Developing an Altman's Z-score-based model to support organisational resilience
Abstract
The adverse consequences of the COVID-19 pandemic were the driving force behind the study. It emphasised the saying “Survival of the fittest” and the importance of having resilience to survive disruptive events. The primary objective of this study was to develop a decision-support model based on Altman’s Z-score to gauge organisational resilience concerns in anticipation of possible disruptive events.
Action design research (ADR) was utilised to develop a theory-ingrained artefact as a resilience decision-support model. A literature review and an empirical study were conducted, resulting in the design of a two-part artefact. Part A comprises a diagram that illustrates the process of analysing the resilience of a company. The Z-double prime of eight sampled companies with going concern problems, i.e. current liabilities exceeding current assets, was calculated and analysed. The Z-double prime of six out of the eight sampled companies indicated a high risk of failure in the year of the going concern problems. However, for four of the eight companies, the Z-double prime did not indicate a moderate or high risk of failure in the years prior to the going concern problems. Therefore, the prediction of possible business failure could not be based solely on the going concern principle and had to be validated. Part B of the artefact is in the form of an MS Excel document. It lists certain words to be counted in a company’s integrated report. These words are divided into three levels of resilience. It includes resilient or resilience (level 1), readiness, response and recovery (level 2) and the elements of resilience (level 3). It was assumed that managers considered resilience or its accompanying elements if they mentioned it in their integrated reports. The artefact was founded on the stewardship theory, which argues that managers will strive to benefit the company rather than themselves. Therefore, the integrated reports were viewed as an honest reflection of management’s value creation activities. The analysis of the integrated reports revealed that companies have minimal disclosures of resilience or the levels of resilience. Companies also tend to increase the references to resilience or its levels in the years they experience going concern problems. The study concluded that the integrated reporting framework should require companies to include references to their resilience in their integrated reports. These references should be divided between the readiness, response and recovery dimensions of resilience.
An adapted version of the artefact mentioned above was developed and presented as a resilience scoring system. The adapted version combines Part A and Part B of the original artefact.