Definition of Corporate Risk

Discuss about the Insider Trading Restrictions and Corporate System.

The corporate risk refers to the potentiality of the firms to gain or lose something of value. Risk can be defined as an unintentional interaction along with uncertainty. It is the unpredictable and uncontrollable outcome for a certain action. In the present case, the corporate risk refers to the possibility that an actual return on investment will be lower than the anticipated return (Delis, Hasan & Mylonidis, 2017). Family ownership is widely recognized as a major source of economical progress and technological innovation. It refers to the process of involving family in the business ownership. It is widely known as the commercial organization, where the decision-making is done by the generations of the family. There is lack in the owner-manager relationship as the business members are related to each other and formal fluid channel of communication (Minichilli, Brogi & Calabrò, 2016).

A business organization uses various economic inputs to provide commodities to customers in exchange for money or other commodities. A key step for any entrepreneur is set up an organization to officially embark on the journey of business, but many new entrepreneur struggles to identify the best way to move forward ( Boubaker, Nguyen & Rouatbi, 2016). One of the primary decisions that is needed to be taken by the business is to choose the type of the structure of the business. The decision implications that are long term, In making the choice, the accountants needs to follow the vision of the company and its nature (Gomez-Mejia, Patel & Zellweger, 2015). The level of control is also to be analyzed it may be controlled privately my closed members or publicly by issuing shares. In this, steps the level of structure and the various legal obligations are also to be examined and decision are needed to be taken. A crucial step is taken as to whether or not involve outsiders to finance the organization (D’Angelo, Majocchi & Buck, 2016).

According to journal by Faccio, Marchica & Mura (2016) is clear that the risk involved in the business is the possibilities that an organisation will earn less than the amount of profits that are anticipated or rather face a loss. As said by Kusnadi (2015), many factors influence business risks that include the volume of sales, input costs, per-unit price, competition, economic climate and regulations of the government. A business with a more risk in business should obtain a structure of capital that has a debt ratio that is low to make sure that it meets its all time business obligations. As D’Angelo, Majocchi & Buck (2016) stated in the journal of the world business, the first type of risk is the Strategic risk that arises at the time when the business implementation does not go according model or plan of the business. A strategy of the company becomes less effective, and it has to struggle to reach the goals that are defined. The next type of business risk is called as compliance risk. This takes place in the sectors of the business that are highly regulated with the legal policies. The third kind of risk is operational risk. This type of business risk arises when the business fails to perform the daily organization operations. A  reputation  of a company can be  ruined any time, either by the above business risks or by something else, it runs the risk of losing clients based on a lack of brand loyalty.

Family Ownership in Business

The Concept of Family ownership business is the most old form and most familiar model of economic organization (Sciascia, et al., 2015). A business with family ownership is a process in which decision-making is affected by multiple generations of a family who have a blood relation. Here the member has both the ability to affect the objectives of the business and the need to use this ability to pursue distinctive goals. They are closely identified with the firm through leadership or ownership. Owner-manager entrepreneurial firms are not considered to be family businesses because they lack the multi-generational dimension and family influence that create the unique dynamics and relationships of family businesses. The majority of the organizations worldwide, from retail shops to multinational public listed companies with a vast number of employees may consist a family ownership.  For instance 46% of the Forbes 400 member fortunes were derived by being a member a family business. In case of family ownership the first generation owner, make the majority of the decisions. Then the second generation or the sibling partnership is in control, in this case the process of decision-making becomes advice-giving. Then the larger third generation who are the cousin group is in control here, the decision-making becomes more practical, the family members often take a vote. In this manner, the decision-making throughout generations becomes more rational. The family owned assets, in the family businesses, are hard to separate from the assets that belong to the business (Tricker & Tricker, 2015).

Block & Wagner (2014) in the article Business Strategy and the Environment, highlights the benefits of the of a members of the family ownership may not be parallel with the interest of the business. According to him, can be said if a member wants to be the president but is not as competent, in this case the personal interest of the family member and the well-being of the business may conflict.  At times, the entire family interest may not be balanced with the business interests (Boyd & Solarino, 2016). If a family wants to distribute funds for living expenses and retirement but the business needs those to stay competitive, then the business interest and the family member interest may not be aligned (Kellermanns, Dibrell & Cruz, 2014). Moreover, at times there may be a conflict between one family member and the other. For instance, family members are the owner. If one of them wants to sell the business to maximize their return, it may contradict with the needs of the business as another member who is also an owner and a manager may want to keep the company because it represents their career and they want their children to have the opportunity to work in the company. Successfully balancing the differing interests of family members and the interests of one or more family members on the one hand and the interests of the business on the other hand require the people involved to have the competencies, character and commitment to do this work (Neubauer & Lank, 2016).

Structuring a Business

The theory of agency by Matzleret al. (2015) prescribes that the ownership structures are influenced by the ability of owners to influence the corporate is taking. The large shareholder gets the benefits of cash flow and control from the company they run. They have a sound incentive system to monitor managers and collect information and in order to maximize the profit. The risk of ownership increases with projects that are risky. Concentrating much on their wealth in a single firm may force large shareholders to conduct business from a more risk adverse condition than if they have diversified portfolio on firms. The family ownership requires and understanding the unique characteristics of mixing the business with family. In general, family share ownership enjoys several advantages. There are various aspects, which separates the family share ownership with the businesses where there is no influence of family. Firstly, there exists a compromise between the family interest and the business interest. There is no win – win situations (De Massis & Kotlar 2014). Secondly, the family members are only the mangers of the firm. The owners are only the mangers as a result the quality of management is higher. Thirdly, when it comes to financial plans, it works much better in case of family shared businesses. The family ownerships shares specific articulated goals, the financial plans benefits the whole family. There lacks competition there exist a personal relationship within the owners. The owners and the investors go mostly on the financial anticipations. In family businesses, attaining the long-term, voluntary commitment for the business of non- employee family shareholders is necessary for security and stability (Neubauer & Lank, 2016). 

In case of businesses where there is family involved as  critically argued by Tricker & Tricker (2015),  there a huge financial and emotional stake whereas in a of regular ones there is no such obligations, the work the quality of work is much better in case of family ownership. The capital structure of the family ownership consists of wealth and capital that are obtained from the internal source. There is no outsiders involved hence the risk is much less as compared to the other type of businesses. These features are generalizations that in aggregate are not fair to any family business. However, being conscious of such tendencies can often provide insight into why things are the way they are and why family firms may behave differently than non-family firms. They also offer clues about both family businesses’ special strengths – and challenges.?

Types of Business Risk

When it comes to risk taking in case of family owned businesses as  Babinet al. (2017)  as adviced that  they may also avoid risk taking due to their goal of transferring the firm to the next generation. Risk taking may be influenced by the regulatory constraints of pension funds and mutual. De Massis & Kotlar (2014) compares firms before and after an activist hedge fund accumulates a stake and find significant changes in performance and firm policies. Without examining the incentives of each separate type of shareholder in detail, family owners are expected to be less risk taking than the  banks financial companies,  mutual funds and industrial companies. A family owned business needs sound corporate governance and needs to be regulated more intensely in order to avoid the negative systemic risks (Minichilli, Brogi & Calabrò, 2016). The risk taking consequences for the family owned are influenced by the internal supervision of the members of the family. If the family members gets associated in the management of the corporations, they are supervised as the board of directors. In this case, large percentages of the equity shares are in the hands of very less shareholders. This hinders the mechanism of supervision from being effective (Sciascia et al., 2015).

In journal of Corporate Finance, by Faccio, Marchica & Mura (2016) several  on the performance of family owned  businesses are mentioned, it can be said that it is growing but the outcomes of the same are mixed. Various studies on family owned business tells us the relationship between family ownership and business performance styles.  The publicly traded family controlled business actually different from other types of business. The family controlled businesses are subject to risk to a lesser extent than the non-family business. The financial Institutions with higher ratio of the family ownership have lesser volatility of stock price when the families control is the government insurance is still negative ( Kusnadi 2015). 

However, Family-owned companies at poses challenges to those who run them. As criticized by Boubaker, Nguyen & Rouatbi (2016), they can be eccentric while developing the unique procedures as they mature. As long as the business continues to be managed by people who are steeped in the traditions, or at least able to adapt to them. Many a times the members of the family can benefit by involving more than one professional advisor, each having the particular skill set needed by the family. Some of the skill sets that might be needed include communication, conflict resolution, family systems, finance, legal, accounting, insurance, investing, leadership development, management development, and strategic planning. Ownership in a family business will also show maturity of the business. If all the shares rest with one individual, a family business is still in its infant stage, even if the revenue is strong (Boubaker, Nguyen & Rouatbi, 2016). When the family business is operated and owned by one person, that person usually automatically the does the balancing that are necessary. For instance, the founder may decide the business needs to build a new plant and take less money out of the business for a period so the business can accumulate cash needed to expand. In making this decision, the founder is balancing his personal interests) with the needs of the business (Delis, Hasan, & Mylonidis, 2017).

Benefits and Challenges of Family Ownership

After analyzing the various literatures and journals, reflecting the influence of family owned in the risk taking of the corporation. It can be said that there is involvement of the multiple generation is missing. In a family owned business generally the ownership is transferred from generations to generations. In the articles reviewed the various generations are not considered. Emphasis has been made on a single generation. Moreover, there are different barriers in the family business in different countries. The different country regulations are ot considered.

Conclusion

This discussion has assessed the risk tolerance of family business owners. It can be said that the owners of the family business are more willing to take financial risks and have a larger share of financial assets in risky assets compared to people who do not own a family business. In case of owners of the family business the net worth, and number of employees affect both risk-taking attitudes and behaviors. The current study helps in understanding influence of family owned business on corporate risk assumption and at the same time
a major source of economic progress and technological innovation commercial business concern, where the decision-making is carried out by the generations of family. There is lack in the owner-manager relationship as the business members are related to each other and formal fluid channel of communication

References

Babin, B. J., Astrachan, C. B., Botero, I. C., Hair, J. F., Prügl, R., Herrmann, J. L., … & Sarstedt, M. (2017). From Family Identity to Family Firm Image and Reputation: Exploring Facets of the Perception of Family Influence in Branding, Marketing, and Other Messaging.

Block, J. H., & Wagner, M. (2014). The effect of family ownership on different dimensions of corporate social responsibility: Evidence from large US firms. Business Strategy and the Environment, 23(7), 475-492.

Boubaker, S., Nguyen, P., & Rouatbi, W. (2016). Multiple Large Shareholders and Corporate Risk?taking: Evidence from French Family Firms. European Financial Management, 22(4), 697-745.

Boyd, B. K., & Solarino, A. M. (2016). Ownership of corporations: A review, synthesis, and research agenda. Journal of Management, 42(5), 1282-1314.

Cain, M. D., & McKeon, S. B. (2016). CEO personal risk-taking and corporate policies. Journal of Financial and Quantitative Analysis, 51(1), 139-164.

D’Angelo, A., Majocchi, A., & Buck, T. (2016). External managers, family ownership and the scope of SME internationalization. Journal of World Business, 51(4), 534-547.

D’Angelo, A., Majocchi, A., & Buck, T. (2016). External managers, family ownership and the scope of SME internationalization. Journal of World Business, 51(4), 534-547.

De Massis, A., & Kotlar, J. (2014). The case study method in family business research: Guidelines for qualitative scholarship. Journal of Family Business Strategy, 5(1), 15-29.

Delis, M. D., Hasan, I., & Mylonidis, N. (2017). The Risk?Taking Channel of Monetary Policy in the US: Evidence from Corporate Loan Data. Journal of Money, Credit and Banking, 49(1), 187-213.

Faccio, M., Marchica, M. T., & Mura, R. (2016). CEO gender, corporate risk-taking, and the efficiency of capital allocation. Journal of Corporate Finance, 39, 193-209.

Gomez-Mejia, L. R., Patel, P. C., & Zellweger, T. M. (2015). In the horns of the dilemma: Socioemotional wealth, financial wealth, and acquisitions in family firms. Journal of Management, 0149206315614375.

Kellermanns, F. W., Dibrell, C., & Cruz, C. (2014). The role and impact of emotions in family business strategy: New approaches and paradigms.

Kusnadi, Y. (2015). Insider trading restrictions and corporate risk-taking. Pacific-Basin Finance Journal, 35, 125-142.

Matzler, K., Veider, V., Hautz, J., & Stadler, C. (2015). The impact of family ownership, management, and governance on innovation. Journal of Product Innovation Management, 32(3), 319-333.

Minichilli, A., Brogi, M., & Calabrò, A. (2016). Weathering the storm: Family ownership, governance, and performance through the financial and economic crisis. Corporate Governance: An International Review, 24(6), 552-568.

Neubauer, F., & Lank, A. G. (2016). The family business: Its governance for sustainability. Springer.

Sciascia, S., Nordqvist, M., Mazzola, P., & De Massis, A. (2015). Family Ownership and R&D Intensity in Small?and Medium?Sized Firms. Journal of Product Innovation Management, 32(3), 349-360.

Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press, USA.