Risk Management - Exposures can Hurt

Risk Management – Exposures can Hurt

I have worked with a number of SME’s and Start-Ups and these communities by far account for our client base here in Asia. A discussion that comes up regularly is that of managing risk events and exposures.

Businesses tend to recognise and address what they see as being the more immediate risks in their activities and seek coverage for things such as loss of property and public liability. These are common and can be seen as being quantifiable exposures in a business.

Business owners invest a lot of money into their business and a very large portion of their time and life into building a quality asset. As such, there are a number of other more qualitative exposures that may present at different points of the business cycle that Directors need to consider for protection.

In the early stages of the business, key individuals can be responsible, dominate and be the absolute drivers of the operations and its growth. A loss of this person or key personnel though illness, death or other events can have dramatic consequences for the business at this vulnerable stage.

Another area to consider is business partners and what happens if one of those is no longer able to contribute to its ongoing functions. I unfortunately witnessed such an event with a client early in my career whilst working at Global Accounting Firm. Two partners had spent 15 years building a very successful business; both were integral to it. One partner became ill and unfortunately passed away. The other partner had neither the capacity to continue driving the business by himself or afford to buy-out the shares of his former partner’s widow. As a result the business began to decline and become a shadow of its former glory days. This situation could have been rectified by cross-insuring each partner against the loss of the other and incorporating such requirement into a Shareholder Agreement. The pay outs would have ensured that the widow receive funds to compensate for the loss of her husband and as well payment for the true value of the business as the time of the event. The remaining partner would receive funds to allow him to restructure the business to continue operations in a fruitful way.

Business owners and partners need to carefully consider what will be the true impact and loss on the occurrence of events. These consequences can have far reaching effect on many parties – employees, suppliers and loved ones. In the early years of a business or venture, people are focussed on building the business and its immediate needs – and this is the correct thing to do. What I am advocating here is that business owners and partners invest some time into considering the consequences of unintended events. Then quantify any loss or impact and consider available risk management tools for protection not only for themselves but surrounding parties.