The Influence of Managers Characteristics on Risk Management Practices in Public Listed Companies (PLCs) Of Malaysia

Transcription

1 Vol. 1, No. 8, 2013, The Influence of Managers Characteristics on Risk Management Practices in Public Listed Companies (PLCs) Of Malaysia Mohd Rasid Hussin 1, Ahmad Shukri Yazid 2 Abstract Risk management as a dynamic scientific discipline and a structured response to risk has become increasingly important among businesses and industries worldwide. Relevant literature in this area of specialization is still lacking amongst developing countries including Malaysia. This particular study aims at examining how the managers characteristics could influence the way they manage risk for their companies/organizations. Based on an industry-wide survey conducted on Chief Executive Officers (CEOs) of Public Listed Companies in the Malaysian Bourse, some interesting and important findings were revealed. First, younger and junior CEOs appear to be more pro-active and more willing to take risks while the older or senior ones were more risk averse and more conservative in their approach and risk decision-making especially. Second, experienced CEOs differed significantly from others in their overall perception of risk especially with regard to financial risk. Third, surprisingly, the Malay CEOs were found to be much more concerned in respect of financial risks compared to their Chinese counterparts. The overall results provide a new insight into the managers traits and relationship with the way they perceive and manage the various potential risk exposures facing their companies and organizations. Keywords: Risk management, Managers traits, Public listed companies 1. Introduction Managing risk and uncertainty has always been a challenge to any type of organisation as they continuously attempt to strive for corporate excellence, whilst at the same time mitigate risks and minimise potential losses that could result in financial ruin. In this regard, businesses and industries have realised the importance and necessity of managing risks on an enterprise-wide basis. This particular study investigates the relationship between managers traits and their perceptions of major and financial risks in the context of Malaysian Public Listed Companies (PLCs). The next section of this researched paper discusses managers traits and their perceptions of major and financial risks. This is followed by a critical examination of the relationship between managers traits and their Risk Management practices. 2. Literature Review It must be highlighted that the growing concern is not only regarding companies and organisations, but also relate to individuals and societies on the whole whereby Risk management as a structured response to risk is viewed as a useful tool of increasing importance to businesses and industries worldwide. Risk Management as an important discipline and area of specialization enables an organisation to develop toward its goals and objectives, to strengthen its corporate governance, and at the same time fulfil its obligation towards stakeholders. 1 School of Economics, Finance and Banking, Universiti Utara Malaysia, Malaysia 2 Faculty of Business Management & Accountancy, Universiti Sultan Zainal Abidin, Malaysia 2013 Research Academy of Social Sciences 282

2 Failure to improve the Risk Management process can cause severe financial loss and damage to the reputation of companies and organizations alike. This will be reflected in the stakeholders confidence and trust. Previous literature (e.g., MacCrimmon et. al., 1990; March et. al., 1987; MacCrimmon et. al., 1986) had suggested that differences in managers traits may lead to differences in their risk perceptions. Thus, it is expected that managers traits influence their perceptions of Financial and Foreign Exchange (FOREX) Risk Management. Before the crisis and in the current period, managers from the two (2) groups of PLCs gave the highest ranking to business risks as compared to financial and political risks. This could be due to a broader definition of business risks which includes uncertainties in firms overall activities that were outside their control. Financial risks were given lesser priority in the period before crisis. Consequently, they also gave less priority to interest rates, foreign exchange and commodity price risks. This result is possibly due to the stable Malaysian dollar and a booming economy. However, it is not surprising that these PLCs gave a higher priority to financial risks during the crisis due to high volatility in interest rates and foreign exchange rates at this time. Therefore, many of these PLCs attributed a higher priority to foreign exchange risk because they were involved in international business, thus exposing them to foreign exchange risk. In the meantime, since many of them were highly leveraged, they attributed higher importance to interest rate risk. On the whole, among the three (3) financial risks, foreign exchange risk was given the topmost priority, especially during the crisis. In the current period, immediately after the Government had imposed the capital and currency control, the percentage who gave higher priority to financial risks declined again. Consequently, the percentage that attributed the highest priority to interest rates, foreign exchange and commodity price risk also decreased as compared to the crisis period. Thus, the results imply that these PLCs did not learn from their experience during the crisis period. They tended to ignore these risks again. Even though foreign exchange risk was not that significant due to the pegging of the Malaysian dollar against the US dollar, they were still exposed to currency fluctuations when the US dollar weakened or strengthened against other currencies. It must be mentioned that in the short term, they might be successful with less dependence on foreign risk management, but in the long term, it could be damaging. The users of financial risk management gave political risk the least priority. This was possibly due to political stability in the country as well as in the ASEAN countries where most of the investments were made. However, during the crisis, the number of PLCs that gave the highest priority to political risk increased slightly. This could be due to political instability at home and abroad. The political situations in other ASEAN countries were also unstable. Another possible reason for the lesser attention paid to political risk is the huge devaluation of Malaysian dollar during the crisis. This must have been quite a shock for the PLCs that had been complacent in managing financial risks, especially foreign exchange risk. The non-users of financial risk management gave less priority to major and financial risk as compared to the users. Business risks were given the highest priority before crisis, probably for the same reasons given for users of financial risk management. It is rather interesting to note that they actually gave the highest priority to interest rate risk due to the fact that many of them were highly leveraged. In fact, this is one of the characteristics of Malaysian companies and organizations. On the other hand, foreign exchange risk was given less priority possibly due to relatively small foreign currency exposure. 283

3 M. R. Hussin & A. S. Yazid The role of Chief Executive Officers (CEOs) is also expected to be crucial in influencing the management of risks. A study by Penafort et. al. (1996) suggested that top management including CEOs play a crucial role in ensuring that strategies of the companies and organizations are successfully implemented. In this regard, foreign exchange risk management must therefore involve the top level management also for effective Risk Management and overall organizational efficiency. Accordingly, the decision to engage in financial risk management must be made clear by CEOs so that managers feel comfortable undertaking financial risk management for their companies and organizations. As such, this aspect provided further incentive for the researchers to examine the CEOs traits in relation to the management of financial risks. MacCrimmon and Wehrung (1990) conducted a study on more than 500 top-level executives in an effort to examine their risk taking behaviours. They examined their behaviour in accordance to: a) hypothetical situations underlying the theory of risk; b) revealed choices in naturally occurring events; and c) attitudes towards risk taking. Interestingly, they found that the most successful executives were the biggest risk takers and older executives were the most risk averse. In addition, people s attitude towards risk taking may depend on their judgement based on personal experience (Brehmer, 1987). If they remember a certain event that led to losses in the past, they may give higher consideration for that risk and vice-versa. Thus, experience may affect managers decisions on the management of financial risks. In the case of Malaysian PLCs, their management cadre comprises of either Malays or Chinese. Therefore, it is considered rather appropriate in this particular study to also examine the ethnic groups of managers in relation to their perceptions and practices of financial risks. 3. Methodology For this particular study, the managers characteristics and personality traits were examined. This includes age, experience and ethnic group as well as their extent of knowledge and level experience of financial risk management. The age and experience of these managers were divided into five (5) categories so that they were approximately normally distributed. On the other hand, the ethnic groups of these managers comprised of either Malays or Chinese. It is believed that these factors would influence perceptions of risks and thus, have differing impacts on the way that financial and foreign exchange risk was managed. As part of this study, potential respondents were involved directly in a survey that seeks to find out the managers perception of major risks. The major risks considered in this study relate to business risks, financial risks, and political risks. In addition, the managers were also investigated in terms of their perception of financial risks, namely, interest rate, foreign exchange and commodity price risks. 4. Findings The managers characteristics examined in the present study were age, experience and ethnic group. The age and experience of Financial Risk Management among these managers were divided into five (5) categories so that they were approximately normally distributed. On the other hand, the ethnic groups of these managers comprised either the Malays or Chinese. It is believed that these factors would influence perceptions of risks and thus, has differing impacts on the way that Financial and Foreign Exchange (FOREX) risks were managed. The role of Chief Executive Officers (CEOs) was also expected to be crucial in influencing the management of risks. In this regard, the decision to be engaged in Financial Risk Management must be made clear by the CEOs concerned so that managers feel comfortable undertaking Financial Risk Management for their companies and organizations. 284

4 In turn, this serves as a form of incentive for the researchers to examine the CEOs traits in relation to the management of financial risks. For instance, if they remember a certain event that led to unpleasant outcome resulting in financial losses in the past, then they may give higher consideration for that risk and vice-versa. Thus, experience may have an effect on the managers decisions with regard to the management of financial risks. Also, there may be some differences and similarities between the different groups in a society. In the case of Malaysian PLCs, their management cadre comprises either the Malays or Chinese. Therefore, it was appropriate to examine the ethnic groups of managers in relation to their perceptions and practices of financial risks. Findings showed that there were significant differences between managers age and their perceptions of major risks in the period before crisis. In particular, 76.9% of the older managers gave the highest priority to business risks as compared to 33.3% of the younger managers. This could be due to the broader definition used for business risks, which include all uncertainties in relation to the operations of these PLCs involved in this particular study. Thus, it is rather obvious that the older managers who tend to be more consecutive attributed greater importance and emphasis on business risks. But, this is not the case of the younger managers who attributed the highest priority in terms of financial risks. Despite that however, they were found to manage less short-term transaction exposure as compared to the older managers. This was probably due to the fact that the younger managers are being more active and more willing to take greater risks than the older managers. Nevertheless, it is highly interesting to note that during the crisis and also in the current period their perceptions towards major risks were more or less the same. Perhaps all managers, irrespective of age, thought that higher priority must be given to major risks especially the financial risks in particular. This is due to the volatility of both foreign exchange and interest rate risks. Furthermore, there were no significant differences between age groups for interest rate, foreign exchange and commodity price risks. As highlighted earlier, the experience of managers in Financial Risk Management may affect their risk perceptions. The results showed that there was a significant difference between experience and perceptions of financial risks during the current period. Findings revealed that more experienced managers (73.3%) gave higher priority to financial risks as compared to 50% of the less experienced managers. This implies that experience did not influence their perceptions of risks before and during crisis. During the crisis, majority of the managers, irrespective of experience gave higher priority to financial risks. It may be true that considerable financial losses suffered during crisis may have led them to perceive higher importance in respect of major risks, especially financial risks. In such cases, their experiences may have an influence on them to attribute higher priority to financial risks in the current period. However, there was a significant difference between experience of managers and perceptions of interest rate and foreign exchange rate risks during crisis. To be more specific, less experienced managers attributed higher priority to interest rate risk (66.7%) while more experienced ones (100%) gave a higher priority to foreign exchange risk. In addition, there was also a significant difference between managers experience and perceptions of interest rate risk in the current period. About 67% of the less experienced managers gave a higher priority to interest rate risk as compared to 20% of the more experienced ones. This was probably due to their familiarity with interest rate futures available. Incidentally, this is the only product offered and the future is only in Malaysian dollars. It appears that more experience is needed for the inclusion of other financial products, such as options and swaps. 285

5 M. R. Hussin & A. S. Yazid Lastly, ethnic groups were examined in order to study their influence on risk perception. The study showed that there was a significant difference between ethnic groups and perceptions to financial risks before the crisis and in the current period. Interestingly, findings revealed that more Malay managers (35.7%) in particular attributed higher importance to financial risks than the Chinese (5.3%) in the period before crisis. Similarly, in the current period, more Malay managers (78.6%) gave a higher priority to financial risks than the Chinese (52.6%). The above result is possibly due to the risk-averse culture of the Malays. Another possible reason could be due to the fact that Malays are still new to corporate business, especially international business. Table 1: Managers Traits and Risk Perception Kruskal-Wallis Test Chi-Square Values Age Before crisis Business risks 6.179* Financial risks *** Political risks 7.056* Experience Ethnic groups *** significant at 5% ** significant at 10% * significant at 20% Before crisis Commodity price risk 6.917* During crisis Interest rate risk 7.668** Foreign exchange risk 7.454* Current period Financial risks 7.495* Interest rate risk 7.770** Before crisis Financial risks 6.669*** Current period Financial risks 2.610** As shown in Table 2, during the financial crisis, significant differences were evident among the CEOs risk perceptions. For the same period, the younger CEOs perceived the highest priority to financial risks, in particular, foreign exchange risk. This was possibly due to the volatility of foreign exchange rates during the crisis period. However, more experienced CEOs attributed the highest priority to foreign exchange risk before the crisis. One possible reason for this discrepancy could be due to their increased involvement in international businesses that resulted in their increased experience. Also, due to interest rates uncertainties, they attributed greater importance to interest rates risk in the current period. As before, more experienced CEOs gave a higher priority to interest rate risk than the less experienced ones. Findings showed that there was no significant difference in the perception of foreign exchange risk during crisis and this was probably due to the huge devaluation of the Malaysian dollar. Thus, all CEOs irrespective of experience thought that this risk must be given the most priority. Possibly due to the capital and currency control, all CEOs perceived that foreign exchange risk was not significant in the current period. 286

6 Table 2: CEOs Traits and Risk Perception Kruskal-Wallis Test Chi-Square Values Age During crisis Financial risks 6.491* Foreign exchange risk *** Commodity price risks 6.480* Experience Before crisis Foreign exchange risk 7.392* Current period Interest rate risk 9.851*** *** significant at 5% * significant at 20% 5. Conclusion This particular study had examined the managers traits and their influence on perceptions and practices of Financial Risk Management. To be specific, the managers traits under consideration were age, experience and ethnic group. It was found that younger managers attributed the highest priority to financial risks during the crisis and in the current period. This would be expected due to the huge fluctuations in interest rates and foreign exchange rates. Before the crisis, they did not attribute a high priority to financial risks, possibly due to their lack of knowledge or belief that the Malaysian dollar was stable against other major currencies. However, the older managers managed more currency exposures, in particular short-term transaction exposures during the crisis and in the current period. Overall, it seems that younger managers were more proactive and willing to take risks, while the older ones were risk-averse and more conservative. Furthermore, the younger managers had much to gain when taking risks in view of the fact that they were at the early stage of their career. If the younger managers are successful, then obviously they have better opportunities to advance in their career development. This particular study also found that the experience of managers did have a bearing and influenced their perceptions and practices of Financial Risk Management. The more experienced managers perceived the highest priority as foreign exchange risk during the crisis but there was no significant difference between experience and the amount of currency risk managed for this period. The management cadre of Malaysian multinationals consists of Malays and Chinese. The Malay managers perceived higher priority to financial risk and this led them to manage more currency exposure. Results from the study showed that the Chinese managers managed more foreign exchange risk if they had forecasted the foreign exchange rates and vice-versa. On the other hand, the Malay managers managed more currency risk compared to the Chinese, irrespective of their views of the foreign exchange rates. There was some evidence to suggest that the Malay managers were risk-paranoid and risk-asymmetric while the Chinese managers were risk-neutral. The above findings are possibly due to the different culture of these managers. The Malays are generally less aggressive, have more respect for the elderly, loyalty, patience, and always try to avoid difficult situations (Abdullah, 1996). On the other hand, the Chinese, according to Abdullah (1996), are generally hard working, modest, money oriented and likes to gamble or take risk. Similarly, there was evidence that suggests Malay CEOs tended to be more risk-averse than their Chinese counterparts. 287

7 M. R. Hussin & A. S. Yazid This could be due to the Malays lack of experience in international business and probably felt rather comfortable depending on Financial Risk Management alone. In addition, the Chinese have vast experience as they have had dominated the economic activities of the country since the colonial period (Gomez, 1999). This study on the whole, revealed the extent of managers traits that have an influence on their perceptions and practices in respect of Financial Risk Management. Several important findings in relation to these issues include the following:- a) Malay managers perceived greater priority to financial risks especially foreign exchange risk; b) Malay managers managed more currency risk as compared to Chinese managers irrespective of their views on foreign exchange rates; c) Malay managers could be categorised as risk-paranoid and risk-asymmetrical, while the Chinese as risk-neutral; d) Older managers managed more currency risks, thus they were more risk-averse than the younger managers; e) Managers with less experience in the management of financial risks managed a greater amount of short-term transaction exposure while the more experienced managed a greater amount of translation exposure; f) Malay CEOs tended to be more risk-averse than the Chinese; g) The younger and less experienced CEOs managed more currency risk than the older and more experienced ones; and h) Managing short-term transaction exposures was more popular among Malaysian managers. Overall, these findings support the hypotheses made and in some ways are consistent with earlier studies in developed countries. Financial Risk Management seems to be more popular among Malaysian PLCs especially during the crisis period. Bibliography Abdullah, A. (1996). Going Glocal: Cultural Dimensions In Malaysian Management. Kuala Lumpur, Malaysian Institute of Management. Ankrom, R. K. (1974). Top-Level Approach to the Foreign Exchange Problem. Harvard Business Review 52(July - August): Belk, P. A. and M. Glaum (1990). The Management Of Foreign Exchange Risk In UK Multinationals : An Empirical Investigation. Accounting And Business Research 21(18): Bodnar, G. M., G. S. Hayt, et al. (1998) Wharton Survey of Financial Risk Management by US Non- Financial Firms. Financial Management 27(4): Brehmer, B. (1987). The Psychology of Risk. Risk and Decisions. W. T. Singleton and J. Hovden. New York, Singapore, John Wiley & Sons Ltd.: pp Buckley, A. (1996). Multinational Finance. London, New York, Prentice Hall. Glaum, M. (1990). Strategic Management Of Exchange Rate Risks. Long Range Planning 23(4): Gomez, E. T. (1999). Chinese Business in Malaysia. Surrey, Curzon Press. MacCrimmon, K. R. and D. A. Wehrung (1986). Taking Risks: The Management of Uncertainty. New York, The Free Press. 288

8 MacCrimmon, K. R. and D. A. Wehrung (1990). Characteristics of Risk Taking Executives. Management Science 36(N0. 4): March, J. G. and Z. Shapira (1987). Managerial Perspectives on Risk and Risk Taking. Management Science 33(N0. 11): Penafort, F. and C. H. Ponnu (1996). The Role Of Top Management In Implementing Strategies Successfully. Malaysian Management Review 31(2):