Rating of network-integrated corporations.

Abstract While conventional rating systems are still focused on individual companies, in reality stand-alone business of a single enterprise respectively debtor is more likely the exception than the rule. Joint business activities of two or more companies (organizational networks) are becoming ubiquitous and have a critical influence on each partners' success. In order to avoid that rating that turns into some rather useless ritual, network characteristics, such as network assets, network capital, network securities, network management competency, network business opportunities and network structure have to be taken into account when evaluating solvency of a network-embedded corporation. Using primary credit cooperatives as an illustrative object, this paper gives an overview on those new rating criteria becoming relevant in conjunction with network-embeddedness, so that workable opportunities can be shown to improve the reliability of ratings.

Keywords Co-operatives * Co-opetition * Organizational networks * Rating * Value Net

JEL D80 * G10 * G20 * G30

Introduction

Conventional rating systems in business and management, especially in banking, are focused on individual companies. But nowadays, a stand-alone business of a single enterprise respectively debtor is more likely the exception than the rule (Stahl and Eichen 2005). Joint business activities of two or more companies, organized in value networks, are becoming ubiquitous. Often this collaborative entrepreneurship beyond the strict borders of conventional enterprises is not considered by the architecture of rating systems. However, neglecting the complexity of network structures can turn rating into some rather useless ritual. In consideration of new legal frameworks such as Basel II, that continuously raise requirements with respect to validity of rating systems, it is imperative to examine, which challenges rating of network-integration corporations is faced with. Using German primary credit cooperatives, which are integrated into a strategic network called Finanzverbund, as an illustrative object, it can be shown impressively that conventional rating systems have to rise to a broad spectrum of challenges.

The German Credit Cooperatives' Finanzverbund: A Prototypical Organizational Network

There are two paths leading to organizational networks. On one hand, network structures can be a result of eroding trust structures, e.g. going along with spin-offs, carve-outs or leasing (e.g. sale-and-lease-back, leasing of manpower). On the other hand, network structures can result from consolidation of loose market-relationships, flowing into virtual companies (e.g. Amazon, Ebay), strategic alliances (e.g. Star Alliance, badge engineering by Fiat and Ford), outsourcing (e.g. Porsche, sourcing out assembly to Valmet Automotive), joint ventures (e.g. Toll Collect) or working pools (e.g. when organizing infrastructure projects such as railway building). Besides, traditional and still popular forms of organizational networks are cooperatives. All those varieties mentioned have in common, that not conventional size, expressed by criteria like private property, manpower, establishments or balance-sheet volume, is critical, but rather virtual size, i.e. the option to access to resources in private property of other organizational units (e.g. via sharing or leasing).

Particularly in the banking sector, network structures become more and more important (Petry and Rohn 2005, pp. 265-272). A very impressive example of a network structure is the German Finanzverbund, a strategic network of approx. 1,200 credit cooperatives (e.g. Volksbanken, Raiffeisenbanken), acting as business centers, central banks (e.g. Deutsche Zentral-Genossenschaftsbank) respectively federations (e.g. Bundesverband der Deutschen Volks- und Raiffeisenbanken), acting as network-centers, and specialized service agents (e.g. Deutsche WertpapierService Bank), acting as service-centers (Fig. 1). All those units are acting legally autonomous, while being economically partially linked, and to a certain degree, represent a prototype of an organizational network (Sydow 1992, pp. 78 et seq.).

[FIGURE 1 OMITTED]

Weaknesses of Conventional Rating Systems

In conventional rating systems network embeddedness of corporations, as it is typical for German primary co-operatives, is often neglected. When analyzing typical rating criteria (Everling and Heinke 2001, columns 1755-1774), it can be shown that interpreting rating objects as isolated companies is rather dangerous and can make rating-results unusable because central influences on economic performance are not taken into account (Reiss 2001a, b, pp. 133-160; Heinrich 2002).

Neglecting Network Assets

A central aspect determining the rating score as a result of the rating process is a financial analysis based on data derived from external financial accounting (Kasperzak 2003). Limitation to assets mentioned in balance-sheets (proprietary; legal size) neglects that intangible network property rights are critical for value creation in network structures. Though having a major influence on the performance of the rating object, this virtual common property (virtual and economic size) is not covered through conventional financial analysis, similar to other classical positions beyond balance-sheets (e.g. options, features), even though trans-corporate teamwork is an important fundament of strategic concepts such as one-stop-shopping and multi-finance. In the Finanzverbund, for example, each primary cooperative can not only access to its own resources, but also to complementary resources of partners (e.g. insurance products of R+V-Versicherungen, leasing products of VR Leasing).

Neglecting Network Capital

Network structures are characterized by innovative capital structures respectively inter-corporate capital, e.g. venture capital, private equity, pool financing, leasing, factoring or securitisation. Capital is often provided by network partners such as network-centers or business angels. Similar to mezzanine financial instruments connected with intra-corporate finance (e.g. participation certificates, anonymous investments), strict demarcation between equity capital and debt capital cannot be adhered in networks. Virtual growth of capital, for example, by extending partnerships (instead of building up additional capital assets or circulating assets), by doing leasing (instead of acquiring additional equity) and by placing orders to freelancers or subcontractors (instead of doing it self-made, i.e. by the conventional staff) is not taken into consideration. Additionally, network-wide know-how (human capital) that is not only built in the individual corporation only, but also in other partner corporation, is neglected. In the Finanzverbund, such specific human net capital is assembled and available at regional academies (e.g. ADG Montabaur, GENO Akademie Stuttgart) or via information platforms (e.g. VR-Banken-Portal, VR-Info-Forum or VRNetWorld).

Neglecting Network Securities

Referring to stand-alone liability structures in order to evaluate credit worthiness neglects, there can be (collateral) securities corresponding to network-embeddedness. On one hand, there can be hard financial securities that lead to network partners' liability, such as hostages, parent guarantees, net-worth-maintenance agreements, surety bonds, debt-purchase-agreements, letters of credits, recourse rights or credit insurances. On the other hand, soft forms of securities, such as goodwill-declarations or the acceptance of the first-call-principle in context with guarantees, can strengthen solvency of the individual corporation.

Apart from those additional liabilities provided by individual network partners, there can be collective network securities. Among these are security funds, guaranteed unions or collective property (i.e. syndicate). A typical example is the guarantee funds of the BVR, installed as collective security funds, liable for primary credit cooperatives experiencing problems with liquidity.

Soft informal forms of collective suretyship are based on network-wide principles as solidarity, reciprocity, bona fide or co-operative culture, that pledge network actors to vouch for liabilities of other network partners due to ethical or reputation reasons. In the Finanzverbund, for example, insolvencies of primary credit cooperatives, that are imminent despite of payments out of the security funds, are often abandoned by pushing for mergers with regionally contiguous cooperatives. Last of all, individual liability risk can be alleviated by organized collective risk management. A typical example is trading of securitized credit risks inside the credit cooperatives' network (e.g. "VR Circle"-transaction, organized by DZ Bank) (Koneberg 2006).

Neglecting Network Management Competency

Usually ratings only refer to classical competencies of entrepreneurial leadership, such as competency in personnel management, commercial practice in a certain industry or professional competence. Meanwhile, management of multilateral relationships in networks requires a broader spectrum of competencies (Reiss 2001a, b, pp. 121-187). Network management competency also consists of interactive skills, such as the abilities to acquire new network partners, to handle multilateral constellations and to manage coopetitive relationships. It is a typical characteristic of organizational networks, that cooperation (e.g. in product development) and competition (e.g. in product distribution) are combined with intention. This phenomenon, called coopetition (Brandenburger and Nalebuff 1996), can shortly be characterized as a competition among partners that can foster stimulating challenges between partners on one hand, but on the other hand, requires a specific ability to manage conflicts. Specific forms of coopetition that can be watched in the Finanzverbund are network-wide benchmarking (Fit4Service-Club Finanzdienstleistungen) or redundant businesses (e.g. distribution of consumer lending both by Volksbanken and by norisbank).

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