140
Greek shipping magnate Aristotle
Onassis built a business empire
that stretched across the world and
incorporated dozens of industries,
and was underpinned by complex
financial arrangements. Onassis
recommended utilizing “other
people’s money,” and while this
approach might yield financial
success, it may end with others
bearing the costs of failure.Traditional risk
In theory, the risk takers in a market
economy are the shareholders, who
effectively “own” the business. TheT
he degree of financial risk
borne by a company has
profound implications for
the long-term viability and success
of the business, its employees,
and its shareholders. A business
structured in a traditional manner
would put the most risk on the
shareholders, since they stand
to lose their investment if the
venture fails. But the proliferation
of increasingly complex financial
mechanisms and means of
accounting have, to a degree,
insulated a business’s owners from
the worst effects of failure.
shareholders’ capital finances the
business start-up, and remains at
risk until it is repaid in full. If the
business liquidates, the holder of
“ordinary” shares (as opposed to
“preferred” shares, which are higher
in ranking and yield dividends
before ordinary shares) is the last
in the line to be paid. The ordinary
shareholder is therefore the least
likely to recover his or her
investment. Because of the risks
they take, entrepreneurs are held in
high esteem. So are early-stage,
venture-capital investors, who invest
in start-ups in return for equity.WHO BEARS THE RISK?
When a business is
financed with debt,
or with other people’s
money......a small investment
in shares can yield
control of the company....while the costs of
failure are largely borne
by the work force...This increases
the chances of huge
profits for the
business owners......and the company’s
middle managers, who
take the blame for
poor performance.Heads I win;
tails you lose.IN CONTEXT
FOCUS
Financial riskKEY DATES
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
market risk (changes in the
value of equity, interest rates,
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
on this change in strategy
fails—the business collapses
in 2001 and shares are
suspended. Nearly 25 percent
of staff is laid off.