Wednesday, January 20, 2010

ERM-BC-COOP: Often overlooked risk


Practitioners worth their salt always consider succession planning as part of a true enterprise risk management/business continuity plan - if it is not "enterprise," it's not really a "plan."

But we, this scrivener included, rarely think about is the financial well-being of senior management.

Let's say that we have a family-owned business, and one of the family members is the major stockholder.

As long as the major stockholder is alive and both physically and financially healthy, no problem.

But if the major stockholder "dies" financially, what impact will it have on the business? Will it drag the business down because the major stockholder's personal and business finances are comingled? (It works the other way around, of course, and that is more common; the business fails and the principals are financially injured or ruined.)

If the major stockholder physically "dies," is there a document in place (and where is it) to assure a smooth distribution of the (now-deceased) major stockholder's company assets (stocks) to the surviving stockholders or to new stockholders?

Granted, this falls under the general heading of "succession planning," but for most practitioners, "succession planning" is all about who is going to fill the missing person's job on either an interim or permanent basis.

While the example above typically is a concern of small businesses - Mom-and-Pop organizations - it could, should, also be applied to any organization that has "shared" ownership - that means stocks or other "paper" owned by more than one person.

Consider a major conglomerate, a General Electric-size company. If an executive has been acquiring discounted stock over a number of years and suddenly this stock comes on the market, what will this flood of paper do to the company's stock price? The fact that the executive or executive's estate must sell already makes an impact on the paper's value - if the exec improved the organization's position, the stock may lose value; on the other hand, if the exec was driving the company into the ground, the value may go up.

As with all things "risk management," the practitioner only can make the client aware of the risk and suggest means to avoid or mitigate the risk. In this particular case, this practitioner would advise the client - organization or individual - to seek the advice of both legal and financial planning experts.


John Glenn, MBCI
Enterprise Risk Management practitioner
JohnGlennMBCI at Gmail dot com

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