We have seen a long dry spell that included 2008 with just 43 IPOs and a first quarter 2009 that saw a single offering. 2010 is poised for a possible recovery with 53 companies that entered registration in 4th quarter 2009, the most new registrants in two years. (data gleaned from Ernst & Young’s latest IPO pipeline report) Technology claims the largest number of new registrants but the group as a whole cuts through all sectors. Average fund raising target is $190 million. but 24 of the new registrants are smaller companies seeking to raise less than $100 million.

I gave my first directors and officers (D&O) liability insurance presentation to a board of directors in 1996. The CFO of this publicly traded company asked me to discuss the highlights of its recently renewed D&O insurance program. The presentation lasted less than five minutes—and not one question was asked by any of the board members present. In fact, most of them were engaged in other conversations that they must have deemed more important or more interesting than insurance. My presentation was a mere formality: the board essentially rubber-stamped the CFO’s insurance
decisions.

Since then, a board’s involvement in insurance decisions, like D&O coverage, has changed dramatically. Now our firm presents to its client public company boards and audit committees at least once a year. Board members are no longer passive and disinterested when it comes to insurance. Instead, most are well informed about the liabilities directors face and want to fully vet their D&O insurance protection—specifically its structure, limits and scope of coverage. Questions often arise about insurance carrier solvency, the importance of differences in conditions A-side coverage, appropriate coverage limits and the terms and conditions of the policy. A decade ago, CFOs generally made all these decisions; in today’s ever-litigious corporate environment, many executives now defer these important decisions to their entire boards for input and formal approval before finalizing major insurance placements.

Risky business

Boards are also becoming more engaged in risk management, specifically enterprise risk management (ERM). Traditional risk management identifies exposures to loss, examines various techniques to address the risk and then selects the most appropriate techniques to control it. Note that risk management focuses only on accidental losses, not all losses. A key technique used in risk management is insurance or risk transfer; however, insurance is only one facet of risk management. It’s been suggested that the paradox of insurance is that it is a good first and last response to managing risk, but is not always the most appropriate response. There are other important risk management tools, such as risk avoidance, self insurance, loss prevention, loss control, contractual risk transfer and alternative forms of risk financing.

All-encompassing risk

In contrast, enterprise risk management deals with all aspects of an organization’s risk, not just accidental loss. The Risk and Insurance Management Society defines ERM as “a strategic business discipline that supports the achievement of an organization’s objectives by addressing the full spectrum of its risks and managing the combined impact of those risks as an interrelated risk portfolio.” The Committee of Sponsoring Organizations of the Treadway Commission defines ERM as a “process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.” Both definitions are mouthfuls, but the point is that ERM is all-encompassing and comprises the spectrum of organizational risk. Note the key takeaway that ERM is a process “effected by an entity’s board of directors.” Since the recent financial and economic meltdown, the board’s involvement in ERM has grown significantly. Boards are expected to more effectively identify and assess risks across the organization, driven in large part by anxious shareholders and other stakeholders who want to ensure that both the balance sheet and shareholder value is properly protected. As such, the board’s role in ERM is one of the hottest topics in corporate governance.

Proposed rules

In July 2009, the Securities and Exchange Commission (SEC) took these responsibilities even further by proposing new disclosure rules regarding board oversight of ERM, which could impact how boards approach and manage risk in the future. The proposed amendments include newly mandated disclosures on the boards’ increasing involvement with ERM. If you thought directors of a public company had a tough enough job fulfilling traditional fiduciary and stewardship duties, imagine how those directors must feel knowing they could be held responsible for not accurately identifying and assessing all entity risks and for not properly planning a response for each one. If the SEC proposal passes, Christmas will come early and often to the plaintiff’s bar.

More responsibility?

The process of identifying and managing traditional and known risks is certainly doable for directors. But should they also be held accountable for the highly improbable “Black Swan”? According to Black Swan author Nassim Nicholas Taleb, “a Black Swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was.” He considers 9/11 the prime example of this phenomenon. Think about being responsible for identifying something that is unpredictable, something that has a huge negative impact, and after the fact, experts assert that you should have predicted it. That is one tough exercise for anyone. Boards need to be well equipped to deal with these increasing responsibilities, relying heavily on outside professional service providers to guide them through the labyrinth that is ERM. Whether or not the proposed SEC risk management oversight rules are enacted, ERM will become a recurring theme in boardrooms across America. In fact, it just moved to the top of the agenda.

by Spence Hoole

- Diversified Insurance Group was a title sponsor of the Summit 2009 Director & Officer Conference –

SALT LAKE CITY – December 11, 2009 –

“Requirements for today’s corporate directors and officers are evolving more quickly than ever before,” said David W. Steuber, partner in Howrey LLP, Los Angeles, Calif. Steuber joined a capacity group of more than 140 leading executives who participated in the 9th Annual Summit Conference for Directors and Officers (www.summitconf.org) at Stein Eriksen Lodge in Park City, Utah last week. SageCreek Partners, Ernst & Young and Diversified Insurance, along with several additional business support organizations, co-hosted the event.

“The Summit Conference is an event that is well worth attending,” Steuber continued.”It is a practical program for the director and officer who is serious about understanding cutting edge corporate governance issues and implementing measures designed to meet the ever-evolving legal, ethical, and social requirements imposed upon today’s businesses.”

Additional presenters at the event included Reatha Clark King, Ph.D, a member of the board of directors of Exxon Mobil, and Doyle Arnold, the Chief Financial Officer at Zions Bancorp. Working panels and topics included discussions of new SEC regulation, accounting changes and strategies for dealing with risk in organizations and industry. Keynotes included a discussion via satellite with U.S. Senator Bob Bennett. Additional presentations included keynotes by Bob Gay of Huntsman-Gay Capital and Lynn Blodgett, CEO of Affiliated Computer Systems, who spoke about company culture and the importance of being a good human while returning value to shareholders.

The Annual Summit Conference has featured senior management from the SEC, Nasdaq, PCAOB, CALSTERS and ISS, as well as leading industry executives and even a few controversial figures such as now-disbarred plaintiff’s class-action lawyer Bill Lerach. At the Summit, directors and officers of public or nearly public companies meet to receive updates on legal, financial, regulatory and business trends so that they can focus on their responsibilities in their professional roles.

On Friday night, the wait was over for the finalists of the 2009 Ernst & Young Entrepreneur of the Year contest for Utah and southern Idaho. Awards were given in a total of eight categories. Over 1,200 people attended the black-tie event at the Salt Palace Convention Center.

Utah Lt. Gov. Gary Herbert, the keynote speaker, noted that small businesses fuel the state’s economy, with about 57,000 “small employers” representing 97 percent of the state’s employers.

Utah’s economy favors free markets, which is why a handful of national business publications have rated Utah’s economy as No. 1.

“I fear, at least in some ways, (the importance of free markets is) being forgotten in Washington, just a little bit,” Herbert said as the audience applauded in agreement. “Capitalism is becoming a dirty word. I’m here to tell you that’s not going to happen in Utah.”

New this year in the awards competition was a social-entrepreneur category, described as being for well-managed organizations that solve problems in the community with strong leadership. Matt Minkevitch of The Road Home received the award.

Minkevitch said The Road Home’s clientele are people who live in the margins and have one setback that ruins them financially. They end up homeless.

“One of the significant transitions that has taken place over the last eight years is we’ve focused on the other end of homelessness,” he said, “to help people move into housing.”

The Utah award recipients will next compete against other companies for national awards. Diversified Insruance Group was one of the sponsors of the awards.

Award recipients in the Utah competition were:

Technology: Matthew Heaton — BlueHost

Retail and Consumer Products: Jonathan Freedman, William Freedman and Charles Freedman ?— DownEast Outfitters

Emerging: David Flynn and Rick White — Fusion-io

Contract services: Douglas Sayer — Premier Technology Inc.

E-Commerce: Ryan DeLuca — Bodybuilding.com LLC

Social Entrepreneur: Matt Minkevitch — The Road Home

Services: Andrea Anaya — Career Step

Distribution and Manufacturing: Dallin Larsen — MonaVie

Diversified extends congratulations to all of the finalists and award recipients.