![]() ![]() A company is a “good citizen” if it contributes to improving its communities and the environment. However, most people now believe that firms must satisfy the needs of all the stakeholders-including employees and their families, the public at large, customers, creditors, the government, and others. ![]() Traditionally, many people believed that a firm should serve only its shareholders. Recently, many developed countries have seen a tendency to change the rules of corporate governance. This is the efficient-markets hypothesis. Actual market value should reflect all these elements and includes all the information available to the market. We just have to decipher the particular model by which we wish to calculate the firm’s value and to enumerate the many factors (including risk variables from the enterprise risk map) that may affect firm value. This approach replaces the traditional concept of profits maximization, or expected profit maximization, enabling us to introduce risky elements and statistical models into the decision-making process. In other words, the literature referred to the maximization of the value of the firm’s shares (its market value For a public firm, the price of the stock times the number of shares traded., or the price of the stock times the number of shares traded, for a publicly traded firm). Traditionally, the drive for the firm to maximize value referred to the drive to maximize stockholders’ wealth Value of equity held by the owners of a company plus income in the form of dividends. Once we get an appropriate model, we can determine firms’ values and use these values to reach rational decisions. Sager, “The Relationship between Asset Risk, Product Risk, and Capital in the Life Insurance Industry,” Journal of Banking and Finance 26, no. Sager, “The Interrelationship among Organizational and Distribution Forms and Capital and Asset Risk Structures in the Life Insurance Industry,” Journal of Risk and Insurance 70, no. Sager, and Savas Papadopoulos, “Capital and Risk Revisited: A Structural Equation Model Approach for Life Insurers,” Journal of Risk and Insurance, 74, no. Sager, “The Impact of Mortgage-backed Securities on Capital Requirements of Life Insurers in the Financial Crisis of 2007–2008,” Geneva Papers on Risk and Insurance Issues and Practice, The International Association for the Study of Insurance Economics 1018–5895/08, Etti G. ![]() See references to Capital versus Risks studies such as Etti G. The inputs for a model that determines value allow us to examine how each input functions in the context of all the other variables. Textron and other well-run companies saw their values plummet. In 20, even strong companies felt the effects from the credit crisis. External variables, such as the 2008–2009 credit crisis, may well affect firm value, as can the weather, investors’ attitudes, and the like. While “cash-rich” companies have greater value, they may not optimally use their money to invest in growth and future income. Instead of the simple stock value, nonpublic firms may well create value using inputs such as revenues, costs, or sources of financing (debt of equity). Therefore, people may interpret the term “firm’s value” differently with public versus nonpublic companies. With nonpublicly traded firms, the market isn’t available to explicitly recognize the company’s true value. Even nonpublicly traded firms share the same goal. In terms of publicly traded corporations, maximizing value translates to maximizing the company’s stock value. In this section, we illustrate in simple terms how the function integrates well into the firm’s goal to maximize value. The CRO is usually part of the corporation’s executive team and is responsible for all risk elements-pure and opportunity risks. The individual concerned with the organization’s ERM strategy is often given the position chief risk officer (CRO) Part of the executive team responsible for all risk elements in the organization. Finance departments may take the lead, but engineering, legal, product development, and asset management teams also have input. While the enterprise risk management (ERM) function compiles the information, every function should identify risks and examine risk management tools. In Figure 4.2 "Notable Notions Risk Map", we map every risk. We also discuss the ambiguities regarding the firm goals.Īs you saw in Chapter 4 "Evolving Risk Management: Fundamental Tools", risk management functions represent an integrated function within the organization.We show a hypothetical example of ERM adding value to a firm. In this section you will learn how the ERM function integrates well into the firm’s main theoretical and actual goal: to maximize value. ![]()
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