Assignment 3

Tinashe Grace Tembo

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Exercise 1

Risk is the uncertainty that future expected earnings may deviate from expected/desired earnings or
expected/desired outcome. In business, risk can be used to measure the uncertainty that an investor is
willing to take to realize a gain from an investment. Risk can also be defined as the probability that a
future event, of undetermined duration, may cause the loss of an object or other damage which does
not depend exclusively on the parties involved, for example, it may be affected by economic factors.
According to notes found in “Week 5 –Ethics and Corporate Governance. pdf, UNICAF University.”
risk is defined as “a condition in which there exists an exposure to adversity.” Additionally, there is
an expectation of what the outcome should look like.

“Gallati, R., 2003. Risk management and capital adequacy. McGraw Hill Professional” states that
there are 3 categories of risk, namely Market risk, Operational risk and Credit risk. Their relationship
can be seen below as extracted from “Week 5 – Ethics and Corporate Governance. Pdf, UNICAF
University, Pg. 2.

The Bank for International Settlement (BIS) defines market risk as “the risk of losses in on – and –
off – balance – sheet positions rising from movement in the market prices.” (“Week 5 – Ethics and
Corporate Governance. Pdf, UNICAF University, Pg. 5.) There are a lot of factors that contribute to

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market, however the main ones are; foreign exchange, Interest rate, commodity risk and equity. As
such when assessing market risk, all of these factors are taken into consideration.

When assessing the market risk, other factors are taken into consideration such spread risk, basis
risk, specific risk and volatility risk as these may affect the price a financial instrument. Spread risk
is the potential loss due to changes in spreads between two instruments. For example, there is a credit
spread risk between corporate and government bonds. Volatility risk is defined as the potential loss
due to fluctuations in expected/ or implied volatilities. Specific Risk is attached to only a specific
contract or investment opportunity and as such is diversifiable. And lastly Basis risk is the potential
loss due to pricing differences between equivalent instruments such as bonds.

Market risk affects organizations business in different ways. A change in the market environment
can cause companies adjust their prices of their commodities and services which in turn could affect
sales volumes, or it competitiveness in the market. We can look at the market place in Malawi,
following the economic crisis it is currently undergoing. Due to scarcity of forex, local suppliers
have increased their prices, which have caused middle users to adjust their prices to ensure that they
are still able market a reasonable profit. As such the cost to the end users has substantially increased.
Due to these increases, the end users are now forced to opt out purchasing certain commodities
opting to either source out a cheaper alternative or forego the commodity all together. As such sales
have been reduced. The companies that have been able to survive are the proactive ones and the
companies that have a larger market share in that sector.

Grout and Zalewska (2006) explain that the direct and indirect regulation of quoted companies is a
common and growing feature of “stock market” economies. These regulations are intended to impact
returns and/or risk of those holding claims on the underlying assets. For example, competition law,
price controls, investor protection, market entry restrictions. “Over the past decade, a number of the
world’s largest banks and research and academic institutions have developed sophisticated systems
that model the credit risk arising from important aspects of their businesses (Gallati, 2003).” The
output of these analysis is important in risk management, performance measurement and customer
profitability analysis.

Bank for International Settlement (BIS) state Credit risk/exposure as the risk that a counterparty will
not settle an obligation for full value, either when due or at any time thereafter. In exchange for-
value systems, the risk is generally defined to include replacement risk and principal risk. For
example, when an individual borrows a loan from a bank or loaning institution, there is a risk that
they may be thieves, and do not intend to repay the loan. As a mitigating factor, most loaning

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institutions or bank normally request for collateral such as a title deed or ownership paper work for
an asset.

A credit risk arises when a loan is taken. Loans include, Consumer installments, overdrafts and credit
card loans, Residential mortgages, Non-personal loans, such as commercial mortgages, project
finance loans, and loans to businesses, financial institutions, governments, and their agencies, Direct
financing lease to name a few. Loan impairments represent the probability that a bank will not be
able to collect on pending loans due to deterioration of the credit quality of one or more loans. The
estimated economic capital needed to support the institution’s credit portfolio activities is generally
referred to as its required economic capital for credit risk.

Cui et al. (2018) studied the Impact of Green Lending on Credit Risk in China find that allocating
more green loans to the total loan portfolio does reduce a bank’s Non-Performing Loan ratio. They
conclude that institutional pressure by the Chinese Green Credit Policy has a positive effect on both
the environmental and the financial performance of banks.

According to Gallati (2003) Operational risk is not a new risk as it is one of the first risks that bank
must manage. However, the ideology that Operational risk management has its own management
tools, structure and processes is new. Operational risk is the risk of losses caused by flawed or failed
processes, policies, systems or events that disrupt business operations.

According to the BIS paper, the most important types of operational risk involve breakdowns in
internal controls and corporate governance. Most financial institutions assign primary responsibility
for managing operational risk to the business line head. Unlike market and perhaps credit risk,
operational risk factors are largely internal to the bank.

“While the industry is far from converging on a set of standard models, such as are increasingly
available for market and credit risk measurement, the banks that have developed or are developing
models rely on a surprisingly similar set of risk factors. Those factors include internal audit ratings or
control self-assessments; operational indicators such as volume, turnover, or rate of errors; loss
experience; and income volatility.” (Week 5 –Ethics and Corporate Governance. pdf, UNICAF
University.)

Based on studies, I conclude that the most important out of the three, is the operational risk as it
looks at the risk that policies, processes, and/or systems are flawed. This is a factor that can cause an
organization to collapse. This is not exclusive to the banking sector but to any organization that is a
going concern.

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Exercise 2

Zadek (2007) supports that Companies don`t become model citizens overnight. Nike`s
metamorphosis from the poster child for irresponsibility to a leader in progressive practices reveals
the five stages of organizational growth. Organizations’ learning pathways are complex and iterative.
Companies can make great strides in one area only to take a few steps backward when a new demand
is made of them. Nevertheless, as they move along the learning curve, companies almost invariably
go through the following five stages not in this order per say but they eventually experience each of
these stages as the company grows. I will be assessing the five stages a companies go through as
provided in the notes provided in “Week 6 – Ethics and Corporate Governance.pdf, UNICAF
University”

The first stage is the defensive stage. This occurs when a company faces unexpected criticism. This
is normally from the media or activists, but can also be from employees, customers and Investors. In
most cases company’s responses are designed and implemented by their legal and communications
teams and tend to involve either outright rejections of allegations or denials of the links between the
company’s practices and the alleged negative outcomes. The legal and communications team aim to
fix the companies image by either fixing the pending issue or diverting the focus to another aspect of
the company, such as if a scandal of a misconduct is published, the company may opt to divert
attention to its charity works to improve its image in the publics eyes.

“We can look at the Royal Dutch/Shell’s handling of the controversy around carbon emissions. For
years, the company – along with the rest of the energy sector – denied its responsibility for emissions
created by the production and distribution of its energy products. recently, Royal Dutch/Shell
acknowledges some accountability. But unlike some of its competitors, the company continues to
resist environmentalists’ demands that it accepts responsibility for emissions from its products after
they have been sold.” (Week 6 – Ethics and Corporate Governance.pdf, UNICAF University.)

The second stage is the compliance stage. In this stage it’s clear that a corporate policy must be
established and observed, usually in ways that can be made visible to critics. The required
compliance is understood as a cost of doing business; as such it creates value by protecting the
company’s reputation and reducing the risk of litigation. (6 – Ethics and Corporate Governance.pdf,
UNICAF University) For example, in today’s day and age, companies put warning labels for even
the most obvious dangers, due to the fact that some people have shown that they require it. Such as,
chainsaw manufacturers having a warning label that says “Do not hold the wrong end of the
chainsaw”.

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The third stage is the managerial stage. This the stage that the company realizes that it’s facing a
long-term problem that cannot be ignored or covered up or pushed away with attempts at compliance
or any public relations strategy. (6 – Ethics and Corporate Governance.pdf, UNICAF University) As
such the company gives managers of the core business responsibility for the problem and its solution.
For example, when Nike was under fire for the conditions of their labor forces it came to understand
that it would be required to be compliant with agreed upon labor standards in their global supply
chains, as such it would be difficult if not impossible to achieve without changes to how they set
procurement incentives, forecast sales, and manage inventory.

The fourth stage is the strategic stage. This is the stage where companies learn how realigning its
strategy to address responsible business practices can give it a leg up on the competition and
contribute to the organization’s long-term success. (6 – Ethics and Corporate Governance.pdf,
UNICAF University) For example, the companies in the Automobile sector have come to realize that
their future depends on their ability to develop environmentally safer forms of mobility. As such
safety features are a priority, and they aim to reduce their carbon footprints.

The final stage is the civil stage. In this stage, companies promote collective action to address
society’s concerns. (6 – Ethics and Corporate Governance.pdf, UNICAF University). Sometimes
this is linked directly to strategy. Tobacco companies understand that their products are a health
hazard, as such they ensure that they promote awareness of the dangers of smoking, but in doing so,
they inevitably are also advertising their product. As some say “Any advertising is good advertising”.
A generation ago, most people didn’t think tobacco was a dangerous health threat.

Throw the above mentioned steps, a company are able to predict the trends, their social responsibility
and as such are able to mitigate most issues that may arise. As such companies to be able to predict
and credibly respond to society’s changing awareness of particular issues.

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Exercise 3

“The civil-learning tool is intended to help companies see where they and their competitors fall on a
particular societal issue. It can help organizations figure out how to develop and position their future
business strategies in ways that society will embrace. The tool factors in the two different types of
learning, organizational and societal. When an issue is just starting to evolve, companies can get
away with defensive actions and deflections of responsibility. But the more mature an issue becomes,
the further up the learning curve an organization must be to avoid risk and to take advantage of
opportunities.” (Week 6 – Ethics and Corporate governance.pdf, UNICAF University.)

(Zadek, S., 2007. The path to corporate responsibility. In Corporate ethics and corporate governance
(pp. 159-172). Springer, Berlin, Heidelberg.), (Week 6 – Ethics and Corporate governance.pdf,
UNICAF University.)

The Higher Opportunity Green Zone and the Risky Red Zone can be presented by the above picture.
It firstly takes into consideration the 5 stages of learning that I discussed in exercise 2, and further
discusses what companies do and why they do it in the individual stages. It then looks at the four
stages of issue of maturity.

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The Higher Opportunity Green Zone correlates with the 5 learning stages. It looks and what
companies do and why, assessing motivating factors of a company. As per material found in (Week 6
Ethics and Corporate governance.pdf, UNICAF University), when it is analyzing the five stages of
learning it talks about the what and why. As such in the first stage, Defensive stage, it asses that a
company will normally deny, and they do this to defend against attacks to their brand or product’s
reputation. It also states that in the Compliance stage a company will a policy based on required
compliance. The company will normally do this to mitigate the erosion of economic value because of
ongoing reputation and litigation risks.

In the third stage, managerial stage, company will embed the social issue in their core management
processes. Companies do this to mitigate erosion of economic value and achieve a long term solution
that gains the company some economic value and they achieve this by integrating the responsibilities
into daily operations. In the fourth stage, the Strategic stage, the company integrate social issues into
their core strategies. This is done to enhance economic value in the long term. And finally in the
Civil stage, companies promote broad industry participation in corporate responsibilities. And they
do this to enhance their economic value by overcoming disadvantages and realize gains instead. As
a company progresses through the stages the higher into the opportunity green zone it is.

The Risky Red Zone centers around the four stages of issue maturity. The first stage is Latent. This
is the stage where activists and NGO’s are aware of the social issue, but there is weak scientific
evidence, as such the issues in most cases is ignored by the companies. The second stage is the
Emerging stage. This is the stage that there is political and media awareness of the social issue.
There is emerging research but the data is still weak. At this stage businesses experiment with
approaches. In the third stage, the consolidating stage, there is an emerging body of business
practices around the social issue. As such there is issue based voluntary initiatives being established.
There is litigation and a rise in needs for legislations, which leads to voluntary standards being
developed. And finally there is the fourth and final stage which is the Institutionalized stage. In this
stage, legislations and business norms are established and these practices become normal day to day
practices.

Overall in the Civil-Learning tool, primarily concentrates on progressive learning, teaching

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Exercise 4

“Lindgreen and Swaen (2010) explain that the high ranking of corporate social responsibility (CSR)
on research agendas appears to be reflected in theoretical and managerial discussions that argue ‘not
only is doing good the right thing to do, but it also leads to doing better. As a result, CSR has moved
from ideology to reality, and many consider it necessary for organizations to define their roles in
society and apply social and ethical standards to their businesses. Although organizations
increasingly adhere and demonstrate their commitment to CSR, many struggle with this effort.”

“Moir (2001) asks what are the social responsibilities of business? The area defined by advocates of
CSR increasingly covers a wide range of issues such as plant closures, employee relations, human
rights, corporate ethics, community relations and the environment. Indeed, CSR Europe, a
membership organization of large companies across Europe, in its reporting guidelines looks at the
following areas: workplace (employees); marketplace (customers, suppliers); environment;
community; ethics; and human rights.”

In this exercise, I will assess four CSR issues in the American and European context while including
examples. According to Matten and Moon (2007), the most widely accepted conceptualization of
CSR found in business and management literature is that of Archie Carroll who sees CSR as a
construct of four different areas of business-society relations, Economic responsibility, Legal
responsibility, Ethical responsibility and Philanthropic responsibility.

In economic responsibility, they look at the fact that companies have shareholders and they in turn
demand a reasonable return on investment. To ensure that the company can operate, they have
qualified employees, and a customer base. Their primary goal is to function as a single unit to ensure
longevity of the business, In the American context, it looks at corporate policies, emphasizing on
good corporate governance and consumer protection, while in the European context, it has a legal
framework, it ensures that corporate constitution is upheld. It enforces that minimum wages, work
hour to name a few, is adhered to. In other words, in the European context, they are very rigid in
following the legal framework.

In Legal Responsibility, looks at the demands law makes on businesses, and what it requires them to
abide by. Companies are expected to conduct their business as outlined by their law. In the American
Context however there is a low level of legal obligation on businesses while the opposite can be seen
in the European context. There are relatively high levels of legislation on business activities. For

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example, in trade marking, the bylaws outlined by America are not are stringent as those outlined in
the European context.

In the Ethical responsibility, it obliges business to do what is right, basing on ethical moral practices,
even when they are not obligated by law to do so. In the American context it looks at the corporate
policies that affect the local communities, while in the European context it looks things such as high
level of taxation in connection to high level of welfare state provision of local services. In other
words, in the American context it leaves it in the businesses’ hand to do the ethical thing while in the
European context, in imposes this through things such as taxation.

And lastly, the Philanthropic responsibility. This aspect of CSR addresses a great variety of issues,
including, charitable donations, Recreation rooms for employees, Support to local schools or
sponsorships. In the American context, it is the responsibility of the businesses to have initiative
while in the European context, it imposes high taxes on such initiatives as such, prime providers for
education/ scholarships are governments.

Overall the American context is more flexible and allows for “wiggle room” as it looks at the stages
of CSR, while the European context, still mitigates the scope of a business’ CSR through rigid
legislations and laws.

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References

 Gallati, R., 2003. Risk management and capital adequacy. McGraw Hill Professional.
 Aven, T., 2016. Risk assessment and risk management: Review of recent advances on their
foundation. European Journal of Operational Research, 253(1), pp.1-13.
 Grout, P.A. and Zalewska, A., 2006. The impact of regulation on market risk. Journal of
Financial Economics, 80(1), pp.149-184.
 Cui, Y., Geobey, S., Weber, O. and Lin, H., 2018. The impact of green lending on credit risk
in China. Sustainability, 10(6), p.2008. Todorovic, Z., 2018 Application of Ethics in the
accounting Profession with an Overview of the Banking sector. Journal of Central Banking
Theory and Practice, 7(3), pp. 139-158.
 Cui, Y., Geobey, S., Weber, O. and Lin, H., 2018. The impact of green lending on credit risk
in China. Sustainability, 10(6), p.2008.
 Araz, O.M., Choi, T.M., Olson, D.L. and Salman, F.S., 2020. Data Analytics for Operational
Risk Management. Decis. Sci., 51(6), pp.1316-1319.
 Lindgreen, A. and Swaen, V., 2010. Corporate social responsibility. International journal of
management reviews, 12(1), pp.1-7.
 Zadek, S., 2007. The path to corporate responsibility. In Corporate ethics and corporate
governance (pp. 159-172). Springer, Berlin, Heidelberg.
 Moir, L., 2001. What do we mean by corporate social responsibility?. Corporate
Governance: The international journal of business in society.
 Friedman, M., 2007. The social responsibility of business is to increase its profits. In
Corporate ethics and corporate governance (pp. 173-178). Springer, Berlin, Heidelberg.
 Matten, D. and Moon, J., 2007. Pan-European approach. A conceptual framework for
understanding CSR. In Corporate ethics and corporate governance (pp. 179-199). Springer,
Berlin, Heidelberg.
 Kopp, R. and Richter, K., 2007. Corporate social responsibility at Volkswagen Group. In
Corporate ethics and corporate governance (pp. 201-210). Springer, Berlin, Heidelberg.
 Week 5 –Ethics and Corporate Governance. pdf, UNICAF University.
 Week 6 – Ethics and Corporate Governance.pdf, UNICAF University.

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