Case study 2: Dealing with Risk and Uncertainty Business & Marketing

Dealing with Risk and Uncertainty
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Dealing with Risks and Uncertainty
Introduction
Risk and uncertainty are two terms that any business professional should be aware of as they have the potential to bring down an entire company or steer it to greater heights. The likelihood of a tragedy in a business environment to occur as a result of pursuing a course of action is termed as risk, whereas uncertainty refers to all unforeseeable future events that cannot be quantified (Brillinger et al., 2020). Risk qualify as a form of uncertainty that can be predicted and measured. Failure by companies to establish a robust risk management plan exposes them to dangers that the future holds for them. While risks and uncertainties pose threats to growth and development, cleaver and professional approaches towards risks breed unimaginable benefits.
The year 2020 has been a stumbling block to almost every viable business organization. Companies have been struggling with the risks of running bankrupt due to the COVID 19 pandemic that has interrupted the business world like never before. Gas and oil industry has been the worst-hit, and most of the companies are now struggling to recuperate from the numerous risks that the pandemic unleashed. Chesapeake Energy (CHK), an Oklahoma based oil ad gas giant, is on the verge of filing for bankruptcy owing to the oil price, supply, and demand risks. Whiting Petroleum, a CHK peer, has already succumbed to the bankruptcy risk due to the volatile oil prices with reduced demand due to the COVID 19 restrictions (Egan & CNN Business, 2020). CHK has opted for a Restructuring Support Agreement (RSA) and while at the same time halting dividends on stock (Chesapeake Energy, n.d.) to evade the impending bankruptcy.
CHK Recent Actions
The US government, through its Chapter 11 bankruptcy code, offers an opportunity for a corporation that has been overwhelmed by risks and uncertainties to reorganize and keep the business running (Iverson, 2018). Owing to the tremendous amounts of debts, CHK opted for the Restructuring Support Agreement (RSA), a Chapter 11 plan that would allow the company to reorganize its business and hopefully offset the debts threatening bankruptcy. Additional measures to salvage the once giant of oil and gas include a $925 million debtor in possession package, $2.5 billion exit financing, and a $600 million worth of rights offering during the Chapter 11 contract period (Chesapeake Energy, n.d.). Earlier in April 2020, CHK suspended dividend payments to remain competitive in the stock market.
The move by CHK to suspend dividends as well as signing of the RSA contract is a clear indication of financial struggles and an attempt to avert bankruptcy risks. Also, by virtue of being a corporation, CHK eliminates the risk of individual personal liabilities. Filing for bankruptcy and any other chapter 11 plans are some of the options to alleviate debt risk. However, some approaches can help tackle the impending dangers more proactively. Financial crises start with an unpleasant market share. Reviewing the market operations and objectivity would have been a good start. Also, expenses in useless operations need not be an option. Most importantly, the company ought to have an elaborate risk management framework and a resolution plan to limit the company against excessive risk-taking that might lead to insolvency.
Adverse Selection
Another familiar term in the world of economics is adverse selection. A scenario in a business environment that places two participants, for instance, a buyer and a seller, completely at contrasting positions with the likelihood of one or the other exploiting their advantage gives rise to adverse selection (Klein et al., 2016). An adverse selection has played out quite well in Chesapeake Energy in the recent past on matters relating to employee layoffs. Reuters reported in April that the oil company laid off over 200 employees, half of whom were based at their headquarters in Oklahoma, while the other magnitude was in their different oil fields (Reuters Staff, 2020). According to Chesapeake Energy, the layoffs were in response to the adverse effects on businesses that were caused by the COVID 19 pandemic. The layoff process, however, results in adverse selection when the workforce is reduced based on their capabilities and capacities at the company. High ranking employees are more likely to be entitled to huge compensations amount as opposed to their counterparts on lower levels. Layoffs during the unprecedented time of the pandemic are excusable, and companies on their deathbeds like Chesapeake Energy might use a skewed selection process to their advantage to avert huge compensations.
Layoffs based on seniority and workers' ability that the company learns in the course of employment give rise to the adverse selection problems. To evade the effects of the problem, the company ought to exhaust all other options before making the final decision. Furlough, for instance, seems like a better option, both to the company and the employee, as opposed to layoffs. It would also be fair if the company made public the selection criteria to earn the trust of the employees. If it becomes the only option, the company ought to have stipulated the seniority rules in regards layoff process during the employment contracts. A skewed selection process is more likely to result in legal battle. Therefore, it is vital to consult a legal expert on HR matters.
Moral Hazard
Moral hazard is a rampant problem in the insurance and banking industry. Just like the adverse selection problem, the moral hazard problem plays out in other domains, primarily on employee layoffs and unemployment. To best describe what moral hazard is, take the case of a person who has insured his housed against fire hazard. The notion of being insured makes the person less vigilant about fire hazards, leading to moral hazard effects (Klein et al., 2016). The moral hazard problem arises in an employer-employee scenario when a person insured against unemployment cheaply signs up for voluntary layoffs, bearing in mind that they stand a chance to...