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Managing risk customized solutions to help address it. Many ultrawealthy individuals and families find they benefit by working with a personal risk manager that can provide comprehensive resources to properly align protection for their property, liability, family and lifestyle. And because you and your company will now be more prominent, it is imperative to have total coordination between your business estate plans. (a) Protecting yourself and your assets Personal liability: Entertaining guests at your home, letting your teenage child drive your car and serving on a board of directors are among everyday activities that can expose you to legal liability. Your increased public prominence may lead some to believe you have “deep pockets,” making you a target for expensive lawsuits. A personal excess liability insurance policy is designed to protect against multimillion-dollar settlements resulting from personal injury, bodily injury or property damage lawsuits. Consider a recent example, in which the teenage son of a wealthy business owner was involved in an automobile accident with a bicyclist. Although there was no indication that the driver acted irresponsibly, the court awarded a $20 million judgment to the bicyclist. The insured carried only $5 million in excess liability insurance, meaning his family’s financial situation may be severely harmed for years to come. Consulting with a personal risk management expert can help you set appropriate liability limits for your lifestyle. Personal property: As you acquire wealth, it’s likely you will acquire high-end property and assets. Key areas of risk to consider include the following: • Homeowners—High-value homes are often built with unique materials and features. Not all insurance policies provide for appropriate replacement costs in their loss settlement provisions. • Automobiles—Luxury, exotic or collector vehicles may require specialized insurance. • Valuables—Most standard insurance polices have low dollar limitations for loss of high-value items such as jewelry, art and other collectibles. Specialized coverage can help properly protect these assets and investments. Benefits of a broker: When wealthy individuals accumulate new property and nonliquid assets, protection for each is often purchased as needed with a local agent. However, working with various agents or brokers in different states can lead to gaps or overlaps in coverage. Additionally, the distinctive aspects of high-value items can require specialized solutions that often are not available through local agents. By working with a broker that specializes in addressing the risks associated with the high net worth lifestyle, you will benefit from expertise, comprehensive coverage, innovative solutions and access to broad, customized coverage. Protecting yourself and your business: There’s no doubt that you are now looking to the future with the anticipation that your business and family will long benefit from all of your hard work. Now is the time, however, to consider the effects that events beyond your control—such as death and disability—may have on your business. It is critical to evaluate the risks inherent in your business and in your estate plan. Coordination of the two will help protect the business and ensure continuity of the legacy you have created. Wealth transfer: It is important to evaluate the IPO’s impact on your estate plan, including the risks in transferring wealth to succeeding generations. Those potential risks can include: • significant taxes at your death; and/or • unwise dissipation by heirs, their divorcing spouses and creditors. Properly drafted and executed wills and trusts can protect your assets from taxes and creditors. Many wealthy individuals choose to fund trusts with assets as well as with life insurance. Owned by a trust outside the estate, life insurance has the potential to supply an income-tax-free benefit to the trust free of estate tax. Careful planning in this manner with your tax and/or legal advisors can allow wealth and assets you’ve created to pass to your family intact. Key person: You may be the “brains behind the business,” but you also may have irreplaceable employees. If something unexpected happened to a key employee, would your business suffer? Key person insurance helps you cover additional costs when such a situation arises. You even may be able to combine protection for your business with an agreement designed to reward a vital employee for continued employment. These are just some of the concerns that may arise as a result of your new wealth. Again, you may benefit greatly by working with a personal risk manager to design the right protection for your family and your business. 8.6 Managing compliance risk NYSE Governance Services Compliance and ethics programs are designed to prevent and address corporate risk—such as SEC enforcement actions and other government prosecutions against directors, officers and other employees of public companies in connection with regulatory violations. In order to minimize the risk of these lawsuits and enforcement actions, it is in the interest of the company, its board and its management to design and maintain robust controls and procedures designed to prevent misconduct and ensure regulatory compliance. A corporate ethics and compliance program is a written and operational commitment to companywide compliance with all applicable laws and, therefore, provides protection to the company and management in three major ways: • It reduces the chance that employees will engage in criminal misconduct. • If employees do break the law, it can help mitigate the consequences for the company. The DOJ, the SEC, and many other agencies are more lenient on companies with effective ethics and 94 NYSE IPO Guide
Managing risk compliance programs when making charging decisions and assessing penalties. • It establishes behavioral and professional expectations for employees, allowing the company to set standards in advance and facilitating termination of employees for misconduct when rules are not followed. Assuming a corporate ethics and compliance program exists, an organization must still perform incremental compliance activities, as risks can and do change over time. Engaging in an ethics and compliance risk assessment is one way a company is able to analyze the effect that ever-changing risks have on the organization, prioritize these risks and develop options and actions to reduce the threat they pose. Organizations often confuse an ethics and compliance risk assessment with a general corporate-wide risk assessment and are uncertain as to the scope, frequency and structure of such an assessment. As an increasing number of organizations have begun to institute ethics and compliance risk assessments, leading practices have started to emerge. They are as follows: • Examine all major areas of misconduct—A common mistake organizations make when conducting an ethics and compliance risk assessment is to limit the potential risk universe to a preconceived list of likely high-impact risks. Rather, a proper ethics and compliance risk assessment encompasses all potential risks, including both those that are systemic to the average organization and those that are unique to the industry in which the specific organization operates. • Examine risk contextually—To be effective, the ethics and compliance risk assessment must take into account the ability of the organization to plan for, prevent or mitigate each risk area. This focus entails examining the controls, processes and procedures designed to prevent compliance failures, as well as assessing the effectiveness of the individuals in positions of substantial authority in recognizing and preventing a compliance breakdown. • Address current and potential risks— An effective ethics and compliance risk assessment should take into consideration risks that presently exist, as well as those activities that are currently legal but could reasonably be called into question in the future. • Review internal and external information—Ethics and compliance risk assessments should include an examination of internal corporate documents, as well as industry information and historical incidence reports. To be adequately predictive, the ethics and compliance risk assessment should include not only compliance breakdowns and failures but also near-misses. • Include participants from all levels of the organization—When collecting and assessing potential risk areas, ethics and compliance risk assessments should involve personnel across various disciplines and seniority levels. This can be accomplished through workshops, focus groups, surveys and interviews. • Consider impact and likelihood of occurrence—Ethics and compliance risk assessments should weigh risk areas to account for impact and likelihood of occurrence. By assigning quantifiable weights or ratings to each relevant risk area, organizations will be able to rank them appropriately. • Document the outcome—The outcome of the ethics and compliance risk assessment should be documented in a defensible action plan. This plan should include not only a description of the process that was followed but also the actions that were taken to design, implement or modify the compliance program. • Be defensively objective—The ethics and compliance risk assessment process should fairly assess the full universe of the organization’s potential risks, including existing acceptable industry practices. Resist the temptation to ignore or deemphasize risks because they could be costly to address from a financial or internal political perspective. • Quantify each risk area—The ethics and compliance risk assessment process should allow for quantification of each risk area. An assessment that goes beyond “likelihood” and “impact” can be more useful in prioritizing compliance budget spending and activities, as well as in justifying any incremental controls, policies, processes or spending that must be implemented. Furthermore, if executed correctly, such quantification can be used to measure program effectiveness, a U.S. Federal Sentencing Guidelines criterion of an effective ethics and compliance program. • Conduct ethics and compliance risk assessments periodically—The frequency with which an organization chooses to conduct ethics and compliance risk assessments and schedule follow-up risk reviews may depend on the nature of the organization’s industry. However, if the methodology and process is adequately defined, it can reasonably be conducted on an annual basis, and year-over-year results can be appropriately compared. Since operating environments, regulations and government enforcement priorities routinely change, it is inadvisable to conduct ethics and compliance risk assessments on a less frequent basis than every two years. • Measure employee knowledge—The ethics and compliance risk assessment should include a measurement of employee knowledge, as well as awareness of the compliance program and supporting controls. Doing so can help pinpoint where training and communications programs need to be improved. • Benchmark—When possible, the ethics and compliance risk assessment should benchmark against peer organizations. In addition to industry peers, consider those organizations that are peers in terms of size and geographic scope. This is particularly important as it ensures that the organization meets NYSE IPO Guide 95
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