A system of principles for assessing the risks of changes in the value of TNCs

Бойко М.В., студент; Петров К.С., студент; Кудрявцев И.А., студент, Факультет международных экономических отношений Финансовый университет при Правительстве Российской Федерации

Ключевые слова: ТНК, металлургия, корпорации, управление рисками, принципы оценки рисков, факторы риска

Entrepreneurship and risk were always tied together. It is not a big surprise because there is no profit without risk. In the 21st century a variety of risks expanded and changed - there is less possibility of pirate attack on a company's cargo ship, however, at the same time with the development of the Internet and globalization new threats were posed and risks as well. Risk assessment was introduced as a requirement in the last century, however, companies used it even before due to its benefit of being prepared. Every modern corporation has its risk department which work is extremely crucial for a company in general. The crisis of 2008 proved that there are serious risks which affect even the business giants. It is known that such risks can influence the value of a TNC because anyway it is all about market capitalization, whether it is direct influence or not.

But what is “risk”, actually? The general definition of risk by dictionaries is just simple “the possibility of something bad happening”. Generally, it is right, but we need to specify it for financial purposes, which gives us next definition: “Risk is defined in financial terms as the chance that an outcome or investment's actual gains will differ from an expected outcome or return”. In CAPM (Capital Asset Pricing Model) model, risk is referred as a volatility. Sometimes in the exact definition “chance” is replaced by “probability” which we find more appropriate word.

While we are still speaking about definitions there is another vital question we need to ask: what do we mean when we say “principles of risk assessment”? During the course of our research, we stumbled across different interpretations of this statement. In the Guidance Note for the Glasgow Art School (of course it is not a TNC, but as an example of a particular interpretation it works) under the section “Basic principles of risk assessment” they described those general principles are to: * identify the hazards

• decide who might be harmed

• evaluate the risks

• decide whether existing controls are adequate

• record findings

• review assessment and revise if necessary

As we can see it is a step-by-step plan or instruction on how to assess risks. Can it be considered as principles? In Cambridge Dictionary the word “principle” is defined as “a basic idea or rule that explains or controls how somethin g happens or works”. In this case it explains “how it happens or works” so we can admit that it is the system of principles of risk assessment. The similar approach the Committee of Sponsoring Organizations of the Treadway Commission used in 2013 in their framework. They stated 17 principles which should be present to make the entity's control structure effective and 4 of them are concerning risk assessment:

• COSO Principle 6: The entity specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives.

• COSO Principle 7: The entity identifies risks to the achievement of its objectives across the entity and analyzes risks as a basis for determining how the risks should be managed.

• COSO Principle 8: The entity considers the potential for fraud in assessing risks to the achievement of objectives.

• COSO Principle 9: The entity identifies and assesses changes that could significantly impact the system of internal control.

This is also an example of “how it happens or works”, or in this particular case, what the entity does in relation of risk assessment.

These examples together with the definition are leading to the idea that there are two types of principles - which explain the process, and which control the process. Now let us see the example of the latter. In the article of Afinogenova I.N. and Snegovskoy A.N. which is called “General principles and methodology for risk assessment” they state the system of principles of risk assessment has three levels:

Each level consists of the principles which can be also presented as a pyramid.

Figure 1. Levels of the system of principles of risk assessment

Figure 2. Principles of risk assessment on each level of the system.

Before we make some conclusions on this system let us first break down all the levels and principles.

1. Methodological principles, i.e., principles that define the broadest conceptual provisions and, more significantly, do not depend on the characteristics of the type of risk under consideration:

1.1. Risk uniformity is that the concept of risk is the same for all participants in the activity, i.e. if the risk is presented as damage, there are no subjects who believe otherwise. Because it is impossible to develop a risk strategy and tactics when the players in their implementation have divergent viewpoints, the principle of risk uniformity is required.

1.2. Risk positivity denotes that the integral risk indicator is at least equal to the level of tolerance. This notion is frequently related with the principle of “performance” in investment planning. The project's effectiveness is commonly defined as the positive effect of its implementation, i.e. the excess of the totality of the results obtained, taking all risks into consideration, over the estimated total costs required for the project's implementation. The idea of attainable results is linked to the principle of positivism. There should be no dangers to the point where the case is hopeless. For most people, one chance in a thousand is too little to make an activity appealing. It should be highlighted that the risks and consequences of various solutions should be considered.

1.3. Risk objectivity refers to the assessment's ability to accurately reflect the changing object's structure and attributes. Simultaneously, one should endeavor to rely on accurate qualitative (structural, functional, etc.) and quantitative process indicators, taking into consideration transient processes and, if possible, the degree of unreliability and uncertainty that is objectively inherent in the future.

1.4. The correctness of risks means that throughout the evaluation, certain formal conditions must be met, which may include:

a) Interval monotonicity, i.e., in a given interval of indicator values, as the intensity of activity grows, the risk value increases, and the uncertainty changes qualitatively in border areas;

b) disproportion, in which a rise in risk is not directly proportionate to an increase in activity intensity (within a certain interval of change in indicators);

c) transitivity, i.e., if the first circumstance is riskier than the second, and the second is riskier than the third, the first situation is riskier than the third;

d) additivity, i.e., if the risk of the first type of activity is equal to - R1, and the risk of the second type of activity is equal to R2, and both types of activity are conducted at the same time, the total risk is equal to the sum of the individual risks, or Rtot = R1 + R2. The aforementioned formal principles appear natural at first glance, but they are not usually followed in reality, or their viability is difficult to determine for various reasons.

1.5. Because of the complexity of risks, they must be considered as a closed system with a hierarchical structure. Initially, there are emergent risks, which are risks connected to the object of study's emergent features and activities, and non-emergent risks, which are risks associated to the object of study's structural components. This principle is sometimes referred to as “consistency,” but the authors believe it is more suitable to refer to it by the proposed name because consistency is always associated with the concept of completion, which is usually unattainable in practice.

1.6. The interdependence of risks suggests that the occurrence of some dangers causes the emergence of others, either automatically or through complicated mediated linkages. The emergence of economic hazards, for example, is inevitably linked to the emergence of social dangers. It should be noted that all non-economic risks can be divided into three categories:

a) those that allow for direct economic assessment already today (damage from traffic accidents, damage from the consumer's delay at the reception point, and so on);

b) those that fundamentally allow direct economic evaluation but lack an information base and algorithmic support today; and

c) those that do not even fundamentally allow economic (direct) evaluation. Noneconomic risks are expertly taken into account in the latter two examples.

2. Methodical principles, that is, principles that are directly tied to the sort of work, its characteristics, value ideas, historical contexts, and so on. If economic hazards are taken into account first, the following principles can be distinguished from the rest of the principles.

2.1. Risk dissonance refers to the fact that any new activity adds something new to the environment. From the perspective of economic risks, it is this specificity that ultimately defines the magnitude of specific indicators, and the larger the risk, the greater the magnitude of new activity dissonance. Dissonant hazards should be taken into account with the help of methodology.

2.2. The presence of diverse areas of activity is linked to varied risk perceptibility, which predetermines the disparity in their interests and attitudes toward potential damages. This subject has already been well discussed. This necessitates a risk evaluation from the perspective of each activity participant (for example, government officials, journalists, bankers, etc.).

2.3. Risk dynamism means that the methodological support takes into consideration the variety of risks and allows for unambiguous characterization of expected process dynamics.

2.4. Risk consistency is caused by the non-synchronization of distinct stages of activity, which results in uneven resource investment, inconsistent aim implementation, and so on. For example, when it comes to economic hazards, the methodological apparatus should account for the presence of inflationary processes. As a result, while examining risk dynamics, they should be reduced to a comparable form, similar to how investment design is done. Risk consistency is linked to the notion that dangers start at a specific time (not earlier or later) and that prevention processes must be synchronized with other processes. The compound interest function, for example, is the weighting function in stationary economies (including ones with no or constant inflation), with the discount rate or discount rate being the most essential component.

3. Operational principles, i.e., principles relating to information availability, reliability, unambiguity, and processing capabilities:

3.1. Risk modeling is concerned with the idea that a model can be used to represent a situation in which hazards exist. The “principle of modelability” should not be confused with the “technique of modeling”; the latter is used to quantify the risk magnitude, while the former establishes the “rules of the game.” Modelability is one of the most significant rules of the third level, and principles are often necessary to identify the “rules of the game.”

3.2. Risk simplifiability implies that when assessing risks, they choose the method that is the “simplest” in terms of information-computational complexity.

As we can see, in the 3.1 it is spoken about “rules of the game” which means that the “control” system of principles is actually a set of criterions of risk assessment - it controls the process of risk identification, analysis and evaluation.

So, in conclusion for this part we can say that “control” system is more universal while “explain” system are much more p ersonalized to the companies in which they are applied like the School we mentioned, COSO or, as another example, European Institute of Gender Equality, which risk assessment principles are specified for their respective field (as it is shown in Figure 3), which is obviously looks like a plan. Personally we prefer the “control” system but there is no shame or inconvenience to use “explain” one.

Figure 3. Risk Assessment principles and steps of European Institute of Gender Equality

Further in the article we will talk about two examples of TNCs in the field of ferrous metallurgy, discuss their systems of risk assessment and whether they are sufficient or not, possibly giving ideas on which principles should be added or abolished.

Risk assessment on the example of Evraz company

Evraz plc is an international vertically integrated steel and mining company with assets in the Russian Federation, the USA, Canada, the Czech Republic, Italy, and Kazakhstan. The headquarters is in London. It is one of the largest steel producers in the world.

1. These are In constant monitoring of risks, their assessment and provision of key persons from the management team. For the manager, the main responsibility will be introduced in risk management and for the anticipated risks that may arise within the framework of the Company's activities.

2. The principle is that the Board of Directors establishes a business strategy based on an established acceptable level of risk.

3. The principle is that in large enterprises responsible authorities are involved. In order to determine, evaluate and prescribe the necessary measures to manage risks at the regional level and the main enterprises of Evraz. All information on these matters is kept by the risk management group in the corporate risk register. Responsible management bodies report to the Risk Management Group and include vice presidents of structural divisions and business divisions.

Also, about the Evraz risk reassessment system, each year in its report shows the change in risk exposure trends as well as a heat map of the main risks and effects of uncertainty, for example, this map looked like this in Evraz annual report in 2021.

And so, having considered the risk management system of Evraz and its principles in risk monitoring. We can draw conclusions from the company's risk assessment system. The main advantages in the risk assessment system are constant monitoring and subsequent reassessment. Thanks to this, the company is using the example of the Coronovirus Pandemic. She was able to avoid catarrhal losses and quickly adjust the coronovirus security system, which is why, despite the decline in income in 2020, in 2021 the company managed to significantly increase its income. However, there is no perfect risk assessment system. In 2022, there was a conflict between Russia and Ukraine.

Figure 4. Principal risks and uncertainties heat map in 2021

And Western countries imposed sanctions, in particular on Roman Abromovich, who is the main shareholder of the company (28.64%). Because of this, the company's shares ceased to be traded on the London Stock Exchange, as well as there were problems with the payment of a coupon on bonds and there was a risk of a technical default. It is still too early to talk about even more damage, but it will most likely be, since the situation is only getting worse so far. Whether it was possible to assess this risk and be ready to solve it, most likely not, however, the company will definitely have to be ready for such risks in the future, so the risk assessment system should better take into account the risks associated with the political situation and better characterize the expected dynamics of the process (Dynamism risk).

As another example, it is proposed to consider the risk management of US Steel.

A little historical digression:

U.S. Steel is an American steel company, the second largest in the United States (after Nucor Corporation) and the 26th in the world in 2017.

United States Steel Corporation was formed in 1901 because of the merger of 9 steel companies. Subsequently, several acquisitions led US Steel to absolute dominance in the US steel casting market.

However, such giants obviously face great risks. For example, personnel risk led to the fact that in 1961 the share of US Steel in the market decreased to 25%. This was due to the growth of the expenditure part (frequent strikes led to a reduction in the working day and an increase in wages)

The loss of market share can often be associated with the fulfillment of sociopolitical risks. Many financial and economic indicators of a company may depend on the policy of the state. For example, the customs policy of the state directly affects the growth of competition from imports.

To reduce this risk, it was decided to diversify the company's activities by purchasing an oil producing company and an oil and gas corporation. Thus, the change in the value of US Steel has become less susceptible to changes in demand for steel and fluctuations in the market as a whole.

But there are risks from which it is impossible to protect yourself. Most often, these are cases when not only heavy industry is experiencing difficulties, but in principle the entire commercial world is close to ruin. We are talking about the crisis of 2008.

Then the value of US Steel shares fell from $ 180 apiece to $20 in six months, which amounted to a loss of almost 90% of its value.

As we know, in the period from 2019 to 2022, the entire planet was subjected to the covid19 pandemic, which led to a reduction in production volumes and, accordingly, demand for steel and petroleum products. At that moment, the corporation was experiencing its lowest-ever quotes in the amount of $6 per security.

But today the situation has changed. The gift of fate was sent from Russia. One of the largest steel supplier countries found itself under numerous sanctions due to the outbreak of a special operation war on the territory of Ukraine. Now the participation of the Russian steel producer and the supplier of oil and gas is expected to be reduced to a minimum, which will allow the company in question to strengthen its position on the world stage of raw materials supplies. For a complete picture of the company's risk management assessment, we suggest reading the annual risk report:

Risk factors Strategic Risk Factors

Our Investments in new technologies and products may not be fully successful. Execution of our Best for AllSM strategy depends, in part, on the success of a number of investments we have made and plan to make in new technologies and products. All of our investments are expected to drive stockholder value creation and deliver an enhanced business model that delivers cost and/or capability differentiation for our stakeholders. Our Best for All strategy is centered around adding mini mill capabilities, including through the construction of a mini mill facility in Osceola, Arkansas, non-grain-oriented steel line at Big River Steel, a galvanizing construction line at Big River Steel and marketing of our new verdeXTM product line and new advanced high strength steel XG3TM products, which are completed at our PRO-TEC joint venture. Additionally, as with any significant construction project like the construction of the new mini mill in Osceola, Arkansas, we may be subject to changing market conditions and demand for our completed projects, delays and cost overruns, work stoppages, labor shortages, engineering issues, weather interferences, supply chain delays, changes required by governmental authorities, delays or the inability to acquire required permits or licenses, the ability to finance the projects or disruption of existing operations, any of which could have an adverse impact on our operational and financial results. Furthermore, new product development or modification is costly, may be restricted by regulatory requirements, involves significant research, development, time, expense and human capital and may not necessarily result in the successful commercialization of new products, or new technologies may not perform as intended or expected. Unsuccessful execution of these strategic projects, underperformance of any of these assets or failure of new products to gain market acceptance could adversely affect our business, results of operations and financial condition and may limit the benefits of our stockholder value creation strategy.

From time to time, we engage in acquisitions, divestitures and joint ventures and may encounter difficulties in integrating and separating these businesses and therefore we may not realize the anticipated benefits.

We seek growth through strategic acquisitions as well as evaluate our portfolio for potential divestitures to optimize our business footprint and portfolio. The success of these transactions will depend on our ability to integrate or separate, as applicable, assets and personnel in these transactions and to cooperate with our strategic partners. We may encounter difficulties in integrating acquisitions with our operations as well as separating divested businesses, and in managing strategic investments. Furthermore, we may not realize the degree, or timing, of benefits we anticipate when we first enter into a transaction.