Enterprise Risk Management - Lehman Brothers - Assignment Example

Critical Incident Analysis: A Case Study of Lehman Brothers By [Presented to] of Executive Summary With the turn of the 21st century there has been a lot happening in different nations across the world. There have been dynamic changes which are sweeping nations with development and attractive activities adding to the prosperity. Beside the success stories of development and an increasing number of successful companies emerging from different corners of the world, there are also reports of crisis engulfing corporate giants creating a ripple of financial crisis which wrecks havoc on the entire economic system of the world. Such is the case with the Lehman Brothers. The collapse of the Lehman Brothers in the year 2008 due to bankruptcy there was a grave financial crisis not only in the US but across the entire world. In the 21st century the different economies of the world are closely connected with economic and bilateral ties which make one dependent and linked to the other. As a result, an event or incident taking place at distant corner of the world would invariable have an impact on the rest of the nations of the world, because they are connected to each other in one or more ways. In this paper, the researcher takes up crisis as the event of discussion in this paper. For convenience of study the entire paper is divided into a number of sections and discussed. Firstly, the researcher defines crisis, states the different types of crisis, makes a discussion on the impacts of crisis, talks about crisis management, the importance of crisis management and finally does a case study of the Lehman Brothers. Lastly, the researcher draws the conclusion based on the entire discussion throughout the paper. The conclusion again verifies and validates the belief held by the researcher about the corporate crisis and its impact on the entire economy of the world. Contents 1. Introduction 4 2. Definition of “crisis” 5 3. Types of crisis 6 4. Impact of crisis 7 5. Crisis management 8 6. Importance of crisis management 9 7. Case study: Lehman Brothers 10 8. Conclusion 11 References 12 Introduction The organisation or a company is a single body comprising of a number of departments, the departments are again formed by a number of employees designated with particular job responsibilities. The structure and its entire range of its functioning make it a complex structure which needs efficient and strategic planning. The smooth functioning of a company is essential for the commercial success of the company and even for a strong foundation for the entire economic structure of the country. Countries with a number of successful companies are the ones with affluent economic condition. The close connection between successful companies and economic condition of a country can also be made out from the fact that with the crippling of a significant company can break the entire backbone of a country, dislodge a series of crisis for a longer period of time. Proper functioning of the companies is thus very much important. The functioning of an organisation or the company thus becomes a complicated process and subject to a number of risks, in case of mismanagement of emergence if any unwanted situation. It is very much a part of the entire process like the business transactions, making profit or incurring losses. Crisis is one of the unwanted situations inside the company which can cause havoc damage to the company. The great financial crisis in the late 2000s which engulfed the entire world and its economies was caused by the crisis in one of the significant companies. This highlights and bears testimony to the fact that though the companies are individual entities yet they are not entirely detached from the country and their functions have direct impact upon its nation and even to the related nations thus spreading its impact across the world. This paper presents a detailed discussion and report about the critical incident analysis with special reference to the case study of the Lehman Brothers. The collapse of this company brought down the entire financial system of different nations across the world. Definition of “crisis” According to the observations of Borodzicz (2005) crisis is an unwanted event or incident which unleashes a number of more events which destabilizes the set up, jeopardizes it which affects a number of individuals, group, community, the whole society or the entire country. Crisis enforces change; the change is always negative in nature. It brings negative changes in the security, economic, political, social and environmental affairs. The nature of changes due to a crisis is abrupt and comes with no warning at all. This is why it creates greater damages in absence of any back up plan which could minimize the impact of the crisis. It is also defined as an uninformed and abrupt change which disturbs the normal way of life and brings in negative consequences. In case of the Lehman Brothers, the company went bankrupt in the year 2008. Due to the lack of availability of fund, the entire company collapsed. The stakeholders of the company suffered greatly. As the company was interconnected to a number of other companies even they stopped functioning. The incident of bankruptcy of the Lehman Brothers is a crisis because it suddenly closed down the entire company. Due to the dependence of other companies it affected their performance as well. It hugely damaged the reputation of the company. The incident of bankruptcy did not only affect the Lehman Brothers but also the other companies. There could be a number of reasons which causes crisis in a particular company or organisation. The reasons could be analysed as firstly, poor functioning of the system. Crisis could be in a family, society, and organisation or in any company. Secondly, the crisis could be caused by sudden change in the elements of the market can subject a market and the companies to crisis, where the company fails to cope up with the element. Thirdly, crisis could be caused by change in the policy of a company which triggers negative response from the market, investors and customers as a whole. This generates a sense of disapproval amongst the stakeholders of the company who lose their trust and confidence on the company and draws away from the company. It renders the company with lack of funds and financial assistance for it to function and perform. Fourthly, there could be a change in the Board of Director which means a change in the leadership which directs the company. In case of wrong leadership it could land the company in trouble and crisis would begin to surface. Bankruptcy due to mismanagement of the company and fund allocation led to the development of acute shortage of funds. Operating such a giant financial corporation without sufficient funds was impossible which led to its collapse. Along with the collapse of the Lehman Brothers the companies related to it also stopped functioning. This sent a rippling effect across the different nations of the world where one after the other, companies closed down leading to unemployment of thousands and rendering others jobless and homeless. This is one of the most negative situations ever faced by the population of the country. Case Study: Lehman Brothers In the recent memory, in the year 2008 Lehman Brothers were bankrupted which held more than $600 million dollars in its assets. This bankruptcy triggered a chain of events which engulfed the entire nation and not only that but other significant economies of the world. The Lehman Brothers is a financial services company which used to offer financial services and solution to different international companies. With the filling of the bankruptcy all the related companies received a huge financial setback that crippled the financial system of the entire world. This particular incident was one of the most significant and devastating crisis of the recent times. Crisis is one of the most critical incidents which have its impact on the affected entity for the longest possible span of time. When the financial crisis hit the Lehman Brothers, it even affected the related companies across different nations of the world. Besides affecting its performance and financial gain, it has devastatingly affected the reputation of the company. It sent the economy of the not only US but the entire world into great recession. As a measure to the crisis the company sent a signal to its investors regarding the approaching trouble but it wasn’t sufficient enough to be considered as a warning for the crisis. As a result the companies suffered with the crisis and it took massive shape. The crisis management team had to work in the post-crisis period. Types of Crisis According to the observations of Mitroff (2005) there are a number of crisis which can affect the company and cause related damages to the company. The author even said that there are no specific types of crisis and they are not static, the types of crisis changes with time and its veracity of impact also changes with time. However, the conventional types of crisis are firstly, facilities crisis. According to Wisner et al., (2004) facilities crisis is the type of crisis which is caused by any explosion, fire or leakage at the plant or at the company or at any significant building of the company which can seriously disturb the functioning of the company. Damage to the buildings will cause managerial problems; important documents would get lost and hence create disorder in the entire company. Damage to the production plants would stall the operations which could cause havoc financial damage to the company. Secondly, it is the community crisis. According to the author community crisis is created by a number of policies by the organisation which is opposed by its elements or an unfavourable situation created by other organisations or group of people who are opposed to the company or its mission. Such situations are very common crisis which are tackled by the expert management of the company. Thirdly, it is the employee crisis which is one of the worst crises for a company which stalls the operation of the company and does great damage to the working spirit of the company. It is brought by the death of an employee and agitation of the employees regarding the death, or displeasure of the employees and related unwillingness to work. Fourthly, it is the consumer crisis which is often caused by rumours against the company, dissatisfaction of the customers from the products, or substandard performance of the company due to which a company lose most of its consumers. Fifthly, it is the image crisis which the companies have to care for and deal with. Lehman Brothers experienced financial crisis which gravely affected it. The crisis which has been experienced by the Lehman Brothers is the financial crisis which devastated the company and also affected a number of other companies related to it. The sudden collapse of the company unleashed a number of related activities which even affected their functioning and made them run out of funds. Those companies also closed down and the number of unemployed reached great heights which shook the trust of the stakeholders on the company and did a permanent damage to the image of the company. The crisis of the Lehman Brothers was a financial crisis but it spread to greater significant areas and engulfed the entire commercial sector across different nations. Impact of Crisis According to the findings of Bettio et al., (2012) crisis has a number of impacts on a number of elements simultaneously. It does not only affect a particular element of the company. For instance, the sudden bankruptcy of the Lehman Brothers forced it to stop the operations. Not only this, it even forced the company to shut down. As a result the other companies depending on it and deriving facilities from it also got affected. This made huge number of people unemployed and pushed them to uncertain future. Apart from the financial dent it also created a very unreliable reputation for the company which would get reflected in the market response for a long time. It will give rise to a number of speculations among the investors, consumers and the entire market as whole. Thus, a crisis has a wide number of impacts on the company. Slatter (1984) stated a number of impacts which is being brought upon a company by a crisis. Firstly, it disturbs the usual flow of the company or halts its working procedure. The crisis jeopardizes the activities of the company, its production and other operations. It interferes with the system and disturbs it. Restoring the working flow would take a long time and restoring the customer faith into the company is even subject to considerable time and effort from the company. Secondly, it creates managerial problems. The management of a company works according to specific plans and procedure. The crisis disturbs the plan, during the crisis, the elements considered for managing gets distorted and the management plan gets disturbed. Due to the lack of proper management it further complicates the process of resolving the crisis. Thirdly, crisis has direct impact on the financial status of the company. The crisis highly disturbs the operation of the company which has direct implications on the sales and performances generating revenue for the company. So, when the company is hit by crisis it invariably experiences financial setback. Fourthly and most importantly any crisis has a greater impact on the image of the company to its stakeholders. In the wake of a crisis it is the image of the company which gets affected and is one of the most difficult tasks to restore it to its stakeholders. Due to the impact of crisis the entire Lehman Brothers closed down. The impact of the crisis depends of the nature of the crisis and its gravity. Lehman Brothers was a giant offering financial services to a large number of companies across the world. When the company closed down due to lack of funds, the financial services to a number of companies was stalled this again affected their performance and created a negative image in the eyes of the stakeholders. The magnitude of the crisis was such that it crippled the entire economy of the world. There was a great financial depression which took a long time to recover from. Crisis Management According to the study and observations of Sahin (2008) crisis management is a broader concept which has to be studied and understood in its entirety. It cannot be segregated as a single action but a series of action directed at a specific goal. The author further said that he would not like to frame crisis management into one single, formal definition but explain the concepts which led to the existence of crisis management. Mitroff et al., (2010) in their study stated that crisis is any situation or event which can, even for a shorter duration of time, cause harm to the constituents of the institution, its facilities, finances or even to its reputation. It could be an incident or event or a series of events which could cause the above mentioned outcomes. With the nature and working procedure of the present corporate houses, it is increasingly becoming important for the companies to be prepared to tackle any emerging or occurred crisis immediately. If not tackled from the very beginning it could take grave shape and cause more damage than it could have had if not taken care of from an early stage. Crisis management is explained as an art of making decisions, in the wake of crisis minimizing its effect. The decisions taken during a crisis is also very much important for the future of the company. A particular emerging or occurred crisis is being controlled and managed by a group of people commonly known as crisis managers. The management of crisis is a lot more difficult and thus it is carried on in different stages through a number of activities. Firstly, it is planning. Through planning the crisis manager gets the company into the best position for reacting to the crisis or recovering from it. Secondly, is incident response where the manager has to ensure that the organisation makes an orderly and proper reaction to the incident, which could be evacuation of the place in case of any bomb detection. Third step is crisis management which takes into consideration planning, response and even dealing with the crisis. Unfortunately and astonishingly, there was no crisis management mechanism deployed in the Lehman Brothers. Had there been a crisis management team it could have assessed the approaching danger which sunk the company. The magnitude of the crisis was such that it could not be managed but only assessed. The post-mortem of the case of crisis of the Lehman Brothers brought forward a number of reasons which are serially responsible for the collapse of the company. Importance of Crisis Management According to the observations of Seely (2013) the management of crisis in a particular organisation is very much important for its survival and maintaining the position in the market. With this reference the authors enlists a number reasons for the importance of the crisis management. Firstly, robust crisis management plan can enable the company to withstand the threats to their survival and oppressive and unfavourable conditions. For instance, the presence of a crisis management system could have prepared the Lehman Brothers to withstand the sudden lack of funds and provide a cushion against it. In such a scenario, it would have provided saved the company from dissolving itself and thereby could have prevented the other companies from getting affected by it. The negative impact of the crisis could have been limited. Secondly, one of the functions of crisis management units is to prepare the company for the crisis from a very early so that they can face the crisis with less possible harm to the company. Thirdly, effective crisis management plans by the companies greatly helps in achieving improved levels of regulatory compliance. Fourthly, during crisis the communication skills and effectiveness of the communication channels are tested. This enables the company in getting assured of their communication channels as effective ones and in case of the fault with the communication system or its procedure rectifications are made according to the needs and requirements. Fifthly, crisis management prepares the company in advance for any possible crisis; this saves the financial stock of the company as well as its reputation on being able to minimize the impact of the crisis. A crisis hit company suffers with bad reputation which again harms its financial gain. Sixthly, crisis management involves planning for the advancing crisis. This lets the company form an idea about the probable threats which could take the shape of crisis in the near future and take necessary measures for this. It thus, increases the efficiency of the company in contesting the crisis and not invites more such crisis to the company. Finally, it mentally prepares the company and its employees for the crisis so that they do not panic in rush and take wrong decisions which could add to the chaos and worsen the crisis. The crisis in the Lehman Brothers which had an impact across the world was intelligently taken care of during the crisis. Conclusion From the above discussion it was found that major and even minor business ventures involve certain amount of risks which amounts to crisis after a certain point of time. Crisis is nothing but an incident which brings upon negative impact upon the company and cause havoc damage to it. This makes it one of the most significant elements which need to be managed by a special wing of management, that is, the crisis management team. Crisis could create serious long term damage to the business and at time it even becomes the reason for the collapse of a company. This makes the management of crisis even more important. Proper management of crisis prevents the company from the long term damages and even provides a cushion against the emerging crisis. References Bettio, F; Corsi, M; D’Ippoliti, C; Lyberaki, A; Lodovici, M Samek (2012) "The impact of the economic crisis on the situation of women and men and on gender equality policies". [Online] Available at (http://ec.europa.eu/justice/gender-equality/files/documents/130410_crisis_report_en.pdf) [Accessed on May 20, 2014] Borodzicz, E. P. (2005) Risk, Crisis and Security Management John Wiley, Chichester. DeFeo, B and Adamo, L (2011) "Five Types of Crises". [Online] Available at (http://safety.blr.com/workplace-safety-news/emergency-planning-and-response/emergency-preparedness/11zaa01-Five-Types-of-Crises) [Accessed on May 20, 2014] Mitroff.I. (2005) Why some companies emerge stronger and better from a crisis, Oxford Publishers Mitroff. S (2009) Dirty rotten strategies. Sage Publications Sahin, B; Kapucu, N; and Unlu, A (2008) "Perspectives on Crisis Management in European Union Countries: United Kingdom, Spain and Germany", European Journal of Economic and Political Studies Seely, S (2013) Expecting the Unexpected. The Importance of Crisis Management. 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