Group Risk Management

    Generally, especially in India, businesses were started and developed by families that are often referred to as ‘Groups’. These companies are under the same management, operating under the same umbrella. They often share the same ideology, may have similar style of management and functioning and may share some common facilities and may even have shared/common employees and consultants. In such a case, risk that affects any one company can spread to others within the group and also to the entire group due to ‘contagion effect’. This risk may pertain to issues like failure of controls and occurrence of fraud, which will result in tainting of the entire group.

    How, to what extent and why the risk will spread within the group and affect it, will depend on the type of risk, the nature and functioning of the group.

    There are certain risks that are self-limiting that will not spread out and affect beyond certain limit, whereas others, especially non physical ones where emotions and sentiments are at play may even spread across the entire group.

    Thus physical risks like flood or fire may affect only those units in the group that share common facilities or infrastructure or physical space and are inter-connected in that sense. Certain non physical risks like image risk may spread easily across the group with a common management.

    The example selected for this month’s case study is that of a group led by a flagship company that makes rubber products and has other companies dealing in construction and real estate, software, consumer goods, travel and tourism, advertising and printing within the group.

    Supreme Rubber Products Ltd. is the flagship company of the Biju group of companies. Biju group was founded and came into prominence during the lifetime of Biju Sirkar, who set up number of units and became a well-known successful first generation entrepreneur about 50 years back, in the post independence era. The group consists of about 20 companies with interests in rubber products, construction, real estate, software, consumer goods, travel and tourism, advertising and printing.

    Some of these companies are listed, others are subsidiaries or closely held, but all of them are under the same management and share a common logo. These companies operate from three main centers in Kolkata, Bhubaneshwar and Hyderabad. They share a common brand and group logo, and organisational and management practices including HR and training facilities.

    Biju is now advanced in age and although the Chairman of the flagship company, is looking for a successor.

    Out of the companies, the flagship company and the consumer goods company are doing extremely well. The travel and tourism, printing, real estate and the construction company are facing difficulties due to economic downturn. The software company however belying expectations and market trends, is doing quite well.

    Biju being advanced in age the pressure of work and handling of diverse businesses is telling on him. His health is a cause of concern as he had a heart problem that was detected a few months back hence he quickly needs to find a successor. There are two major factions in the group. The elder son of Biju — Gopal and the other his nephew Randhir are power centres and each has been running a company. Gopal manages real estate and construction and Randhir the software company. Both have aspiration to head and control the group.

    Although well respected in the market the group has an autocratic style of functioning and relies on discipline and loyalty rather than on professional managers, systems processes, procedures, controls and governance.

    It is rumored that Randhir has aligned himself with the opposition in the state, and the ruling party at the centre has not taken it well.

    There is some anxiety among the employees about Biju’s health. They are concerned as to what will happen to the companies in Biju’s absense. This has unsettled them.

    The real estate and construction company had received a notice of enquiry regarding excess utilisation of FSI and charging that the higher floors in its latest high rise are unauthorised. The media which was generally appreciative of the group had shown some signs of discomfort in the tone of their reporting of this incident.

    There are unrelated developments, for example :

•         the auditor of the advertising company which had come out with a public issue last year has resigned citing personal reasons.

•         the consumer goods company that had the largest number of employees in the group is facing worker unrest, as they wanted a raise to gain parity with pay scales of other group companies.

•         the flagship rubber products company has received a show cause notice from the pollution control board in respect of effluent discharged from its factory near Bhubaneshwar.

The above various aspects and issues involve potential risk to the group as a whole apart from the companies that are involved.

As a risk manager for the group you are expected to deal with the risk and present an action plan at the ensuing group meeting that is even otherwise expected to be stormy due to the power struggle within the group.

The solution:

The suggested strategy is outlined and implemented as below:

Any risk analysis requires that we first identify the nature of the risk and the level to which it may affect the company or its operations. Since all risks identified here (with the exception of the pollution incident) are man-made and internally focussed, the solutions need to be internally directed. The pollution incident is a man-made external event.

The first and foremost risk, in our opinion, is the power struggle within the group that may end up splitting the group. The group has to firstly formulate a succession plan, that would involve identifying the successor. This could be achieved by identifying fixed production/profit targets that need to be achieved (through honorable means) within an agreed timeframe. This would ensure an open and impartial evaluation as to who is best placed to lead the group into the future and would eliminate the need for internal conflicts.

The immediate problem is the incident of pollution control, that too involving the flagship company. It is not only an environment risk, but may also result in the closing down of the company due to legislative controls. The Company has to consider:

• taking immediate cleaning efforts to mitigate the effects of the pollution.

• training and sensitisation Company’s management and staff with the environmental regulations.

• taking steps to implement safe good manufacturing practices And put in place environmental controls.

The other immediate problem is that of labour unrest. The group needs to:

• identify the differences in salaries and other benefits between companies within the group, and between companies in the same industry.

• control the labour unrest that would affect productivity.

•     take corrective action which would help retain the top talent by rationalising salary and pay scales.

•     develop  cogent and common  HRD practices.

• develop a system of inter-changing medium level personnel within functions and group companies.

The next risk is to the group’s name/reputation that may result from the malpractices that have been reported in the press regarding the construction company, the labor unrest, and environment issues.

The steps suggested are:

• the construction company must forthwith undergo a serious examination of all current and past projects to identify questionable practices and take corrective action, if any, required. The group needs to identify a system of internal control that will ensure that transgression of law are avoided.

• to identify laws which need to be complied by all group companies.

• to identify laws, rules and regulations to distinctly identifiable business.

• to put in place processes to ensure compliance with laws.

This exercise may even highlight suspect practices indulged in by the two contenders who wish to head the group.

The group should also have an effective media policy nad have a media manager and public relations expert to project the company viewpoint to the various stakeholders and the public.

Lastly, the company must identify and address  the concerns of the employees regarding the failing health of the group’s patron and the future of the group. This will not only fortify the group’s already failing morale but also help stem the tide of senior personnel who are apparently leaving for personal reasons. Further, as a long term plan the group should consider succession plans for all key personnel within the organisation, to help ensure transparency, a future road map for prospects for promotion, career development and growth for the employees. Such a plan will also ensure continuity of operations for the companies within the group.

The solution is indicative and illustrative in nature and represents the author’s views. The actual solution will vary, as there cannot be a single right or feasible solution or otherwise.