Global impact Featured

7:00pm EDT February 23, 2010

When doing business overseas, the quality of products and services may differ from those in the U.S., companies may have little control over business processes and insurance policies issued here may not offer the same coverages internationally. Businesses also may face cultural differences and language barriers.

As a result, business owners need to be diligent in their risk management practices and insurance coverage to ensure that everything runs smoothly when entering into international business transactions.

“Insurance purchasing and risk management programs should be built around a thorough global assessment and should fit the company’s specific risk,” says Terrence Parks, CPA, senior account executive, Aon Global Client Network, part of Aon Risk Services Central Inc. “Failure to manage these risks can result in unwanted and potentially significant financial consequences.”

Smart Business spoke with Parks about the key things a business leader needs to understand when doing business internationally and how to develop and use a global risk assessment.

What do business owners need to understand about doing business internationally?

There can be a lot of differences within the global supply chain system. All companies are challenged to find low-cost ways to do business while producing high-quality products.

It’s easier to control and monitor the quality of products incorporated into finished products in the U.S., as many parts of the developing world don’t follow the same quality control procedures. This introduces a whole new set of risks, especially when you’re dealing with time, distance and cultural issues. A company may believe that all procedures are being followed but then discovers a problem when the product is delivered.

Business owners need to include additional steps in the supply chain process to mitigate this risk, including requiring vendors to supply products that meet specifications, requiring independent verification of the product and applying appropriate contractual terms that assign responsibility for damages. They should also have the proper insurance in place to protect the company in the event of a claim. The goal is to insulate the business and prevent losses due to other people’s negligence, but insurance is intended to respond if those mechanisms fail.

Regulations are also different in emerging markets and should be closely monitored. For example, building standards are different in other countries and should be carefully reviewed before constructing a new building or leasing space in an existing building to ensure that both the people and property will be protected in case of an earthquake, fire or other disaster.

What should be included in a global risk assessment?

Relying on other parts of the world to purchase or manufacture products introduces companies to significant vulnerabilities, especially if the company relies on a sole supplier. Part of the global assessment is to identify where the vulnerabilities lie and either establish business continuity plans or prepare alternative supply sources.

Even if there is no immediate solution, business owners should still identify this and work to mitigate any business interruption.

What should business owners be aware of when doing business in Europe?

There is the new Environmental Liability Directive (ELD), which places additional responsibility on potential polluters and environmental damages they may be responsible for. Traditionally, these damages were limited to pollution to water, including groundwater, or someone’s property, but the ELD takes it one step further and includes damages to the habitat. There could be lingering effects to a particular habitat — whether it’s a species of bird, animal or vegetation — that may take years to recover.

This places a higher burden on companies doing business in Europe to be careful of any possible environmental damages, particularly if they are dealing with materials that may potentially damage the environment. Insurance is one of the possible solutions to address this increased liability.

How does directors and officers liability insurance come into play when doing business internationally?

In terms of compliance, D&O liability insurance has traditionally been purchased at the corporate level. While it’s always intended to cover the directors and officers on a worldwide basis, there are various legal requirements in any given country that may prohibit the indemnification of a director or officer through a ‘nonadmitted’ policy.

The actual structuring or arranging of D&O liability insurance needs to be carefully managed to make sure it’s compliant with admitted insurance requirements and will respond to potential liabilities. Directors and officers can be held personally liable and their personal assets can be put at risk if this is not well managed.

How can business owners mitigate some of the risks associated with employee safety when doing business internationally?

There are a number of sources that contain information regarding the political environment and stability of a particular region. The U.S. State Department provides a list of danger hot spots and travel restrictions on its Web site, and this should be one of the first steps when considering travel abroad.

The theme is prevention. Business owners should avoid putting an employee in harm’s way. But, if there’s an absolute need to travel to one of those danger spots, proper insurance, such as kidnap and ransom coverage as well as advance security measures, should be in place to resolve and/or prevent problems that may arise.

Terrence Parks, CPA, is a senior account executive with Aon Global Client Network, part of Aon Risk Services Central Inc. Reach him at (248) 936-5268 or terrence_parks@ars.aon.com.