Posted: June 30th, 2015

LITERATURE REVIEW: DISCLOSURE OF RISK AND RISK APPETITE IN UK BANKS INDUSTRY AND BUILDING SOCIETIES

Literature Review: Risk Disclosures and Appetite in the UK Banking and Construction Industries

According to Au Yong (2006, 45), risk disclosures are the revelations that corporate societies and business operators should make to their investors and clients about the potential enigmas that may compromise operatives in a business. Conrow (2003, 56) and Khan and Zsidisin (2011, 21) noted that there are significant risks inherent in investing in most financial markets and instruments as well as the construction industry in the UK. Such factors are globally common. Accordingly, it is mandatory for a corporate business to keep all its stakeholders informed about all the risks just as they would about the developments. That is because, as Khan and Zsidisin (2011, 23) highlighted the investment derivatives, options and futures are often characterized by factors that may not necessarily be profundities, but that are capacitated to puncture ambitions. Such factors are often unknown to investors. However, companies were described by Greuning and Brajovic (2009, 89) as the holders of the inside information, and hence should make their elaborations on the investment uncertainties known to the investors.

However, that has not been the case in the UK where companies have developed the inclination and tendencies to keep such risks unknown to clients and stakeholders (Baker, Singleton and Veit (2010, 45). According to Youngberg (2011, 32), some UK banking and construction industries’ operations are guided by unusual precepts and beliefs that have been founded on unethical projections. For instance, such companies have believed that uniformed clients are often more likely to invest, compared to informed clients. This, as Khan and Zsidisin (2011, 41) explained, is exploitation as it eliminates all the factors that characterize a mutual relationship in which case both the stakeholders and the concerned company stand to benefit.

Solomon’s literature (2007, 45) highlights the elements that may have sired the contradictory and unethical business foundations. The author elaborated that the elementary principles are compromised by the desire to amass profits. However, such are often done with hope and not professionalism. That implies that the corporate business create the belief that there are distinctly limited chances that may compromise the elements that factor to an operation. According to Starita and Malafronte (2014, 59), some companies of the ilk even proceed to conduct forecasts to determine the projections in a business plain but keep the negative projections in their closet. These are contributory factors to the information gap, a factor that keeps most stakeholders to business in the dark about the essential risks that relate to the businesses of their interests.

Miihkinen (2012, 37) stated that an investor should be made privy to all the information that relate to a business as an investment opportunity should be a choice and not an obligation. He further elaborated that the mutual relationship that develops from information may be the biggest catalyst for growth for all the parties involved in a business. Risk disclosure complements the desire to work together. It so justifies chosen options and helps the investors to prepare reserves and beef up their psychological strength to deal with the expected unexpected. According to Collier and Agyei-Ampomah, (2009, 47), it is an obligation and a tool that would elevate the investment chances of investors. European Conference on Management, Leadership and Governance and Politis (2012, 45) explained that such would probably happen catalyzed by success and the understanding about the navigations that should be made to avoid the risks.

Operating to this disregard has exposed the inconsistencies in the risk narratives that so project the management strategies amongst other contributory elements of the UK firms. When analyzing the economic growth of the UK banking industry, Solomon (2007, 35) explained that amongst other identified banks, Barclays has suffered sufficient economic strain in the UK. That is down to the fact that the company may have adopted a discriminative strategy. Ideally, such firms only explain some risks but ignore the underlying and definitive risks. For instance, depending on the situation, a firm may opt to explain the liquidity and currency risks, or the economic risks and emerging market trends while paying no attention to political risks. In essence, such kind of a strategy would even make the investor oblivious of the political contribution that mires all business across the nation.

Miihkinen (2012, 40) made a contributory remark to the risk management approaches. He stated that whilst paying attention to the risk disclosures is fundamental for firms, it is very essential to integrate the disclosure policies with the firm’s appetite. Essentially, Risk Appetite is the amount, type and approach to a risk that a given company may be willing to assume in its operations. According to Linsley and Shrives (2006, 79), it is the definitive feature of the financial capacity and the management strategies of firms. Kumar and Persaud (2002, 49) opined that poor management may freak away from operations that are characterized by great risks. On the other hand, exemplary management may develop strategies that may make the risks surmountable.

Risk appetite, as was examined by Collier and Agyei-Ampomah, (2009, 47) is the psychological interpretation of the strength of firms. He further elaborated that economists have been compelled to grade companies and firms into different levels depending on their approaches and management strategies. For instance, there are the averse firms that are preliminarily scared of risks. The minimal firms are characterized by their choices of the safer options. Essentially, such firms are not blessed with the large capital bases. The intermediate level has the open companies that have the will and power to conduct risk characterized businesses. Lastly, the senior companies are the hungry companies that exploit the large economic benefits of the opportunities that may bear risks to most other firms (Linsley & Shrives 2006, 79).

Regardless of the level of the risk in which a firm is graded, they should always consider ethics and information as forefront pointers in the integration of the disclosures and appetite (Kumar & Persaud 2002, 78). That would imply that in their risk management strategy, the UK firms would use ethics as a tool to involve the stakeholders to in all agreements. They would hence adopt the position of transparency and friendliness. Harner (2010, 52) explained that however harsh a risk disclosure may sound to an investor, they are often at the positions of considering such revelation as friendly. Elementary strategies would demand that the firm and the investors agree to the risks involved in the deal. Hamilton and Micklethwait (2006, 56) explained that the company being aware of its risk capacity and management approaches, and the investors being aware of the risks into which they may plunge, should mutually support each other. In such a scenario, both the company and the investors may mutually benefit from any deal, or may share the costs of a failure and make the losses cheaper to bear.

Abrahaz and Shrives (2014, 67) explained that a distinctive risk information gap in the UK banking and construction industries are factored by one side approaches to risk management. Characteristically, the involved firms only consider their risk appetites and evaluate their capacity to handle a risk. Kumar and Persaud (2002, 56) explained that firms’ disclosure preferences are subject to their financial capacity and economic ambition strategies. Related to the appetite levels, the junior firms with aversive characteristics may keep off the risks and avoid informing the investors of the reasons behind the decisions. That is so because, according to Miihkinen (2012, 40), they may want to keep the impression that they are well established and can plunge into the markets at whatever the conditions just so to impress the investors. On the other hand, the established firms may operate on the basis that the clients may be scared away by their desire to plunge into the risk-defined markets. Barakat and Hussainey (2013, 42) explained that such companies are guided by the unethical desire to make profits and not to satisfy the need for the maintenance of the operative standards in the UK.

Harner (2010, 34) opined that the UK companies can transform risk disclosures and appetites into platforms that highlight common grounds of interests. That implies that they can be tools that get used by the firms to create a rapport with the investors. He further elaborated that the factors, if not well exploited as risk management tools, may compromise the objectives and strategies that are drawn by firms as they may lose trust with their stakeholders. Collier and Agyei-Ampomah, (2009, 54) explained that trust is the primary ingredient in risk management strategies that involve more than one party in a business. However, such formal relations have been negated by the ambitions of the concerned firms, a factor that has become highly common in the past decade.

Linsley and Shrives (2006, 80) highlighted that the UK banking and construction industries do not have to be unethical to procure profits in the otherwise competitive markets. Accordingly, strategies that would favor firms to assume the dominant roles in the markets may be minimal but substantial applications can always guarantee economic success and stability for all the parties involved. When addressing an ethics conference, Kumar and Persaud (2002, 21) explained that minimal is the term used as most companies have taken to employing similar strategies, a factor that has intensified competition in the UK markets. The disclosure and appetite integration should hence be supplemented with the lucid regulation policy that would elevate the risk approaches and management.

According to Kaplan and Mikes (2012, 36), Risk Regulation is the creation of standardized precepts that govern allowances, barriers and the exploitation of opportunities in the markets. It should be the definitive drive that elevates the risk management approaches and in the process, make it easy to exploit and benefit from market risks. Barakat and Hussainey (2013, 37) explained that the application of risk regulation would involve the sieving of the risks and the repositioning of both the firms’ and stakeholders’ interests. That would create the precepts that enable the stakeholders to maximally reap or avoid the risk markets. Harner (2010, 52) and Au Yong (2006, 44) supported that fact and made it clear that regulation is the creation of standards and abiding by them. Therefore, it is apparent that regulation would not just prepare all parties in a proposal for the risks; it would also make the risks and uncertainties bearable and exploitable. Abrahaz and Shrives (2014, 78) pointed out that regulation is the significant breather that strengthens the positions of stakeholders in a risk market and makes every deal worthy of a negotiation.

The definitive management feature has been underexploited or misused by firms in the UK. According to Khan and Zsidisin (2011, 25), the UK firms only regulate the risks when they are faced with compulsive elements that threaten their success in a risk market. Au Yong (2006, 52) elaborated that though few UK firms operate with the ideal precepts that govern the regulation, some still exploit it as a measure that only favor one side of the team. That implies that they have developed the inclination to avoid disclosure at all costs and at all levels. Considerably, such firms avoid revealing the nature and amount of risks involved in a risk market, and avoid informing the investors of the regulatory measures as well. Hence, as Abrahaz and Shrives (2014, 78) elaborated, they are the only sides that stand to reap maximum benefits from a deal as they ideally only protect themselves.

Well used, risk regulation would, according to Hamilton and Micklethwait (2006, 80), not just complement the UK firms’ appetite, but would also make the objectives of the firms achievable. However, Bohn (2012, 67) pointed out that some banking and construction firms in the UK have adopted the strategy in an imbalanced approach to risk management. He so stated that regulating the risks would require that all the involved parties act sufficiently to reveal their motives in an investment. Accordingly, most stakeholders do plunge resources in a market with varied motives as some aim at the economic and financial gain in a market. On the other hand, others use investment as a competitive strategy to destabilize their adversaries.

Regulating risks while at the same time maintaining the precepts of risk disclosure and appetite would require involving all the stakeholders in the public incentives, franchising, licensing, command, and regulation. Harner (2010, 57) explained that because the risk disclosure is not limited to investors alone, other factors should involve the banking and construction clients. That is a regulatory measure that would improve the marketing position of the UK firms both in the local markets and internationally as well. The UK firms are yet to adopt strategies like the limited intervention levels, a factor that would definitely increase the democratic options and potentials in a market. Such kind of a strategy would enlighten the clients and guide in them making choices with which they are comfortable. Moreover, as the Organisation for Economic Co-operation and Development (2011, 61) explained, the factor would the firms loyalty and in turn increase their benefits.

According to Kaplan and Mikes (2012, 34), risk regulation in the superlative has repositioned companies in other nations like the US as it is the biggest contributory element to the success rates of the rapidly developing nations. In a contradictory statement, Hamilton and Micklethwait (2006, 77) elaborated that success rates in the UK and the rest of the world are not comparable as the nation boasts some of the most successful and dominant companies despite is diminutive size. However, Bohn (2012, 21) explained that the resourceful nature of the country coupled with its rapidly expanding population has created market opportunities that have seen to the rise of the banking and construction industries. Notably, these factors have also multiplied the competition and risks in the market and call for the adoption of strategies that elevate the risk markets in the UK.

Regulating the risks would make investors open to investments, a process that would definitely factor into the reduction of losses. It would also act as a financial security as firms would be free of reprimanding situations, the kind in the kind of legal battles. Such often distract firms and may even cause them tremendous financial losses that result from tarnished reputations. According to Hamilton and Micklethwait (2006, 23), the failure to regulate risks often make it more than likely to experience crises, and stagnation and failures. Regulation makes a company weary of the dangers and opportunities alike and arms it possible to handle the factors that would otherwise be very challenging.

 

Disclosure and Appetite Similarities and Differences in the UK Banking and Construction Firms

In a risk management study in the UK, Kaplan and Mikes (2012, 42) made the revelation that despite their different business operatives, the banking and construction industries in the UK have exhibited vast similarities. According to World Bank and International Monetary Fund (2005, 12), that factor may have been propagated by the regional markets and the similar regulations that the industries have been subjected to. For instance, companies in London may be required to handle their clients in a particular pattern. However, the Organisation for Economic Co-operation and Development (2011, 78) projected that the similarities may not be subject to the localities only. That is because the definitive feature that the industries have in common is a marketing objective that seeks to maximally benefit from the risks markets. Abraham and Paul (2007, 50) supported the factor and highlighted that similar objectives often demand the creation of similar precepts that would inspire the realization of the set goals.

In the first instance, Abraham and Paul (2007, 50) explained that the industries are characterized by a significant risk appetite that was sired by the desire to exploit the market benefits and make maximum profits. Bohn (2012, 86) quoted the CEO of Barclays, Antony Jenkins, as stating that every risk that threatens the advancement of other companies creates the pathway for growth for the daring firms. The bankers and the builders in UK have unanimously indulged in a post economic depression expansion as they seek to out compete themselves. World Bank and International Monetary Fund (2005, 16) explained that a common and definitive feature of the marketing propositions adopted by the two industries is how they have basically aligned their interest and targeted benefits alongside the strategies. These are the elements that have made the market somewhat unfavorable for the investors and other stakeholders. It is required of the banking and construction industries to consider not just their interests, but also the interests if the investors they seek to partner with. It is not ethical to use investors as a stepping stone collect most of the proceeds.

Referring to Bohn (2012, 86), Starita and Malafronte (2014, 39) noted that the alignment of the strategies and benefits at the expense of the interests of the investors is discriminatory and selfish. Essentially, it is the industries’ biggest undoing and has been projected in inconsistencies in the risk narratives. Starita and Malafronte then proceeded to explain that risk narratives’ inconsistencies and lucid information gaps are the other most common feature of the industries as they are both indulged in attempts to conceal their dubious operations (Starita and Malafronte 2014, 40).

The other similarity, as Collier and Agyei-Ampomah (2008, 32) opined, are the numerous regulations that compel the industries to disclosure. For instance, there are regulations and rules that require banks to maintain public records. On the other hand, the construction firms have been subjected to the interstate, national and international rules that govern their environmental policies. These factors, as Cordella and Levy (1997, 32) elaborated, have made the companies in the industries subject to scrutiny as their public expectations that demand their transparency. For instance, when the public demands transparency, they may also question the reasons for failures and success. Though most companies may evade such questions, answers are often indicators of the kind of approaches that they implement in an expansive strategy that seeks to exploit the risk market.

In what has been perceived to be hilarious by British economists, Conrow (2003, 78) stated that the industries have succeeded in making the state rules and regulations seem simple. He explained that the industries are some of the most regulated by the government as they not only handle factors that directly concern the people, but also because they have positioned themselves as exchange earners and contributors to the government’s budget. Despite all the measures, the industries’ records are hardly consistent and nor compliant with the set standards, a factor largely exhibited by the common information gap (Abraham & Paul 2007, 56).

However, the two industries are not short of features that highlight their differences albeit they share so much in common. According to Cordella and Levy (1997, 54), the financial risks faced by the construction firms are majorly propagated by the environmental and climatic risks along with the geographical regions intended for exploits. That is because geography defines the kind of structures that may be erected at a place and consequently, the financial benefits. On the other hand, the banking industry is often threatened with insurance, market, credit and liquidity risks.

As was elaborated by Buckle and Thompson (2004, 29), the differences in the kinds of risks faced by the industries make the strategies and ills that define their strategies different. In the instance, the industries have to use different strategies to lure their investors. For instance, in an unethical practice, the construction industries have created the strategy of overlooking the population shifts, or often fail to disclose such information to investors. Schmitt (2012, 32) explained that such intention is often driven by the desire to reap maximally in the event that the shifts realign the market to favor an investment in a locality. On the other hand, banks may fail to make revelations about the insurance risks that face a financial investment.

 

The Importance of Risk Disclosure for the UK Banks and Construction Firms

Risk Disclosure, according to Conrow (2003, 63), may have been used by most UK firms to target the interest of the stakeholders. However, he expressed idea that risk disclosure is not an impulsive process, and that there are several factors that play in the issuance of elaborative risk statements. Essentially, the statements are not the first definitive feature of the process, as it was referred to by Boyd (2011, 21). The first of them all is research. Research, as was explained by European Conference on Management, Leadership and Governance and Politis (2012, 89), is the preceeding feature of the risk disclosure. It makes the initial revelation to the firm and defines the kind of indulgence that may be inclined to engage in. Accordingly, the research defines the risks and makes paves the way for the elementary consideration of the gravity of the risks and the available options.

In the UK, the research prepares the firm for the confrontation of the risk, a factor that has made the risk market outstanding. Ahmed Barakat and Khaled Hussainey (2013, 29) concluded after a research that the UK construction firms have developed a precept that has molded the market to fit their interests. In the book, Corporate governance and accountability, Schmitt (2012, 56) explained that risk disclosure has been essential in the manipulation of the market to the benefit of the firms. Such manipulation has also benefited the investors and other stakeholders in ethical situations. According to Frenkel, Hommel, Rudolf and Dufey (2005, 78), these elements have ensured financial stability for the banking and construction firms in the UK.

The other essential benefit that firms and their stakeholders stand to accrue is the global exposure, a factor that results from the improvements and strategizing that the firms may adopt as a management strategy. Starita and Malafronte (2014, 98) considered the resultants of risk exposure. He so elaborated that the exposure would position the UK firms for financial success. As a result, the firms would then get investment opportunities beyond the national borders.

When analyzing the elements that result from the common risk information gaps, Buckle and Thompson (2004, 22) stated that there are gross effects that may result from such unethical practices. For instance, there often stands the greatest projection and possibility of a risk evolution. According to Al-Thani and Merna (2013, 41), evolving risks often compromise the objectives of the stakeholders in a project. As Boyd (2011, 25) explained, it is a lot easier to handle the common risks as they become overly familiar and subject to strategies devised as measures for solutions. Risk disclosure that would eliminate the information gaps would hence make it easy to operate by theories that would catalyze success by making the risks less threatening.

Lastly, the UK firms would maintain operations guided by the certainties in the market. For instance, they would be sure that the investors who have pulled resources for an investment would by little chances pull out (Ahmed Barakat & Khaled Hussainey 2013, 29). That is because they would be informed of the details of the endeavor unlike in situations where a project is fraudulently covered with little or no disclosure.

 

 

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