Risk Management

"The biggest obstacle to dealing effectively with risk remains human beings perceptions and misperceptions of it. People tend to get risk wrong in a variety of ways, often consistently." - The Economist (annual risk survey)

If you own a small privately held corporation you invariably manage risk yourself. If so, ask yourself, Do I have a Risk Management Program? Why? Poor risk management affects your profit - or even put you out of business totally. You can successfully manage risk with some help from your team. A good Risk Management Program consists of 4 key areas, viz. contracts, insurance, entity management, and intellectual property.

First, regarding your contracts (customer or supplier), there are five (5) major areas in which you have the opportunity to shift the risk to the other party. They are the (1) indemnification clause (i.e. shifts third party liability), (2) limitation of liability (i.e. caps liability amount and types), (3) remedies (i.e. specific types), (4) disclaimers (i.e. eliminates underlying obligations), (5) waivers (i.e. relinquishing your rights) and finally (5) the condition clause (i.e. "subject to" or "on the condition that"). Generally speaking whoever has control of the risk should be the party that accepts the risk. DO NOT accept risk you can't control.

Second, regarding insurance, an owner of a business must choose what insurance policies will be appropriate. In addition to traditional policies (i.e. medical, disability, and life insurance) a business owner should look into a comprehensive general liability ("CGL") policy and employee liability policy. Reviewing your coverage is critical in the event of a triggering event. There are also specialty insurance policies (e.g. directors and officers). Furthermore, how you handle procedural issues after a "triggering event" is also crucial because your rights are subrogated to the insurer. If you do not understand how company risks are insured have someone help you review your policies.

Third, regarding your entity, each type (LP, LLC's and corporations) has significantly different risks. A simple 10 step checklist is as follows:

1. Assure adequate capitalization - review debt, equity, physical and capital assets;

2. Adhere to corporate by-laws (or the LLC operating agreement);

3. Hold regular company meetings and maintain records;

4. Maintain separate financial accounts for related entities;

5. Avoid intermingling of parent/subsidiary funds/property/transactions;

6. Document corporate transfers to assure arm's length transactions;

7. File all separate tax returns and allocate income/expenses;

8. Document loans and ensure security thereof;

9. Establish clearly with third parties the corporate identity;

10. Conduct periodic legal audits of the entity books and records.

Lastly, protecting your intellectual property (trademarks, copyrights, patents and trade secrets) starts with your recognition that it is valuable property. For example, you should do the following simple trademark audit of your company's name:

1. Prepare a list of all the trademarks currently in use and compare it to your product catalog.

2. If you are using the corporate name on your products consider registering the name for that purpose.

3. Research your company name to see if it can be registered or is infringing another trademark.

Your business attorney can play a key role managing risk, along with several other professionals. Remember, effective risk management is a team sport. Utilizing an advisory team can protect your hard earned dollars. Who is on your team?

Mark J. Guay, J.D. LL.M.

Mark J. Guay is an affiliate of International Subsidiary Development Inc