Strategic risk management for enhanced corporate governance

Abstract

The purpose of this research is to develop and apply risk management procedures to enhance corporate governance, using examples of Chinese company investments. Strategy and risk should be considered together by management and boards of directors as they need to know what risks are embedded in potential or approved strategies. Strategy and risk are linked and may be viewed as two sides of the same coin. One of the fastest ways to massive value destruction is to undertake a strategy without a thorough consideration of the related risks. Well-known financial fraud prediction models and ratios are applied to an ongoing, possible fraudulent Chinese company. They generated numerous red flags for possible fraudulent financial reporting, using one and two standard deviation measurements for risk assessment. This paper finds potential international equity and debt investment destruction of $12.9 billion for this one company and $34.5 billion when this company’s investment losses are combined with three other ongoing possible Chinese fraud companies. In summary, a risk management approach for enhanced corporate governance is developed and applied to the strategy of international investing. A case study is used to demonstrate both a macro-economic risk assessment of an investment target country and a micro-economic risk assessment of an investment target company, using fraud models and ratios.