Page 142 - (DK) The Business Book

140 WHO BEARS THE RISK?

IN CONTEXT

FOCUS
When a business is
Financial risk ...a small investment
financed with debt, in shares can yield
KEY DATES or with other people’s control of the company.
money...
1950s US economist Harry
Markowitz advocates
gathering a portfolio of
investments to protect against
losses due to financial risk.
1990s Research on types of
financial risk identifies ways
of measuring and managing
different kinds of risk, including ...while the costs of This increases
market risk (changes in the failure are largely borne the chances of huge
profits for the
value of equity, interest rates, by the work force...
business owners...
currency, and commodities)
and credit risk (the risk of
nonpayment of debts).
1999 UK conglomerate General
Electric Company (GEC) is
renamed Marconi plc, and its
traditional businesses are
sold off. The directors’ gamble
...and the company’s
on this change in strategy middle managers, who Heads I win;
fails—the business collapses take the blame for tails you lose.
in 2001 and shares are poor performance.
suspended. Nearly 25 percent
of staff is laid off.

he degree of financial risk Greek shipping magnate Aristotle shareholders’ capital finances the
borne by a company has Onassis built a business empire business start-up, and remains at
T profound implications for that stretched across the world and risk until it is repaid in full. If the
the long-term viability and success incorporated dozens of industries, business liquidates, the holder of
of the business, its employees, and was underpinned by complex “ordinary” shares (as opposed to
and its shareholders. A business financial arrangements. Onassis “preferred” shares, which are higher
structured in a traditional manner recommended utilizing “other in ranking and yield dividends
would put the most risk on the people’s money,” and while this before ordinary shares) is the last
shareholders, since they stand approach might yield financial in the line to be paid. The ordinary
to lose their investment if the success, it may end with others shareholder is therefore the least
venture fails. But the proliferation bearing the costs of failure. likely to recover his or her
of increasingly complex financial investment. Because of the risks
mechanisms and means of Traditional risk they take, entrepreneurs are held in
accounting have, to a degree, In theory, the risk takers in a market high esteem. So are early-stage,
insulated a business’s owners from economy are the shareholders, who venture-capital investors, who invest
the worst effects of failure. effectively “own” the business. The in start-ups in return for equity.