An enterprise risk management (ERM) process involves identifying risks relative to an organization’s objectives, assessing them for likelihood and impact, developing a response strategy and monitoring progress. A well-defined ERM process framework can protect and create value for organizations and their owners.
Smart Business spoke with John T. Alfonsi, managing director at Cendrowski Corporate Advisors LLC, about how ERM precesses can mitigate risk and increase a company’s value.
Effective ERM processes can help businesses increase value by affecting the estimates for these quantities.
Information integrity allows management to make well-informed decisions and should provide a valuation analyst with greater confidence in a business’s projections. Valuation analysts can analyze information integrity by examining historical projections and assessing elements of the internal control environment.
The discount rate is the yield necessary to attract capital to a particular investment, given the risks associated with that investment. A project with relatively high risk will require a relatively high yield to compensate an investor for bearing these risks.
The ERM process has little impact on systematic risks unless the business’s performance is heavily tied to market performance. Unsystematic risk is sometimes broken down into two components, industry risk and company-specific risk. Industry risk reflects the risks identified with the industry in which a business operates.
Company-specific risks encompass all other risks, including size, depth of management, geography of operations, customer and/or vendor concentration, competition and financial health.
“When we began our research, I didn’t know what to expect because no study had been done from the business owner’s perspective, only from the consumer’s,” Schiele says. “I half expected to find that businesspeople were thinking along the same lines. It was surprising to see that review sites were way down the list — just 20 percent of businesses surveyed were monitoring customer satisfaction via these sites.”
Our study is the first to consider business as a whole, looking at review sites like Yelp, Angie’s List, Google, Yahoo and others. Aside from childcare and pet care, we addressed virtually every industry. We found that marketing services, health care, manufacturing, financial services and real estate are best at dealing with review sites.
Why don’t more businesses take reviews seriously?
The biggest barrier is time. Dealing with day-to-day issues, they don’t have the energy or resources to monitor sites. And some owners prefer not to read negative things. Still, a business can grow, improve and solve problems by looking at criticism, taking it to heart and making changes.
More companies are mitigating fallout by using services like ReviewInc, which analyzes qualitative data and presents it in dashboard form. The business can see at a glance what people are saying.
Suppose a company is on top of the consumer review data. What then?
Companies that engage with people fare best. If a consumer posts, ‘We stayed at that hotel. The plumbing was bad,’ and the hotel explains how it corrected the problem and adds, ‘Next time you stay at our hotel, we’ll give you a free breakfast,’ that’s a win. But it’s not only about that future promise.
Where do reviews fit in, in a macro sense?
The old model was strictly one-way. Companies told the consumer what they had and that was it. Eventually, it became a two-way conversation where consumers could talk directly to the company. Now we’re seeing three-way communication, with consumers talking to other consumers. Businesses that participate can help foster customer loyalty.
And while it’s beneficial to get positive reviews, it’s even more important to get lots of reviews, period.
So, what’s the biggest takeaway?
Sites like Yelp have turned the tables. The power is in the hands of consumers. It’s important that you aren’t passive. Since you can’t change the platform, how do you change your business to take advantage of a new opportunity to communicate? Understand it and then use it. Use it as a market research tool, which is cheaper than surveys and focus groups.
It’s also more authentic since these reflect actual behaviors, not just intentions. Use it as a customer relationship management tool. Then, armed with this information, make strategic decisions to help grow your business. ●
Figuring out how much liability coverage to buy isn’t easy, but it’s very important.
General liability covers an entity for bodily injury, property damage, personal and advertising injury, and medical payments to a third party because of negligence of the insured. So, adequately selecting the appropriate limits provides defense costs and indemnification to that third party, which will properly indemnify that claimant.
“As an organization, ask yourself, ‘If my limits are not enough to cover the injury, what happens?’” says Cliff Baseler, vice president at SeibertKeck Insurance Agency. “You hope the insurance company will offer a settlement at your policy limits or you might look at out-of-pocket costs.”
Smart Business spoke with Baseler about setting limits of liability.
How can business owners know what limits of liability to purchase?
First, review the limits that your vendors and customers have on their insurance requirements. Many businesses purchase a $1 million occurrence policy with a $2 million aggregate limit for the general liability policy. From there, adding an umbrella or excess policy provides additional limits over your original policies.
The question becomes how much is enough. It’s a balancing act between purchasing exuberant limits that exceed industry expectations or leaving your company on the short side and potentially exhausting policies. If policies are exhausted, you could be covering claims yourself.
More exposed industries will need to buy higher limits, such as manufacturers that produce products with the potential to impact many people or those who face class action potential.
The challenge for many startup companies is having enough capital to cover the cost of purchasing adequate limits. As a well-established company, it is important to look at the cost-benefit of adding additional umbrella limits. In addition, when looking at job contracts, it is critical to make sure your limits match those of the subcontractor or contract requirements.
How can you use benchmarking to help discover the best liability limits?
A benchmarking report is a tool, not an exact science. It takes into account many different factors, such as location, industry size, revenue, employees, etc., to compare companies in the same industry segment. Benchmarking an organization against its respective industry can provide a range of insurance program premiums, limits and retentions commonly used in the industry.
Having this important tool should allow business leaders the piece of mind that they are adequately insuring their company at a competitive cost. Also, in the event of a claim, it can justify the limits purchased if the claim should exceed that limit.
An informal way to benchmark is by attending trade associations or other industry events, so you can ask peers for their limits of liability. Networking is a great way to understand how liability limits are affecting others, before you have to deal with it.
What do marketplace trends like severability tell business owners?
The severity loss trend — the change in size of an individual loss over a period of time — is staggering. According to Chubb, in 1973, a moderate brain damage injury award was $1.24 million; today, that same award is closer to $5 million.
Chubb reports that in 2010 the median compensatory award in Ohio was $13,000, while nationally 12 percent of all jury awards are $1 million or more. In addition, 57 percent of the total awarded damage for commercial/industrial product liability verdicts is for the plaintiff; the remaining amount is for additional costs. These costs include the rise in mass litigation, the high cost of defending product suits, the need for many experts in complex situations or additional awarded damages. This means $1 million of coverage is not always enough to cover the actual injury. The costs associated with a claim are far greater than what most people perceive as ‘enough insurance.’
There’s no easy answer to finding the right liability limit. It may seem ridiculous for a small company to buy $25 million in limits, but what if it has a large automobile fleet? In the end, the most important tool is to have a proactive relationship with your agent. An experienced client advocate will responsibly inform a client on how to properly balance its limit of liability and dollars. ●
Insights Business Insurance is brought to you by SeibertKeck
With the ongoing implementation of health care reform, many employer groups have missed the obligations set forth in the Employee Retirement Income Security Act of 1974 (ERISA).
“The federal government has started systematic audits of group health plans, primarily for compliance with health care reform. They will also include compliance for ERISA. A key provision requires plan participants to be provided with a Summary Plan Description (SPD),” says Chuck Whitford, a client advisor at JRG Advisors.
A SPD is a document that is provided to plan participants to explain the plan’s benefits, claims review procedures and participants’ rights. ERISA contains standards for distribution and the information that must be included.
Smart Business spoke with Whitford about what you should know about your SPD obligations.
What are big misconceptions about SPDs?
The two biggest misconceptions among employers are 1) only large employers are required to provide SPDs and 2) the benefit booklet issued by the insurance company fulfills the obligation to provide participants with a SPD. In fact, all group health plans subject to ERISA must provide participants with a SPD, regardless of size. Both insured and self-funded group plans must comply with ERISA’s SPD requirements.
The insurance company booklet will contain detailed information regarding the plan benefits and coverage. In many cases, however, the plan sponsor (typically the employer) will need to provide additional information not contained within the insurance booklet to comply with the SPD content requirements.
What are employers’ SPD responsibilities?
Employers are responsible for providing a SPD within 120 days of starting a group health plan; within 90 days of enrollment for new participants; within 30 days of a participant’s request for a SPD; every five years if material modifications are made during that period; and every 10 years if no changes have occurred.
The plan sponsor also must provide a SPD to the Department of Labor within 30 days of the request. Failure to do so can result in a civil penalty of up to $110 per day for each day such failure continues, subject to a maximum penalty of $1,100 per request. Multiple requests for the same or similar documents are considered separate requests.
A companion document, a Summary of Material Modifications, must be provided within 210 days after the close of the plan year in which a change was adopted. If benefits or services are materially reduced, participants must be provided notice within 60 days from adoption.
In addition to the SPD, the Affordable Care Act requires plan administrators and issuers to provide a Summary of Benefits and Coverage 60 days in advance of any change in plan terms or coverage that takes place mid-plan year.
The plan administrator is required to provide the SPD to participants in a manner reasonably calculated to ensure actual receipt of material by the participant.
Employers may deliver the document by hand or send it by U.S. mail. First class is preferred, but second or third class is acceptable if return and forwarding postage is guaranteed and address correction is requested. If the SPD is sent electronically, it must follow the Department of Labor’s safe harbor provision applicable to the electronic delivery of SPDs.
How can employers streamline their efforts?
For the sake of simplicity, rather than having a separate SPD for each benefit offered, an employer can combine all ERISA-covered benefits under a single document that includes the SPD. It can function as both the plan document and the SPD.
Rather than being another paperwork burden, use this document to streamline compliance efforts. Besides the required plan provisions, there are many administrative functions that are not required to be in the plan document, such as filing creditable coverage certifications and distributing various notices. When the government audits, it asks the employer to prove it met all additional requirements, such as showing the notices or certifications and producing evidence they were provided as required.
It makes sense for employers to review what and how they communicate ERISA-required information to plan participants. You will want all documents in order when the Department of Labor comes calling. ●
Insights Employee Benefits is brought to you by JRG Advisors
Abuse of alcohol and drugs in the workplace is a reality that employers cannot afford to overlook. According to a 2008 study by the Substance Abuse and Mental Health Services Administration, more than 70 percent of the admitted drug and alcohol abusers in the country are employed, and a majority of those are full-time employees.
The costs to an employer can come in different forms. A study by the National Institute on Drug Abuse found that drug-using employees are 2.5 times more likely to have absences of eight days or more, three times more likely to be late for work and five times more likely to file a workers’ compensation claim.
“Alcohol and drug abuse on the job can cost employers money in many ways. Some of the ways are easily visible, such as higher health care premiums. Other ways are more covert, such as absenteeism, accidents and theft,” says Jan Nedin, MBA, MSEd, RCC, a senior account manager at LifeSolutions, UPMC Insurance Services Division.
Smart Business spoke with Nedin about how to address alcohol and drug abuse at your organization.
What’s the first step to proactively approaching this problem?
Employers must develop a substance abuse policy. It should include:
- A requirement that all employees report to work and remain free of alcohol, mood-altering drugs and other intoxicants.
- Acknowledgement that the company recognizes alcoholism and drug abuse as illnesses that are major potential problems regarding health, safety, security and productivity.
- A statement indicating that behavior and performance problems related to alcohol and drug abuse should be identified early and dealt with constructively via professional evaluation and treatment.
- A clear statement that chemically influenced behavior and/or performance will not be tolerated and could result in discharge.
How can an employee assistance program (EAP) help?
An EAP is a confidential consultation, assessment and referral service available to employees and supervisors to deal with recognition and treatment of substance abuse problems, as well as other personal problems that may be affecting an employee’s performance. It is an extremely valuable tool in dealing effectively with these problems.
What roles do supervisors play?
Supervisors need to know the company policies and procedures, monitor employees’ performance and behavior, and document performance problems. It is not a supervisor’s job to diagnose drug or alcohol problems — that should be left to the professionals. An EAP consultant can train supervisors on when to refer drug abuse and alcohol matters to the EAP for assessment.
What else is important to remember?
Design appropriate health plan coverage. Efforts to help the employee will be much more challenging unless health plan coverage is in place that allows employees to get treatment as needed.
Consider pre-employment and random drug screening. This is not the answer, but rather a tool that must be utilized wisely and cautiously. Pre-employment screening can weed out undesirable applicants so you have less of this problem to deal with after hiring.
If unionized, involve the union. When unions are present, they must be involved for the program to be effective.
Secure good legal counsel. Be sure to have policies and procedures reviewed and approved by a good labor relations attorney prior to implementation.
Don’t make it a witch hunt. Turning a program into a concentrated search for substance abusers may be counterproductive. Place your emphasis on recognizing and helping those who exhibit problems.
Do not concentrate solely on drugs. Alcohol, which is also a drug, can be just as serious a problem, if not more so, and all should be equally addressed. ●
LifeSolutions is part of the integrated partner companies of the UPMC Insurance Services Division, which offer a full range of insurance programs and products. The partner companies include UPMC Health Plan, UPMC WorkPartners, UPMC for You (Medical Assistance), Askesis Development Group, Community Care Behavioral Health and E-Benefits.
Insights Health Care is brought to you by UPMC Health Plan
For most company buyers, taxes are a priority when negotiating a purchase price. However, if tax issues are neglected during the integration phase, the negative consequences can be serious. To improve the likelihood of a successful merger, it’s important to devote resources to intensive tax planning before — and after — your deal closes.
During deal negotiations, you and the seller will likely discuss issues such as deductibility of transaction costs and the amount of local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures such as asset sales can benefit one party and have negative tax consequences for the other, so it’s common to wrangle over taxes at this stage, says Sean Muller, partner-in-charge of Houston Tax and Strategic Business Services at Weaver.
“With adequate planning, companies can be spared from costly tax-related surprises after the transaction closes and integration of the acquired business begins,” Muller says. “Tax management during integration can also help your company capture synergies more quickly and efficiently.” You may, for example, have based your purchase price on the assumption that you’ll achieve a certain percentage of cost reductions via post-merger synergies. However, if your tax projections are flawed or you fail to follow through on earlier tax assumptions, such synergies may not be realized.
Smart Business spoke with Muller about tax planning after the deal closes.
What is one of the most important tax-related tasks in a deal?
Integrating accounting departments is critical, and there’s no time to waste. The seller may have to file federal and state income tax returns or extensions either as a combined entity with the buyer or as a separate entity within a few months following the transaction’s close. Companies must also account for any short-term tax obligations arising from the acquisition.
To ensure the two departments integrate quickly and are ready to prepare the required tax documents, decide well in advance of closing which accounting personnel to retain. If different tax processing software or different accounting methods are used, choose between them as soon as feasible. Understand that, if your acquisition has been using a different accounting method, you’ll need to revise previous tax filings to align them with your own accounting system.
What are the major areas of concern for companies related to tax planning and operational synergies?
Before starting to integrate products, personnel and facilities, examine the tax implications of those actions. Major areas of concern include:
- Supply chain integration. Combining the logistical operations of both companies may make fiscal sense on paper, but there could be tax consequences. Say, for example, that you’re planning to close your seller’s main warehouse and fold operations into your company’s existing warehouse facilities. What if the acquisition’s warehouse is domiciled in a more favorable tax locale than your warehouse?
- Divestitures and sell-offs. Buyers often spin off unwanted divisions or products when they acquire a business, but from a tax standpoint such moves can be costly. For example, selling a segment could eliminate certain tax write-offs or protections. You also need to plan for the tax consequences of selling newly acquired assets.
- Global implications. International acquisitions can be a tax minefield. Companies should keep in mind the kinds of new exposures the deal carries, such as value-added taxes. Also, consider how a foreign purchase may affect your company’s effective tax rate. Be sure your M&A advisory team includes people who are knowledgeable about the relevant tax laws.
- Enterprise resource planning (ERP). If the two companies’ ERP systems aren’t merged and synchronized, data collection could slow or you could lose tax data. This could affect the accuracy and speed of the combined organization’s financial reporting.
When acquiring a company, your to-do list will be long, which means you can’t devote all of your time to the deal’s potential tax implications. However, the tax consequences of M&A decisions may be costly and could impact your company for years. So, if you don’t have the necessary tax expertise in-house, work with outside advisers that do. ●
Insights Accounting is brought to you by Weaver
“We know that leaders aren’t born,” he says. “There’s an evolutionary process of skills, training and maturation that defines leadership development. There’s now a burgeoning demand for better skilled, analytically-trained people to move into positions of leadership.”
Smart Business spoke with Schockman about the state of leadership development and how the current crisis might subside.
How has this crisis of leadership manifested?
The crisis of leadership begins with questions around ethical decision-making. When people enter leadership positions in the public or business realm, they carry a toolkit of their own values and structures, and sometimes those values conflict with each other. At the end of the day, leaders have to make decisions — they can’t just sit on conflicting values.
So, at some point along the way, it becomes a lose-win situation. The crisis lies in the simple fact that too many leaders don’t understand how to achieve ethical decision-making. As you move from there, leaders become distracted by the myriad minutia that they encounter. The visionary piece gets lost.
A lot of good visionaries become functionaries, which signals another death knell for leadership.
In broad terms, how is leadership taught?
How do you get a leader to acknowledge, mid-career, that leadership training is appropriate?
Leaders need to recognize that this is about lifelong learning, about the undulating mind wanting to absorb more at any stage in one’s lifespan. Leadership doesn’t reside in a single silo. It carries over into your personal life, your community/volunteer life, your religious organizations and so on. You become a person who is a übermensch — someone who has big understanding of how leadership moves in a holistic manner.
In the private sector, you’re typically looking at a command structure, where followers become geared to the bottom line and management enlists a particular skill set to get people there. Ultimately, the question is, how can you get ahead of any changes?
The 12th century philosopher Maimonides wrote that the highest form of giving is doing so anonymously. In that way, the person who’s receiving your money doesn’t owe you a favor. And that’s what today’s leadership often lacks. It’s always this climbing on top of each other, of trying to out-do each other, without a sense of the bigger mission, the bigger picture.
What other models epitomize that big picture approach?
Abraham Lincoln. Lincoln was a walkaround leader. He was at the battlefield. He was directing General Grant. He was talking to troops. He knew what was happening in the war. And yet, he had the bigger vision piece of, ‘I’m not only going to hold the Union together, but I’m going to end slavery.’
It comes down to communications skills. Leaders need to be storytellers. Leaders need to develop a contextual basis for their narrative. Lincoln was also very clear about not doing this alone. He cherry-picked his cabinet carefully, as a CEO would, and made sure his team executed and implemented. ●
At the end of the day, leaders have to make decisions — hey can’t just sit on conflicting values. So, at some point along the way, it becomes a lose-win situation. The crisis lies in the simple fact that too many leaders don’t understand how to achieve ethical decision-making.
In broad terms, how is leadership taught?
That segues to a discussion of the hallmarks of effective leadership. What might those be, generally speaking?
Leaders need to be storytellers. Leaders need to develop a contextual basis for their narrative. Lincoln was also very clear about not doing this alone. He cherry-picked his cabinet carefully, as a CEO would, and made sure his team executed and implemented. ●
Experts are needed to explain what is reasonable in various industries, scientific or technical information, complicated financial data, and anything else that laypersons might have difficulty understanding on their own.
That’s why having a good expert witness is critical to litigants.
They tend to have a broad range of knowledge and meet the legal requirements to testify as experts, but they lack intense industry-specific knowledge and can be expensive. In some instances, you may be better off hiring an expert who actually works in your industry, even if that person has never been an expert witness before.
For example, many of my small business clients are small to midsize manufacturers with five to 10 serious competitors in the world. Only a small number of people can testify about those industries without first undertaking significant research.
While such true industry experts are not as polished in court, they may be as good or better than professional expert witnesses, and much cheaper.
How can experts help before trial?
Business clients are often reluctant to micromanage lawyers, but it’s important for business owners to understand that if you can suggest a good expert witness, do not hesitate to suggest that person to your lawyer. ●
Smart Business spoke with Breuer about the benefits of ESOPs and how they’re implemented.
This is an attractive option to companies that may need capital to acquire the stock. Implementing an ESOP also allows a company to receive significant tax and financial benefits. Among the numerous benefits, the dividends paid on stock held by the ESOP are fully tax-deductible, the principal can be repaid with tax- deductible funds, and the owner can choose what portion of his or her stock to sell.
The transaction costs associated with ESOPs are also comparable to traditional buy-outs.
Under certain circumstances, selling shareholders can defer the entire gain recognized from the sale of shares for federal income tax purposes.