Risk Management in a Real Estate Developer Company: Evergrande Group

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Table of Contents

Introduction
Occurrence of Risk in Relation to Economic and Legal Implications
Risk Management Plan
Summary
Reference List

Introduction

The Evergrande Group, also known as Evergrande Real Estate Group, is a substantial Chinese property developer company. Over the years, the company’s success has played an important role in the growth and sustainability of the Chinese economy (Sun and Cao, 2021, p. 534). It contributes about two percent of the Chinese gross domestic product, and some experts have labeled it as a ‘too big to fail’ company (Oxford Analytica, 2021). However, the socioeconomic impacts of the ongoing COVID-19 pandemic have pushed the company beyond its limits. The purpose of this report is to study the risks Evergrande Group is facing.

Occurrence of Risk in Relation to Economic and Legal Implications

Definition of Risk

Risks are common in the corporate sector and are known for blocking organizations from achieving their financial goals. Risk is an exposure in a business or corporate setup that could lead to financial losses or business closure (Bucciol and Miniaci, 2018, p. 160). Risks are quantifiable, and their impacts can be predicted depending on their nature, cause, and intensity. With a proper risk management plan, organizations can prevent or reduce the impact of risks. However, it is more profitable to prevent the occurrence of the risks as much as possible.

Difference between Risk and Uncertainty

Studies have shown a close relationship between risks and uncertainty in that the latter is the worst-case scenario of the former (Hahn et al., 2017, p. 118). In other words, uncertainty is the super-set of risk, and its impacts cannot be predicted. Usually, it is easy to handle risk, depending on their intensity, by preventing them or mitigating their impact (Acemoglu et al., 2017, p. 54). The risks can be measured by quantifying their impacts, something that cannot be done with uncertainty. It gets to times when the impact of a known risk cannot be fully comprehended, making it difficult for a given institution to act appropriately on the risk (Pereira et al., 2021, p. 152). The situation is known as uncertainty, and the company struggles to take corrective measures such as counter investments (De Groot and Thurik, 2018, p. 24). It should be noted that the relationship between the two does not make the same.

Origins and the Nature of Risk

The French first coined the term risk as “risque” meaning shock or uncertainty (Aladağ and Işik, 2021, p. 5). The word was later adopted by the English as ‘risk’ and interpreted negatively. The latter associated it with danger, damage, or loss which has never been a good thing for anyone. The English seemed superstitious in their interpretation and perception of risk (Bouwer, 2019, p. 63 ). There are four main types of risks, as observed by Hopkins (2017), including compliance, hazard, control, and opportunity risks. The ideal sources of the risks vary, but their impacts are related in that they affect an organization’s ability to reach its financial goals (Ramani and Bloom, 2021). Risk analysis begins by establishing when something could get out of control. The analysis weights the likelihood of the negatives happening against the probability matrix, which helps determine the potential impacts of the risk.

Business and Societal Setting

Evergrande Group was initially called Hengda Group and was founded in 1996 by Hui Ka Yan (Hidalgo-Martinez, 2021, p. 1). It is a 500-fortune company, ranking as high as number 122 in the Forbes top company list (Muvunza and Frantz, 2020). It is based in the Nanshan District of Shenzhen in the southern province of Guangdong. The company has invested in several businesses and operations, including real estate development, food, and agriculture, health, sports, recreation and tourism, finance, and entertainment (Nie, 2019). This makes it a diverse investment which could translate to varied challenges in its operations and management. However, real estate and property development are its main venture, accounting for more than half of its revenue (Nie, 2019; Shen et al., 2017, p. 165 ). The company is currently facing a huge financial crisis that has resulted in its liquidity.

The Evergrande Group is based in China, the most populous country in the world. As of 2020, the company had 123,276 employees working in its different domains and subsidiaries. The company mainly carries its projects and businesses where it has completed over 1800 projects in about 20 years (Hidalgo Martinez, 2021, p. 5 ). China is the second-largest economy and one of the fastest-growing, a factor attributed to the company’s fast growth. With massive property development projects in the Country, Evergrande has secured lucrative contracts, immersing lots of wealth (Nie, 2019).

Identification of Risks in the Context of Economic and Legal Implications

Compliance Risks

The Evergrande Group operates under strict regulations put in place by the Communist party, posing a great compliance risk (Noesselt, 2020, p. 546). Chinese companies have staked heavily on mega construction projects inside and outside China. Evergrande’s decision to buy overseas bonds has turned out to be a bad investment. The company is at all times required to operate in line with the government rules and regulations on safety and environmental pollution. The regulations might challenge its ability to do business as usual. The company risks punishment in the form of fines from the government in response to its financial woes(Zhang, 2020, p.141)

Hazard Risks

The company faces hazard risks in almost all of its operations as it highly depends on nare to complete its projects. As mentioned earlier, Evergrande Group has invested in different industries including real estate and development, health, among others. The real estate, property, and development division is the most prone to natural and artificial hazards such as floods, fires, earthquakes, and storms. Drug and substance abuse among the company employee is also a potential hazard that could impact their decision-making capabilities Marzouk and Aboushady, 2018, p. 447). In other instances, technology could pose great hazard risks to the company include cyber espionage and hacking on company information systems or power outages (Marzouk and Aboushady, 2018, p. 447).

Control Risks

Evergrande Group is facing critical control risks in its operations that risk its future. The company has invested in different industries, which could prove challenging to manage. The company’s different branches, domains, and subsidiaries operate collectively. Miscommunication or misunderstanding among the different departments could jeopardize the company’s ability to execute its projects on time, resulting in losses. The lack of relevant internal control measures risks misquotation of financial statements, affecting a company’s future ability to finance its projects. In this case, the company executive made a fateful decision: to buy bonds overseas. The financial investment resulted from decisions made by its management and has turned out to be disastrous.

Opportunity Risks

The company faces opportunity risks as it ventures to invest in various projects. Opportunity risks occur when companies use resources on projects that do not return on investment as projected. The resources used in such projects cannot be regained, forcing the companies to write off losses in their records (Tang and Wang, 2017, p. 1). As for the Evergrande Group, its massive investments in development projects across China and worldwide were mainly funded by bonds. However, the global pandemic drove down property prices, making it difficult for the company to pay its debt (Rein, 2017, p. 83). Having spent investor money and not facing slow property rates, the company is facing a great opportunity risk.

Risk Management Plan

Risk management refers to the process of identifying and eliminating or reducing the effect of known risks on a company’s financial performance or resources. The risks facing business organizations come from within and without, and the levels of their impacts are different. The management plan tackles all kinds of risks affecting business: financial, legal, technological, reputational, strategic risks, and natural disasters. An effective risk management plan must address all forms of risks, identify the most imminent and propose mitigation measures (Carreño et al., 2017, p. 258). The plan should also establish and explain any relationship between different risks and how they affect the overall organizational performance. It should present a clear methodology for risk identification, present control measures, and prudent corrective actions. The plan should include a detailed review and validation procedure, alongside a detailed policy statement on the frequency of review (Bahamid and Doh, 2017, p. 20).

Control Measures

Risk mitigation measures are an important part of the risk handling process. While risk management plans seek to reduce the impact of risks or, if possible, prevent them from occurring at all, the latter is more effective. This is what control measures are meant to achieve in a disaster management plan. Referencing the risks discussed above, the Evergrande Group should implement actionable control measures to reduce the impact of such risks in the future (Shen et a., 2017, p. 372). The measures should also be able to prevent the risks from occurring, if possible. Currently, the company is facing a huge financial crisis due to its financial projects and the global pandemic facing the world at the moment. In a nutshell, the company should develop policies that guide its employees on what to do should such pandemics occur again.

Control measures for compliance risks

Evergrande is required to operate in compliance with rules and regulations set by the national and regional governments. The regulations are meant to ensure standardization of safety to workers and residents. Failure to comply with the rules risks fines, cancellation of contracts, or accidents that could cause loss of lives and property. The company should hence operate within the rules and regulations. However, if the rules challenge the company’s ability to carry out its businesses, it should lobby with the government to lessen them while embracing safety.

Control measures for hazard risks

Hazard risks mainly result from natural and technological sources that potentially pose a danger to people and resources. To prevent the occurrence of these kinds of risks, the company should take all necessary measures such as the installation of lighting arrestors, constructing effective drainage tunnels, and reinforcing loose walls on hillsides. Other measures include an adequate study on soil structure before starting constructions, employee training, and installation of safety management systems.

Control measures for control risks

Control risks are closely related to human error and ignorance, making them more lethal and frequent than other forms of risks. The company should first instill proper management tools and resources to guide management staff and other employees to prevent them from happening. The company should also put management rules and regulations, employee code of conduct, and financial reporting policies in place. Implementing disciplinary measures against errant or corrupt employees could reduce the chances of deliberate mistakes among the company staff. Lastly, the company should automate financial and accounting services whenever possible to reduce the chances of human error.

Control measures for opportunity risks

Opportunity risks are devastating to both small-scale and large companies, which could lead to business closures. Opportunities enable companies to grow in revenue, expand their market reach and acquire or develop new products and technologies. To prevent the occurrence of this kind of risk, the company should conduct thorough research on the project and target market. It will help determine the profitability of the project and unearth any other potential risks. The research should consider the risk on investment, payback time, culture and values, and of the target population any other market-related information. The company should also put in place an effective quality assurance plan to prevent any losses from investment. The company should also embrace active measures that check on its growth and investment in risky projects. Lastly, it should insure its projects against potential risks. This will ensure the company is compensated in case of losses.

Corrective Actions

Corrective actions are an essential part of a risk management plan, which are implemented after a risk has occurred. For instance, Evergrande Group is in its worst financial crisis, which has cast uncertainty on its survival and future (Milcheva, 2021, p. 5). A company’s inability to achieve its financial goals has never been an easy task for the management (Muriana and Vizzin, 2017, p. 320). As for Evergrande Group, the causes of its current crisis are well known, and there are several alternatives that could either see the company’s survival and prosper again or collapse. The company can seek a bailout from the government at the moment to ensure it remains operational. The company could also default its operations which could have a huge implication on the global economy. All in all, the company should review its management operations to ensure it foresees high-impact disasters in the future.

Corrective action for compliance risks

Corrective action for compliance risks is the measures taken in response to rules and regulations that have been broken. As for Evergrande, the company should begin by negotiating with its debtors to service its debts. The company should also seek alternative sources of revenue to finance its projects in order to remain operational. The revenues should be acquired in line with the debt limits set by Beijing.

Corrective action for hazard risks

Hazard risks are lethal and should be acted upon as soon as they occur. Reactive measures against this kind of risk include providing first aid to fire and other disaster casualties or drainage of flooded water. Other measures investigate the causes of the disasters, evaluation of the impact of the disasters, and compensation for losses caused by the hazards. The company should formulate policies to prevent the occurrence of such incidents in the future.

Corrective actions for control risks

The company is in its current situation because of poor decisions made by its management personnel. The damage has already been caused, and the company stands to lose. Some of the proactive measures that the company can take include the dismissal of those who made the decision. The company can also train its employees on critical decision-making skills to avoid such scenarios in the future. The company can also put measures that check on the powers of some individuals within the company if found incompetent.

Corrective action for opportunity risks

Opportunity risks cost organizations a lot, affecting their overall financial performance. As for Evergrande, the company should share the risk among different departments to reduce its impact in the aftermath. The company can also take the risk at the expense of other opportunities. The company can also change the consensus of the risk by seeking a bailout from the government or other financial institutions.

Record-Keeping and Review Frequencies

Documenting and reviewing the impact of risks is an essential part of any company business. Risks challenge a company’s ability to achieve its financial goals, announced at least quarterly (Sperotto et al., 2017, p. 320). The finance department should take full responsibility for risk management and control. As a result, risks should be documented before the beginning of a financial period. It implies that the risks should be reviewed and documented four times a year. The risk management plan should be reviewed before the beginning of the company’s fiscal year. It will enable the company to put relevant, actionable, and effective management measures before risks occur during the given financial year.

Summary

The report introduces the Evergrande group, its business and societal setup, and the company’s risks. It explores the origin and nature of different types of risks such as compliance, hazard, control, and opportunity risks. The report profoundly explores the different types of risks and presents a detailed disaster management plan. The plan presents preventive and corrective measures for each type of risk discussed herein. The preventive measures are meant to ensure the risks do not occur. The corrective measures reduce the impact of the risks after they have occurred. It completes by presenting a record-keeping and review recommendation.

Reference List

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