Risk Takes On the World
Barbara A. Morris
A successful risk management program in a multinational organization hinges on the ability of the risk manager to see the bigger picture.
As one risk management consultant observes, the key to successfully overseeing a global risk management program is to “get your eyes up from your desk and look out to the horizon.”
This is a theme that permeates the global risk management advice offered by educators, consultants, insurance company executives and other professionals. They caution that not only must the risk manager become knowledgeable about the highly specific rules, regulations, and cultural morays that influence business–and therefore a company’s exposure–in a given country, but the risk manager must also be keenly aware of the broader issues and developments that can likewise exert tremendous influence over a company’s operations abroad.
In fact, risk managers sitting in corporate headquarters somewhere in the U.S. are mistaken if they believe they can successfully manage a global program in a vacuum from the office.
Sheila Small, assistant treasurer, risk management and insurance, at New York-based Verizon Communications, concurs, observing that perhaps the single, most significant challenge to the global risk manager lies in bringing together the full range of resources needed to successfully manage the program.
“Risk managers (of global programs) must be prepared for a major coordination task. They should set up a network as well as they possibly can,” advises Small. The network to which she refers will likely involve coordination with many individuals, including those from the foreign country’s local brokerage offices and other locally based entities. Such a challenge, she points out, involves a tremendous amount of time and organization on the part of the risk manager to ensure that “all the ducks are in a row.”
“It takes a lot of e-mails–and a lot of phone calls. It’s not an easy task,” says Small, who reports that her time spent on Verizon’s international operations, as a percentage of premium paid, is by far higher than that exerted on behalf of the communication company’s domestically based insurance programs.
Other risk professionals agree. “The single most important thing a global risk manager can do is to constantly feed into the circle of individuals at the other end, because ultimately the responsibility falls to you,” says Merritt E. Fabel, director of corporate risk and insurance at New York-based American International Group (AIG), a leading insurance and financial services organization that operates in about 130 countries and territories around the world. “The risk manager can’t say ‘I’m not a mind reader. I don’t have a crystal ball.’ That rationalization is not acceptable. The risk manager needs to get out there.”
The ebb and flow of the worldwide, or regional economy; political upheavals; the strengthening or deterioration of country alliances; the outbreak of disease; the occurrence of natural disasters–these are just a few of the developments cited by experts that continuously loom on the global risk manager’s horizon and which must be viewed–and viewed often.
This broad-brush, or enterprise, approach to risk management has for years been advocated for companies of every orientation, whether domestic or international. Yet Robert E. Hoyt, head of the risk management and insurance program in the Terry College of Business at the University of Georgia in Athens, stresses the urgency of adopting an enterprise risk management orientation when a company’s operations are scattered abroad.
“It’s important for any corporation to take a more holistic approach (to risk management) but such an approach is all the more important in the context of a global corporation,” observes Hoyt. Some risk managers, he adds, may initially reject the notion that their operation even has an exposure abroad.
For example, a risk manager may take comfort in the fact that his company’s key suppliers are U.S.-based. Yet upon closer look, that same risk manager may uncover the unsettling information that some of those suppliers are heavily dependent upon resources obtained abroad. Likewise, Hoyt cautions that any company that has a presence on the Internet potentially opens the door to exposures abroad. Internet security, he adds, “becomes all the more prominent when a company is dealing more actively on an international basis.”
In his book Risk Management and Insurance, coauthored with James S. Trieschmann and Sandra G. Gustavson, both also of the Terry College of Business, Hoyt identifies several key risks that can be addressed through enterprise risk management, ranging from the “pedestrian to the exotic,” all of which present even greater challenges to the global risk manager. These include: adverse commodity price fluctuations; failure of a company’s electronic data processing system; lapses in communications links with customer markets and suppliers; disruptions caused by political upheaval; regulatory changes that disrupt the business environment; changes in technology that hamper strategic goals; lapses in due diligence relating to mergers and acquisitions; counterparty reliability in financial hedges; obstacles to timely strategic planning; and spoilage or crop disease causing damage to the quantity, quality or marketability of grain supplies.
Hoyt and his coauthors also point out that global firms basically have three options with respect to how they structure their international insurance programs. A company can buy insurance in its home country and arrange for coverage wherever it does business. This approach, say the authors, has the advantage of being easy to administer and leaves the decision-making in the home country. On the downside, however, is that such an approach may be illegal in some countries that require admitted insurance, and favored tax treatment of insurance premiums and loss payments may be lost. Also, the insured will not have a local insurer to provide claims and other services overseas.
In the second approach outlined by the authors, insurance program design and the purchase of insurance is left to the firms’ management in each of the countries in which it does business. Yet while this approach has the advantage of meeting any local laws and preserving favorable tax treatment for premium and loss payments, it can lead to what the authors call “a very inefficient program structure” and potential coverage gaps if the firm is doing business in a number of countries.
A third and what the authors identify as being perhaps the most popular approach for many global firms today is what they call a “global controlled master program.” Under such a scenario, a global insurer works through its own subsidiaries or partner insurers in each of the countries in which the insured corporation does business to provide uniform coverages globally.
“We view ourselves as one unified company operating on a worldwide basis and our philosophy is also to manage risk on a worldwide basis,” says Irv Rothman, president and chief executive officer of Compaq Financial Services, the Murray Hill, N.J.-based wholly owned subsidiary of Compaq Computer Corp.
Rothman, whose company has offices in 41 countries that provide financial products and services that cover about 90 percent of the worldwide operations of Compaq Computer, observes that some companies, perhaps so anxious to tap into a foreign market, will establish risk management strategies totally independent from their overall corporate goals and operating philosophy. As their international operations expand, their risk management programs become increasingly fragmented.
“A company (with international operations) has to establish a risk management philosophy,” cautions Rothman. He explains that at Compaq Financial Services, the company’s risk management experts from around the globe gather at one location to forge a global strategy “that every-one is satisfied with and that can then be aligned with the nuances of doing business locally.” Convincing everyone that this unified approach is the most effective has itself been a challenge. “It’s taken some education, some cajoling,” concedes Rothman, “but we continue to work at it and we get there.”
The direction the risk manager ultimately takes with regard to structuring a global program will depend on many factors, both internal and external. Yet the good news, says Richard S. Betterley, president, Betterley Risk Consultants Inc., a Sterling, Mass.-based risk management consulting firm, is that risk managers have a growing array of resources at their disposal.
Whereas once there were only a handful of brokers that could offer truly global insurance capabilities, today, Betterley observes, the quality and quantity of truly global insurance networks has evolved considerably. “Many regional brokers around the world have come together in networks that can service the (risk manager’s) business. This creates more choices for the risk manager, which is a good thing,” Betterley adds.
Likewise, Small of Verizon points out that the risk manager of a global program must also avail herself of key resources closer to home, some of which might even be found in the same building.
At Verizon, explains Small, a number of risk management-related functions are clearly delineated among various departments. For example, responsibility for such functions as contingency planning and corporate and personnel security falls to the company’s safety department. Financial matters, which embrace currency fluctuations and other financial risks associated with a global program, fall to the responsibility of another assistant treasurer.
Small also points out that while e-mail, telephone, and facsimile are unquestionably effective modes of quick communication, on-site, face to face meetings with local professionals are also essential. With Verizon operating in 19 countries, Small often travels. She develops a highly efficient network of resources by meeting directly with local professionals and encouraging open communications across boarders and oceans.
“It’s very important to get to know people and to let people know who you are and what your organization can do for them. Personally, I find I have gotten the message across,” says Small, as evidenced in part by the fact that she often receives unsolicited faxes from Verizon’s foreign locations asking her office for input on coverage or related issues.
But, she says, the key to the success of the company’s global program is that the various departments work side by side, not as totally separate entities. “We get together for monthly staff meetings. We assist each other and keep each other informed.”
Fabel also stresses the importance of gaining meaningful and current information about specific locales in which the company operates.
“It’s important to know what is usual, reasonable and customary,” says Fabel. For example, he points out that transactions may be conducted differently abroad, or certain words or business terms may not translate accurately from one language into the other. The status of risk management may also vary starkly from one country to another, Fabel warns, citing as an example the U.S. risk manager considering fire safety measures at a foreign-based location. “He may be thinking of an advanced computer detection system, while they’re still thinking about sprinklers.”
Fabel cautions that the risk manager may find himself hitting the proverbial brick wall if he attempts to keep risk management strategies “equal” across every border. Instead, he advises the global risk manager to learn what is both necessary and customary in a given location and to establish programs that more accurately reflect local needs.
“Risk managers have to have a certain amount of understanding of the countries their company is operating in or considering entering,” concurs Mike Haubenstock, a partner in New York-based PricewaterhouseCoopers’ Global Risk Management Solutions (GRMS) practice, a large risk management consultancy with more than 5,000 professionals worldwide.
Important questions cited frequently by experts that demand answers supported by dependable intelligence, include: How stable is the country politically? How strong is its currency? How reliable is the financial data of the foreign entity with which the company is planning to do business or extend credit? Is the locally admitted insurer financially solvent? Will the company’s investment in an operation abroad be recoupable in U.S. or foreign currency? How vulnerable is the area to the occurrence of natural disasters or severe weather conditions? How far has technology and safety standards progressed in the country the company is evaluating? What are the potential employment practices liability issues that are created by joining people from differing cultures into a single work force? Are the area’s local officials and potential work force receptive–or hostile to–American companies? What has been the track record of shipments from the U.S. arriving intact at the contemplated location?
The bottom line, adds Paul Horgan, PricewaterhouseCoopers’ GRMS insurance leader, is that a company’s executive leadership “must carefully evaluate the geographic region with an eye toward risk identification and mitigation” and the risk manager, he cautions, must play an integral role in this process.
No matter how extensive a U.S. company’s international operations have become, W. Gordon Knight, president of AIG’s New York-based WorldSource division, stresses that the process of a company’s expansion abroad is still realized through a country-by-country determination.
The risk manager, observes Knight, does not only face the challenge of identifying and addressing country-specific risks that currently exist, but of anticipating trends and developments that may impact the region–and therefore the company–at a later point in time.
For example, the recent Mad Cow disease scare, while originating in England, nevertheless affected companies across many boarders that imported certain beef-based products. Actions by the European Union (EU), which potentially impact companies operating in any of its member countries, should also be high on the risk manager’s radar screen.
“Businesses need additional protection when they venture overseas,” adds Knight, who outlines a number of exposures that become glaringly menacing when a company moves its operations or strategic relationships beyond its domestic boarders. These include losses associated with: damaged goods in transit, whether by land, sea or air; damage to overseas buildings and contents owned by the insured; employee dishonesty, disappearance or destruction of property; good faith acceptance of counterfeit paper currency or money orders; third-party lawsuits, including product liability claims, brought against the insured in the U.S. or abroad as a result of its overseas business activities; kidnapping and extortion schemes as well as losses associated with political instability, war, embargo or government intervention (see sidebar on page 30); and accident or health problems experienced by employees and their family members traveling outside the U.S.
Hoyt also warns that certain financial exposures become “all the more prominent for international firms,” such as those associated with the extension of credit to foreign companies and the potential losses that can result when a foreign currency is converted back into U.S. dollars. The exposures created by exchange rate risk, counterparty credit risk and other financial risks are not normally addressed by traditional hazard coverages and must therefore be managed through specific products and risk management strategies, says Hoyt.
Pamela J. Ritz, president of Austin-based Specialty Risk Management, likens the role of today’s global risk manager to that of a “plate spinner,” someone who is challenged to keep all of the plates simultaneously in motion so that none hit the floor. Ritz, whose company provides risk management services to both a large private client base and insurance companies, believes the global risk manager must continuously evaluate the scope of the company’s exposures and the portfolio of products and services in place to address them. The risk manager must be aware of issues and trends, she adds, “that once never entered their radar screen.”
Equally important, continues Ritz, is the readiness of the risk manager and his full arsenal of personnel and resources, both domestic and abroad, to act when a loss either threatens or occurs. A speedy and aggressive response, says Ritz, can make the difference between an incident being effectively managed and from which the company successfully rebounds, or one that develops into a full-blown property, liability, or public relations disaster.
The Very Real Political Risk
As a corporation extends its operations beyond U.S. borders, the risk manager is challenged to address the unique exposures arising from the actions of individuals or governments hostile to foreign companies and their employees.
“The world is becoming riskier and the risk manager needs to become more concerned with political and economic risk, warns Ambassador L. Paul (Jerry) Bremer, senior advisor, political and emerging risks, at New York-based Marsh Inc. And while Bremer says there may be more opportunities for corporations seeking to tap into developing or emerging markets, he cautions that these venues likewise present an increased risk of doing business.
Bremer, an authority on counter-terrorism with extensive experience in both private and governmental entities, including a 23-year career in the U.S. Diplomatic Service, identifies a number of exposures that either manifest or become magnified when a company conducts business abroad.
He cites, as an example, the occurrence of “creeping expropriation,” which occurs more subtly than the scenario in which a government seizes the property and assets of a foreign company outright. Today, says Bremer, the more likely scenario will see the actions of a host government perhaps capping allowable increases on the price of a product or subjecting the company to additional and burdensome taxes, “in effect undermining the viability of your investment.”
Other actions that can undermine a U.S. company’s financial position include a government’s refusal to arbitrate a dispute or to pay an award if won; the imposition of controls on the investing company’s ability to move its capital out of the host country; or the imposition of barriers which impede the company’s ability to convert its profits back into U.S. dollars.
Additionally, warns Bremer, actions by the host government, groups, or individuals can take a more immediate toll on the security of a company, perhaps compelling the forced abandonment of a facility, which potentially places both personnel and properly at increased risk. Likewise, Bremer reports that fully 80 percent of the terrorist acts committed against U.S. interests abroad target U.S. businesses, rather than governmental or military posts. Kidnapping, to which any employee, not just the high-profile executive, is potentially vulnerable, is yet another exposure that can grow right along with a company’s international growth, Bremer notes.
“When a company is considering entering a market, it needs to have intelligence about the area, which includes intelligence related to political risk and potential concerns for security,” adds Jeff Schlanger, chief operating officer, Security Services Group of Kroll, a Division of Kroll Associates, a New York-based international crisis consulting and investigative firm.
The challenge to the risk manager, warns Schlanger, is the ability to “take the real dangers into consideration” and to effectively respond with appropriate products and services, which include those related to corporate security, political risk and travel security, and crisis management.
For as Schlanger warns: “Kidnapping and extortion, product contamination, property terrorism, workplace violence, computer sabotage and other crises are very real threats to companies, employees and consumers the world over. And while these perils themselves can be grave and frightening, being unprepared for them is the greatest danger of all.”
COPYRIGHT 2001 Axon Group
COPYRIGHT 2001 Gale Group