Breakfast session -
Risk management strategies to reduce your personal liability and drive business performance
Taking the risk out of IPOs and M&A: risk management strategies to help reduce liability
When starting a business, the last thing on most CEOs’ minds is the possibility of being sued, let alone facing bankruptcy. Nonetheless, CEOs need to plan for those contingencies when they start a business — as well as when they engage in an IPO or sell a business.
But there are ways to minimize that risk. That was the key theme of a talk delivered over breakfast by Priya Cherian Huskins, Partner and Senior Vice President of Woodruff-Sawyer & Co., and Mike Herrinton, Americas Risk Leader for Ernst & Young, who spoke at a Wednesday breakfast session at the Forum.
The “three V’s”
Herrinton cited the “three V’s” that are driving risk for companies: velocity, volatility and visibility. “The three V’s are moving faster than ever before,” he said. “New companies are under tremendous pressure to produce results, particularly as they embark on an IPO or M&A.” Investors, he added, expect to see that pre- and post-IPO companies have the business processes in place to deal with volatility.
In fact, Cherian Huskins said that most companies are sued within four years of going public, when they have to stand up to the scrutiny of reporting results and running a business. She added that officers and directors must recognize they do have some personal liability when they start a business, and they need to take some defensive steps, including buying insurance that protects both the company and themselves as individuals.
Preparing for — and mitigating — risk
Herrinton also said companies need to develop effective corporate governance measures to mitigate and protect against risk. Corporate governance is one of the critical success factors that help companies define success, he said, citing an Ernst & Young study, Turning Risk into Results, which found that companies with the highest risk management maturity profiles typically have three times the EBITDA of companies with less mature profiles. “Effective risk management does enable organizations to deliver better value,” Herrinton said.
And investors recognize that value. Herrinton said more than 80% of bankers are willing to pay a premium for companies with a more effective risk management strategy.
Both speakers agreed that all organizations need to prepare for things that may go wrong. According to Cherian Huskins, they must protect themselves with a personal indemnification agreement — a contract between themselves and the company to cover damages and legal fees in the case of a lawsuit. She also noted that executives need to make sure this agreement will continue if the company is acquired by another organization.
Priya Cherian Huskins