Archive for November, 2009

Multi-National Business and Risk

November 9, 2009

Does a corporation overlook proper “due-diligence” when expanding their operations and, if so, how often might this occur?  I don’t mean the normal, everyday analysis, but a significant Risk Management concern; the legal framework one must consider when crossing borders!

European businesses have become very familiar with establishing new ties with various professional services when they open subsidiary operations in the northern part of North America, particularly in their understanding that Canada is completely different from Europe (and, again, different from the USA).  They locate legal, accounting, banking and insurance specialists who, many times, do not have direct ties with their European operations.  They realize that NAFTA (North American Free Trade Agreement) can benefit their Canadian subsidiaries in allowing an opening into the greater American marketplace, a major advantage to locating in Canada, and then look for the most suitable expertise to assist them.

Examples that I have seen include the contacts made through the various European-Canadian Chambers of Commerce with one lawyer (friend of mine) being especially adept at being able to obtain clientele in this manner.   There are numerous other examples but I will only provide one to whet the appetite for connecting with me.

Why do they like to enter America through Canada?  Many Europeans realize that Canada is significantly closer to our European “roots”, as opposed to our American “neighbours”, in areas like politics (should I term it “social democracy” and multi-party governing, as opposed to a true 2-party form?).  Maybe, for them, it is a gradual change from Europe to America.  And yes, many Europeans do love America.

Now what about American corporations; do they prepare themselves in the same manner?  Do they understand that Canada is not the 51st state?  Reality tells us that many American corporations do not fully comprehend that Canada has distinct laws, particularly in the areas of Health & Safety, Workers’ Compensation, Vacation/Paternal Benefits, Unionization, the “Duty to Accommodate” in areas of Disability and, surprisingly, “Francophone” issues, among many others.  They do, however, realize that we have a “Government Health Care” system in place, unlike their home country (and, yes, there can be major cost savings from that associated with employer provided “group medical insurance”).

Sure, Canadian media is driven by American news events (CBC often reports items faster than CNN, by internet) and Americans residing in Canada don’t recognize that they’re living in a foreign country because of so many similarities (we also watch the same television programs and movies) but there are, in fact, major differences!

What is the significance of some of these issues that can be so different?  An example mentioned to me, over a recent coffee meeting, gave rise to an item that was publicized significantly in Canada not too many years ago.  See the following for one example:

Knowing that some corporations do not see the “negative press” (“Reputation Risk”) as something to be of concern may be one issue to debate at another time but as a “new employer” in a different country it should give rise to discussions in the Board room, should it not?

Or, what about language issues or a “Napoleonic Code” legal system which should also be Risk Management concerns?  You may ask what the Napoleonic Code is but it heralds back to the times of Emperor Napoleon and still is the legal system in use, today, in the Province of Quebec, a part of Canada that is also the reason that we are a legally “bi-lingual” country.

There are a large number of differences between Canada and the USA that cannot (or should not) be overlooked by an American subsidiary operating in Canada.  Anyone who recommends that their subsidiary operate as a “branch” of the parent will be confronting many major issues never contemplated at home.  Quite possibly now, a majority of American firms operating here, treat their operations in this manner without fully realizing the many Risk Management issues they face.

The most significant, in my mind, was Bill C-45 and the debate it caused in 2003, when Directors, Officers and Management could be fined and imprisoned for the most serious of health and safety violations!  I had clients who wanted to buy insurance protection which was not available because these are considered “uninsurable” (criminal) events.  What could they do?  We provided training and consulting from a Risk Management capacity which lessened their concerns.  This needs to be an ongoing function.

To conclude, it may be better to obtain the expertise of local consultants when expanding multi-nationally.  Good Risk Management practices would indicate that, instead of assuming that everything is the same as to what one has become accustomed, businesses should take a few moments to contact us.

Total Cost of Risk (TCOR) – What costs should be included, really, when determining your Cost of Risk when operating your business?

November 5, 2009

Many companies and business people relate the terms “insurance” and Risk Management (RM) as being nearly synonymous.  It is necessary to realize that this is like comparing a banana with a watermelon (everyone always talks about apples and oranges so I want to be different, OK?).

Insurance, often, is considered to be a means of RM.  However, it is a means of “Risk Transfer”, solely – transferring an identified or (in some cases) unidentified “risk of loss”.  What about that “bad debt” suffered because your customer – a manufacturer, for example – just filed for bankruptcy protection that was never anticipated or that sudden devaluation of currency and the impact on your cost of imports?  Risk Transfer to a 3rd party, as in an insurance company or other similar firm, e.g. captive, pool, futures market, hedge fund, etc. for means of reimbursing a loss, after it has occurred, or reducing the impact of a catastrophic incident are all effective means of RM but are not all insurance acquisitions.

What is RM, though?  Is it a method of minimizing or reducing a loss, all the time?

This is where TCOR is involved – determining the

  • “direct costs” involved with insurance (premiums, deductibles, retentions, etc.),
  • “indirect costs” (how much time and money is involved in preparing your claims reports, meeting with the lawyers and accountants, etc.?) and
  • “prevention costs” (those Health & Safety meetings should be included in your TCOR and the costs of hiring a new employee because you just terminated someone – oh, yes that may have also been a direct cost, too).

RM includes identifying and establishing your goals in business, differentiating them based on the “certainty of managing your risk” i.e. accidental vs. speculative, etc.  It may also involve outsourcing some (yes, Commercial Lenders even give their Loan Agreement Reviews to people like us to minimize their risk of error; Lawyers don’t always have all the answers regarding Contracts and must refer to us; Accountants don’t always have the best suggestions either and do call us) questions and/or routine work for which one is not adept at handling.  Taking steps to control those risks through various cost-effective means should involve someone with RM training and experience, from Financial to Information to Operational Risk.

Many insurance agents and brokers will attempt to fill this role but, unless being paid on a fee basis (as opposed to their earning a commission on the sale of those insurance policies to you), you may be placing him/her in the potential position of a conflict of interest, are you not?  How are you able to truly trust that individual to save you money (insurance costs may decrease but there is no guarantee) in the short-term or the long-term?   I have heard this comment on numerous occasions.

Have you ever argued with that insurance broker/agent over the added cost of improving your company’s security system, e.g. sprinkler upgrade, or the effectiveness of that Business Continuity Plan in reducing a Business Interruption claim and why you’re being charged such exorbitant (in your mind) premiums?

There may be excellent reasons and the insurance company may insist, or dispute, but why not request a 2nd opinion (better yet, why not ask for our help from the start)?

This is all part of TCOR!  Surveys have indicated that much of a company’s true Cost of Risk of being in business is “non-Insurance premium” and one major international insurance company’s survey results indicate that less than 50% of all business losses are reimbursed by insurance.

This is exactly my reasoning for the emphasis on TCOR, RM and the need for consulting with an expert in the field.