take fully informed decisions while considering all the different types of constraints within their company and in accordance with the policy balances within it. Some studies have suggested the major role of management teams and governance bodies in the adoption of integrated risk management mechanisms [KLE 03, BEA 05, DES 07, IHB 09], as well as their interactions on risk management performance in the company [BRO 09], yet these studies mainly concern large companies and not medium-sized enterprises [VER 13]. The issue of strategic risk management in SMEs, and more precisely that of the link between risk management and the governance system [MAN 10], therefore remains. For this reason, we focus on understanding how the actors and governance bodies of SMEs are likely to facilitate or constrain strategic risk management. We assume in this regard (1) that if managers of SMEs alone can shape the risk management of their company, this may affect the company’s performance and (2) that risk management could be more effective when the managers rely on an extended system of governance involving, in particular, the members of their management team, a board of directors or an advisory committee.

The chapter is organized as follows: in section 1.2, we discuss the effects of governance arrangements on risk management in SMEs, adopting the dual logic proposed by Anthony [ANT 88], whereby two types of influence, enabling or constraining can act as regards risk management. In section 1.3, we compare the proposals established regarding the case of nine French SMEs in the Auvergne Rhône-Alpes region.

1.2. The role of managers and the governance system in risk management: enabling and constraining influences

Governance arrangements can have two types of influence, enabling or constraining [ANT 88], on risk management in SMEs. Governance systems can function as levers (enabling function) by enabling the accumulation of new information, knowledge and expertise essential to the identification and assessment of risks by offering the possibilities of individual actions or by improving the coherence and effectiveness of the collective decision-making process. On the contrary, they can limit procedures for the acquisition of new knowledge, reduce the variety of actions designed to better understand or manage risks, or constrain the effectiveness of collective decision-making processes (constraining function). It is from the perspective of these two types of influence (enabling and constraining) and the two types of process (informational and policy) that we discuss successively the role of managers (section 1.2.1), then the governance system extended to the management team of the company on the one hand and to the supervisory bodies on the other hand (section 1.2.2) in strategic management of risks in SMEs.

1.2.1. Managers of SMEs shape risk management in their company

In SMEs, managers aggregate most of the powers [HAM 87, FIN 92, CAR 04, LI 17]. They stand as real “key persons” and play a leading role in strategic decision-making [LI 17] and, by extension, in their company performance [ADA 05]. Through their speeches and decisions, they also shape the control environment, that is, the culture and spirit of the organization [COS 04]. They therefore represent a powerful lever to disseminate the “culture of risk” in SMEs.

However, they may be required to impose, more or less involuntarily, “the” risk management approach that they consider most appropriate. They may underestimate the risks and/or their impacts, if they themselves are over-confident, or if they tend to overestimate the quality of the information available to them for understanding the risks incurred. On the contrary, they may overestimate the risks and, through overly prudent strategic choices, slow down the development potential of their company. The concentration of ownership and management powers and, as a corollary, the weakness of disciplinary governance mechanisms, also imply a reduction in the accountability of managers to internal and external stakeholders [BRU 07], making them less vigilant as regards the formalization of internal control and risk management procedures or, on the contrary, too cautious by increasing the number of preventive measures or by limiting investment projects, which they personally consider too risky for the sustainability of the company. We therefore suggest the below proposal 1:

PROPOSAL 1.– Managers of SMEs have an enabling influence on the informational and policy processes that underlie strategic and global risk management, but this influence may become constraining when they are in charge of this function in isolation.

1.2.2. Extended governance system as support to managers of SMEs in the strategic management of risks

According to a concept of governance that goes beyond the purely disciplinary role of governance bodies, in favor of an advisory and resource-providing mission [ZAH 89, CHA 06, WIR 11], the governance system can be considered as a support to the management of the company and should thus constitute an aid to the strategic management of risks [MAN 10]. Two components of the extended governance system can more specifically play a role in risk management within SMEs: the management team and the board of directors.

1.2.2.1. The central role of SME management teams in risk management

Risk management initiatives within organizations appear to be successful only with strong support from the management team [BEA 08]. The often family-based nature of the team can influence the risk management process, as can its functional diversity or ability to extend to new members or functions.

According to Hambrick and Mason [HAM 87], there is a strong consensus on the strategies to pursue in a homogeneous management team that shares common values. In the case of a dominantly family management team, this consensus is based on the altruism, loyalty and commitment of the family members [ENS 05, GOM 07], who will be able to share private and consensual information with regard to risk. This suggests that in view of imminent risk, the family management team could take decisions regarding actions to be implemented faster than non-family management teams because agency conflicts would be limited [CHI 14]. Conversely, the coexistence of family and non-family managers in the management team could have a negative effect due to conflicts emerging in the strategic arena to prioritize risks. Too much family involvement [LEB 11] could result in new agency costs due to divergent objectives between the team members [GON 16]. We therefore adopt the following proposal:

PROPOSAL 2a.– The presence of family members in the management team would have an enabling influence on the informational and policy processes that underlie the global and strategic management of risks, but this influence could become constraining when family involvement becomes too strong.

Functional diversity within the management team, that is the range...

Table of contents

• Cover
• Table of Contents
• Title
• Copyright
• Preface
• Introduction
• Part 1: Risk Management, Governance and Stakeholder Value Creation
• Part 2: Risk Management as a Lever for Organizational Development
• Part 3: Risk Perception and Management by the Manager-Entrepreneur
• Conclusion
• List of Authors
• Index
• End User License Agreement