Rolls Royce's Credit Risks and Their Potential Impact on the Investment

BUSINESS AND MARKETING
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Introduction
During its operations, a business can register and report encouraging results. However, sudden impacts of unprecedented and unexpected events could lead to sharply reduced financial performance (Kim et al., 2021). Similarly, there could be a need to reevaluate the business expectations and goals (Nocco and Stulz, 2006). In such a situation, a business may respond to the crisis by undertaking several significant rapid actions (Schelper et al., 2021). For instance, the entity might have to look for ways to minimize its expenditures, review its research and development efforts, invest in strategic programs, and promote digitalization (Choi et al., 2016). Therefore, concerning the Rolls Royce PL case study, this report aims to identify credit risks and their potential impact on the company's investment. Moreover, this work strives to determine the current business continuity strategies implemented by Rolls Royce PL and recommendations for improvements. It will further explore the company's governance nature and possible improvements.
Part A
There are various critical areas of credit risks and their impact on the investor's potential to invest in the company. The first instance is the default risk, which affects the borrower in the case of Rolls-Royce failing to make payments on its debt obligations (Çığşar, 2019). Consequently, according to Tang et al. (2010), investors could experience significant losses, reducing their willingness to invest in Rolls-Royce Plc's financial instruments. Counterparty risk is when one party to a contract fails to fulfill its obligations (Teresiene and Gudaviciute, 2021). In the case of Rolls-Royce, this could include the risk of suppliers or customers failing to meet their obligations or of the company failing to meet its obligations to its creditors (Caouette et al., 1998). Mäntysaari and Mäntysaari (2010) assert that these risks could significantly impact investors' willingness to invest, as they could result in financial losses. The third peril is liquidity risk, where a company cannot meet its financial obligations due to a lack of liquid assets. For Rolls-Royce, this could include the chance that the company cannot meet its debt obligations due to a lack of cash (Venkat and Baird, 2016). Thus, Rudhani and Balai (2019) note that investors may not invest in a company with a high risk of default due to a lack of liquidity.
The fourth credit risk is the Interest Rate Risk. In this case, a company's debt obligations become more expensive due to increased coupons (Sweeney and Warga, 1986). The entity's ability to fulfill its financial obligations will reduce and could result in investors being unwilling to invest in its financial instruments (Hassan and Zhang, 2021; Mouna and Anis, 2016). There is also the currency risk, whereby there is a possible impact on the company's assets or liabilities upon changes in currency exchange rates. Bartram (2019) suggests that investors may be unwilling to invest in Rolls-Royce's financial instruments because they may experience significant losses due to currency fluctuations.
Part B
Rolls-Royce Plc has a well-developed business continuity strategy that includes proactive and reactive measures (Kong, 2022). Proactively, the company has taken steps to ensure that its operations remain resilient in the face of potential risks, such as investing in advanced technologies, diversifying its workforce, and investing in contingency plans (Hool et al., 2022). The company also has a comprehensive risk management plan that is regularly reviewed and updated (Hubbard, 2020). Furthermore, it has an extensive disaster recovery plan in place designed to ensure that operations can continue in case of disruption (Willumsen et al., 2019). This plan includes strategies such as redundant I.T. systems, backup power sources, and detailed business continuity plans (Qvist-Sørensen, 2020).
Additionally, Rolls-Royce Plc has established a crisis management team responsible for responding to potential disasters and mitigating their effects (Thakur and Hale, 2022). It has implemented a range of reactive measures to reduce the potential impact of disruptions (Fearne et al., 2021). These include regularly conducting business continuity exercises and reviews, ensuring adequate insurance coverage, and training staff on responding to disruptions (Fani and Subriadi, 2019; Zeng et al., 2017). Overall, Rolls-Royce Plc has taken a comprehensive approach to business continuity and has taken steps to ensure that its operations remain resilient in the face of potential risks (Hoang and Phang, 2021). The company is committed to mitigating the impact of disruptions and taking proactive steps to guarantee the continuity of its operations.
As part of its overall Business Continuity Management strategy, there are some suggestions on areas Rolls-Royce Plc should consider improving concerning its business continuity approach. For instance, the company should continue to focus on further improving its business continuity strategy (Niemimaa et al. 2019). This could include updating its risk management plan to have new and emerging risks and ensuring its contingency plans are up-to-date (Fraser et al., 2021). Additionally, it should continue to conduct business continuity exercises and reviews to ensure that its strategies are effective and that staff is adequately trained (Păunescu et al.,2020).
The company should also consider investing in new technologies, such as artificial intelligence and machine learning to identify and manage potential risks (Leo et al., 2019). Some measures the business can consider include establishing predictive analytics systems to anticipate disruptions and developing advanced data security systems to protect against cyber threats (Song et al., 2019). Rolls-Royce Plc should also increase its collaboration with other businesses and organizations to share best practices and insights into potential risks (Planko et al., 2019). This could include participating in industry forums and working with research institutions to understand potential risks better. By taking a proactive approach to risk management, the company can be better prepared for any eventuality.
Part C
Rolls-Royce Plc has demonstrated strong leadership in its corporate governance (Roll-Royce, 2021). The board of directors comprises independent, experienced, and diverse representatives with various backgrounds, skills, and perspectives (Krok et al., 2019). This diversity allows for a wide range of perspectives to be considered when making decisions. The board of directors also sets the company's strategic direction and is accountable to shareholders for the company's performance. The U.K. Corporate Governance Code requires that the board be effective in its decision-making process, and Rolls-Royce Plc has demonstrated this (Elmagrhi et al., 2020). The board has established several committees to assist in decision-making, including the Audit Committee, Nomination Committee, and Risk Committee. These committees help ensure that decisions are thoroughly considered and discussed before they are executed (Aladwey et al., 2022).
Additionally, the board of directors holds regular meetings to review the company's performance and strategy. Regarding remuneration, Rolls-Royce Plc has also demonstrated strong governance in terms of compensation. The board of directors set up a Remuneration Committee responsible for setting the payment of executive directors (Roll-Royce, 2021). The committee ensures that remuneration is fair, reasonable, and linked to performance. The Remuneration Committee also considers the company's long-term objectives and the competitive environment when setting remuneration levels.
Part C (I)
This report recommends further improvement in the governance of the business with respect to leadership, effectiveness, and remuneration. Rolls-Royce Plc could further improve its leadership by increasing the number of independent directors on the board. Independent directors bring a unique perspective to the board and help ensure decisions are executed in the company's best interests (Al-Matari, 2020). Additionally, the company could use additional measures to ensure that the board is diverse and representative of its stakeholders...