Every business in the world suffers from some kind of risk to its operations. It doesn’t matter whether that company is involved in keeping data safe, keeping workers happy or safe or maintaining a supply chain. The risks remain.
Some risks can be managed through insurance. But there are some risks that are stubborn and remain regardless of how diligently a company behaves.
Back in 2009, the small country of Greece was about to default on its debts. International lenders were starting to get suspicious that the small nation state wouldn’t be able to pay them back. The government in Greece simply wasn’t collecting enough taxes from the people to service its debt.
As a result, the interest rate on the government debt began to rise. And as the interest rates began to rise, people saw that the interest payments on the debt would become even more burdensome. In turn, this suggested that Greece would be even less likely to repay its debt, and so the interest rates rose still further.
A few weeks into the crisis and the interest rates on Greek debt had gone through the roof. And because Greece was part of the euro, it could not just print money to pay off its creditors. It had to do it the hard way.
In the meantime, the contagion spread. Businesses all over the Eurozone feared a collapse of the financial system. Banks strained to manage the fact that Greece could not pay its debts. It was only when the European bailouts came that disaster was averted and the markets returned to some form of sanity. However, the risks to business were apparent.
When governments make bad decisions, the consequences of those decisions are not insurable. There was literally nothing businesses could do to forestall the inevitable contagion and panic in 2009. They had to rely on politicians to sort out the problem that they created. And there was nothing they could do to manage that risk away.
Damage To Reputation
Do you remember a company called Hoover? The company made (a still makes) vacuum cleaners. In fact, up until 1992, the company had been so successful that its name was synonymous with vacuum cleaners in general. However, they messed up. In 1992, they began their so-called Hoover free flights promotion. The British arm of the Hoover company had built up a large inventory of excess vacuum cleaners and wanted to get rid of them quickly.
To do so, they offered free airline tickets to anyone that spend more than £100 on its products. Hoover, it seems, genuinely believed that people would only buy its vacuum cleaners if they actually needed one. The problem, however, was that people just bought the vacuum cleaners so that they could get the free tickets. But the tickets, which allowed people to travel all over Europe and to the USA, were many times more expensive.
Ultimately, the demand for Hoover’s product outstripped the company’s expectations and they had to retract the offer. The public went crazy, demanding that Hoover honor its promise despite the fact that it was an obvious mistake. Neither the public nor the media seemed to care that by demanding that Hoover keeps its promise, it would go out of business. In 1993, the Hoover Holidays Pressure Group was formed. And then in 1994, the BBC Watchdog programme ran a special investigating the complaints of Hoover’s customers. Hoover executives were sacked, but the company survived. The incidents dealt a body blow to Hoover’s reputation which it is only now recovering from.
Most businesses won’t make the same crazy decisions as Hoover did in the early 1990s, but business reputation is still at risk. One of the biggest risks to reputation is the risk that an employee is injured or treated unfairly. That’s why so many businesses make use of employment law solicitors. They want to avoid damaging and expensive tribunal proceeding and keep their good reputation.
In 2008, the financial world went into meltdown after the holders of subprime mortgages stopped paying the back the banks. House prices had been in a bubble economy for nearly a decade and were tracking well above earnings. Soon that bubble was going to pop and all that phony equity stored up in those houses was about to evaporate.
As soon as the prices of houses dropped, people who had taken out mortgages saw their equity go negative and stopped making loan repayments. The banks were soon in crisis mode. So many people had defaulted that it had exhausted their reserves. As the news spread, people desperately tried to get their money out of the banks, just in case it evaporated into thin air.
As a consequence, the banks stopped lending to each other and to businesses. They wanted to preserve any reserves that they had left in order to stay in business themselves. However, for businesses, credit is vital. And during the worst days of the financial crisis, businesses could not get access to the credit they needed to carry out their operations.
Again, the credit crunch was another example of a risk that businesses dread. Businesses are so dependent on just-in-time production techniques. And, as such, they are dependent on credit facilities to manage their cash flow. Suddenly losing access to credit meant that many businesses had to suspend their operations. Although total disaster was averted in 2008, there was still very little individual businesses could do to buffer against the risk.
Fluctuating Commodity Prices
The prices of commodities famously fluctuate. One moment the price of coffee is low. Then there is a flood in Brazil, the crop is destroyed, and the price goes vertical.
Managing commodity price fluctuations is an endless problem for businesses. This is especially true for those dependent on commodities. Yes, there are financial instruments that allow businesses to insure against price changes. But in the depths of a true crisis, these can soon unravel.
The problem that businesses face in this environment is that they’re unable to make long-term planning decision. That’s because they never know what the price of their commodity inputs might be in a week, month or year from now.