Tag Archives: Directors

Dead Reckoning and Board Risk

There is a navigational term called “dead reckoning.” It is taken from the period before radar and GPS. Back then, navigators used the sun and the stars to get from point A to point B, until point B got to within sight.

It worked as follows: Once you knew where you started, knew where you were going and knew your speed, you could use the sun and the stars to set your bearings and chart a course. There was always much uncertainty and large margins for error built into navigational estimates.

This is what board risk governance looks like today. Instrumentation is poor. Most available data is not current. It does not tell us where we are today. It is historic. It’s a bit like buying last month’s newspaper today. Interesting, useful, but not up to date.

In the board room solace, or concern, can be taken from management information. However very many non-executive directors are nervous. They know that they are getting old news. They know that they carry the same statutory obligations as their executive director colleagues but that the executive directors have the most up-to-date news.

The boardroom equivalent of the crow’s nest includes strategic and integrated reports as well as risk reports on what today are highly networked organizations. Organizations are no longer vertically integrated. Organizations no longer have jurisdiction or control over all of the non-financial activities (i.e. the operations) that drive business results. To make matters worse, we live in a hyper-connected, multispeed, uncertain world where multiple things can have multiple impacts on reputation and business operations.

In the boardroom, there is an awful lot more uncertainty than certainty.

What Nassim Nicholas Taleb has told us is his seminal, spine-chilling Black Swan and Antifragility is that not only are we buying yesterday’s news but that the news we are getting is hugely erroneous. He talks of the ludic fallacy, much of which is embedded in contemporary risk management practices.

What Taleb is also telling us is that discontinuity is the new norm. And that the organizations that will thrive in the future are the ones that will take their energy from that discontinuity.

But how is this to be done?

From 35,000 feet, it looks like integration of risk, strategy and decision-making processes.

At 500 feet, it looks like measurement of alignment (remember this is dead reckoning!) with both internal organizational and international proven and accepted guidelines linking risk, strategy and decision-making processes.

Can organizations move beyond dead reckoning and get better instrumentation? Absolutely! I will come back to this in a later post.

In the meantime, consider the prize:

Empirical evidence underpinning an assured calculation of:

  1. Sustainability of current performance,
  2. Enhancement of future performance,
  3. Soundness of transformational strategies,
  4. Management capability to defend reputation and operations under abnormal and adverse conditions,

This makes a difference when talking with credit raters, funders, investors, regulators and a whole swath of other stakeholders.

What’s the barrier to entry for organizations?

Is it cost? Not really.

It is:

  1. Integration of board audit/risk/strategy committee(s)/terms of reference
  2. A track record in seeking and receiving external attestations
  3. Already understanding:

a. The value of linking corporate objectives, strategies, governance and risk management decision making processes,

b. Setting organizational agility as a strategic imperative,

c. The need to integrate governance, risk and compliance roles, processes and key performance indicators (KPIs)

The immediate gains? Access to, and lower cost of, capital than your less capable competitors

The immediate benefits?

  • Increasing management’s understanding of strengths and areas for improvement in integrating risk, strategy and decision-making processes across the organization
  • Supporting implementation of the organization’s strategy through improved alignment of objectives with mission, vision and values of the organization
  • Achieving and maintaining abilities to make, and execute, decisions across the enterprise, and seamlessly shift direction (called organizational agility), when called to:

– Grasp opportunities,

– Increase performance,

– Avoid threats and risks.

In my next post, I will talk about how we can get from dead reckoning to up-to-date calculations of risk, strategy and decision-making process integration — at the pace of change!

Insurance Product Development (Excerpt, Part 3)

CHAPTER 4: Roadmap to Creativity

Culture of Creativity

Creating a culture of creativity is an essential building block for a successful product development company. To succeed, every profit center leader should ingrain a culture of creativity into every aspect of its daily routine. The start of this creative journey begins with the support, process, rewards and goals. silhouettes-81830_640 Each of these steps is discussed in this chapter.

New Product Directors

It is advantageous for each profit center or business unit to appoint a new-product director as a resource charged with overseeing product idea generation and development. This can be a full-time or part-time position. Responsibilities could cover a wide range of activities, including:

  • Idea generation – Interact with staff, brokers and clients about product needs.
  • Idea validation – Review ideas with the product innovation council.
  • Project oversight – Assign a product champion to each new idea.
  • Post-launch performance review – Track new product sales.

Having a new-product director who is responsible for this journey — “the navigator” — can be extremely helpful to a profit center’s success. Experience has shown that it is most effective if the new-product director is a full-time, dedicated employee who is an experienced executive who can command respect and attention. If the organization has a centralized new-product department, this department partners with each new-product director and assigns a staff member who will provide support and assistance.

Product Innovation Council

The formation of a product innovation council in each profit center can provide the company and its new-product director with an organized approach to finding and vetting ideas. The new-product director will lead and organize the product innovation council within that division and should consist of managers from each of the profit center’s major product lines. Regional, legal and marketing participation should also be included. The purpose of the product innovation council is to find new products ideas, review ideas submitted and recommend to senior management developed ideas for evaluation. For smaller organizations, a single product innovation council, sometimes called a product innovation steering committee, can be very satisfactory.  

New-Product Champion

Finally, for each individual new product, the profit center should choose a champion who steers a particular product through development. The new-product champion will be a crucial part of the product development team.

Usually, the new-product champion is a manager or underwriter who will have the ultimate responsibility for the product once launched.

Product Development Process

The key to the success of a creative culture is the establishment of a methodology to develop, design, test, launch and confirm the validity of a new product.

New-Product Award Program

To maintain momentum on this creative journey, it is important to recognize profit center participants who contribute to the development process. Therefore, it is advantageous to have some standing reward program. A program might look like this:

  • Idea Accepted for Development, $100
  • Launched Product Idea, $500
  • Financially Successful Product, a percent (usually very small) of the first-year revenue, up to a fixed amount, such as $10,000

Non-monetary rewards, however, should not be underestimated. Psychologists tell us that a nice letter of recognition from the CEO or an acknowledgment in the company newsletter can often
be more valued by the employee than a $100 gift card. Some companies use sophisticated surveying techniques to find the most optimal combination of rewards, often finding that the monetary rewards do not have the level of impact they were thought to have. The following are a few examples of items that could be offered:

  • A letter of appreciation from the profit center executive
  • Recognition in the profit center newsletter
  • Lunch with the profit center executive
  • A photo with the CEO
  • An additional personal day off

Specific New Product Goals

That which is measured is that which is done. It thereby goes without saying that a product in development must have specific, measurable goals before launch. Also, however, the entire organization should have specific, measurable goals for product development.

How much are new products contributing to the top line? To the bottom line? What are the other measurements such as speed (“cycle of development”), account retention, cross-selling impact, etc.?

Once the firm has its overall goals, these must be incorporated within the budget and goal setting of every profit center so that the goals and strategies of the profit center align with those of the firm as a whole.

Directors’ & Officers’ Liability

Directors’ & Officers’ Liability Coverage — The Basics
Directors’ & Officers’ (D&O) liability has become an increasingly core coverage for many companies, regardless of size, type, non-profit/for-profit status, and rightfully so. Considering our litigious society, and today’s difficult economic environment, D&O coverage should be an essential part of your insurance program.

Typical D&O coverage provides for “any actual or alleged act or omission, error, misstatement, misleading statement, neglect or breach of duty by an Insured Person in the discharge of his/her duties.” In basic terms, D&O policies are designed to provide financial protection for your directors and officers while performing their duties as relates to their company.

Directors’ & Officers’ Liability — The Risks
Common activities and situations in which D&O coverage would come into play:

  • Conflicts of Interest — many executives serve on multiple boards and/or have investment portfolios that could potentially create conflict of interest situations. Non-profit board members, in particular, are more likely to be affiliated with a number of organizations within their communities, both professionally and personally, placing them at additional risk. Be certain your company adopts and enforces formal Conflict of Interest policies that all members must adhere to.
  • Information Disclosure — the SEC has specific requirements that all publicly traded firms must follow as to when and how information is released and broadcast to the public. In addition, your employees and other directors and officers have certain expectations regarding confidentiality. Breach of these regulations, rules or expectations may open your company up to both civil and criminal suits and judgments. Ensure your company has strict, written protocols regarding the dissemination of information, both privately and publicly.
  • Breach of Duty of Loyalty and Breach of Duty of Care — Your directors and officers can be held personally responsible for negligent investment decisions and/or alleged failure to operate in honesty and good faith, whether these actions be direct or indirect. Employees and shareholders alike expect a company’s portfolio to perform well and a lackluster performance can oftentimes be traced back to the lack of corporate governance and poor management. Your firm’s officers must create and adhere to strict written fiduciary care guidelines so as to avoid shareholder derivative actions.

Directors’ & Officers’ Liability — The Protection
D&O policies vary greatly from insurer to insurer and are oftentimes designed for particular types of risks. The most common types of policies are those designed for non-profit and for-profit organizations and publicly traded and privately held companies. Some important components to consider when purchasing coverage are:

  • Entity Coverage — Provides direct protection for the firm itself. Many suits name individuals as well as the organization and Entity coverage ensures coverage for liability incurred by the organization.
  • Duty to Defend Provision — Requires the insurer to pay claim expenses even if the allegations are baseless, rather than providing reimbursement after such a claim is closed.
  • Defense Costs Insured Outside the Limit of Liability — An essential provision! Many plaintiffs seek to protect their own long-term interests and investments in a company by seeking to impose new corporate management practices rather than monetary damages. In addition, a class action suit can easily and quickly exhaust a policy’s limit of liability with pure defense costs.
  • Outside Entity Coverage — Extends coverage to individuals serving on other boards as part of their job function.
  • Broadened Definition of An Insured — Expands coverage to include your employees, volunteers, trustees, committee members, family members and spouses.
  • Libel, Slander, Copyright and Trademark Infringements — Extends personal injury coverage for suits alleging damages related to publishing liability.
  • Severability Clause — Assures protection for innocent parties within the application process. The provision provides for knowledge of material or false statements given within the application as possessed by one insured will not be imputed to another insured.

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