Risk Insider: Nir Kossovsky

Protecting the Enterprise When the CEO Stumbles

By: | February 12, 2018 • 3 min read
Nir Kossovsky is the Chief Executive Officer of Steel City Re. He has been developing solutions for measuring, managing, monetizing, and transferring risks to intangible assets since 1997. He is also a published author, and can be reached at [email protected]

There are a wide variety of factors that lead stakeholders – investors, employees, customers, lenders, suppliers, regulators – to become enamored with a company. While much of it may rely on a cold, hard analysis of the industry, economic trends and financial performance, for some companies, especially small cap, early stage or rapidly growing companies, the CEOs’ personality can become a major factor. Stakeholders believe in the CEOs’ vision, personal charisma, leadership team and the culture they’ve built.

CEOs are also a major source of reputational risk and companies today are quick to jettison leaders for questionable ethical practices even from eponymous firms, or companies where CEOs become an outsized component of corporate reputation — like Uber.

As a result, when we analyze and underwrite reputational risk at companies, we consider a number of CEO-related questions:

  • What do stakeholders expect of the CEO?
  • Are there different expectations among different groups of stakeholders?  For example, a younger customer may give greater weight to social responsibility, while an older investor may give more weight to financial performance over time.
  • What are the consequences if stakeholders are disappointed?
  • What impact is there if CEO behavior is the source of risk?
  • What mechanisms, if any, is the board using to keep the CEO on track with strategy while the board is protecting the assets of the firm?

One of the crucial factors in situations like these is whether stakeholders believe that, ultimately, the company is bigger than the CEO and that its value is not dependent on his or her presence.  This calculation is partly psychological – can they separate the person from the company in their own minds? How much value does that individual add, above that of a replacement CEO?

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Part of the calculation, however, is very tangible. How strong are the company’s underlying assets? How strong is the company’s leadership infrastructure — other C-level executives, division heads and so on — the people who run operations on a day to day basis?

In the case of Steve Wynn, for example, the answer involves both factors.  Yes, the Wynn name brought cache and added value to properties.  And since the company operates in a regulated industry, its licenses and approvals for projects currently underway now hang in the balance.

One of the crucial factors in situations like these is whether stakeholders believe that, ultimately, the company is bigger than the CEO and that its value is not dependent on his or her presence.  This calculation is partly psychological — can they separate the person from the company in their own minds?  How much value does that individual add, above that of a replacement CEO?

But those properties have a certain amount of intrinsic value — even if some organizations cancel conventions or visitors cancel reservations.

Critically important in all this is the board of directors.  Are they equipped to take quick, decisive action?  Will members of the board be viewed as partly culpable for any CEO-related scandal?  Will there be resignations or will the board remain stable and united?

When a crisis hits, does the board have a simple to understand and completely credible story to their stakeholders, validating their good governance practices and attesting to their prudent stewardship of the company? Whatever steps they have taken over the years to manage reputational risk, do they have third party warranties, in the form of insurance policies, that help them communicate that narrative persuasively in the court of public opinion and mitigate the usual post-crisis onslaught of litigators, regulators, and social media trolls?

Obviously, CEO reputation is always crucially important to any company. But when it is a core component of the corporate brand and enterprise value, boards need to consider additional protections against the individual downfalls that so often occur.

More from Risk & Insurance

More from Risk & Insurance

2018 Most Dangerous Emerging Risks

Emerging Multipliers

It’s not that these risks are new; it’s that they’re coming at you at a volume and rate you never imagined before.
By: | April 9, 2018 • 3 min read

Underwriters have plenty to worry about, but there is one word that perhaps rattles them more than any other word. That word is aggregation.

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Aggregation, in the transferred or covered risk usage, represents the multiplying potential of a risk. For examples, we can look back to the asbestos claims that did so much damage to Lloyds’ of London names and syndicates in the mid-1990s.

More recently, underwriters expressed fears about the aggregation of risk from lawsuits by football players at various levels of the sport. Players, from Pee Wee on up to the NFL, claim to have suffered irreversible brain damage from hits to the head.

That risk scenario has yet to fully play out — it will be decades in doing so — but it is already producing claims in the billions.

This year’s edition of our national-award winning coverage of the Most Dangerous Emerging Risks focuses on risks that have always existed. The emergent — and more dangerous — piece to the puzzle is that these risks are now super-charged with risk multipliers.

Take reputational risk, for example. Businesses and individuals that were sharply managed have always protected their reputations fiercely. In days past, a lapse in ethics or morals could be extremely damaging to one’s reputation, but it might take days, weeks, even years of work by newspaper reporters, idle gossips or political enemies to dig it out and make it public.

Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

These days, the speed at which Internet connectedness and social media can spread information makes reputational risk an existential threat. Information that can stop a glittering career dead in its tracks can be shared by millions with a casual, thoughtless tap or swipe on their smartphones.

Aggregation of uninsured risk is another area of focus of our Most Dangerous Emerging Risks (MDER) coverage.

The beauty of the insurance model is that the business expands to cover personal and commercial risks as the world expands. The more cars on the planet, the more car insurance to sell.

The more people, the more life insurance. Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

As Risk & Insurance® associate editor Michelle Kerr and her sources point out, growing populations and rising property values, combined with an increase in high-severity catastrophes, threaten to push the insurance coverage gap to critical levels.

This aggregation of uninsured value got a recent proof in CAT-filled 2017. The global tally for natural disaster losses in 2017 was $330 billion; 60 percent of it was uninsured.

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This uninsured gap threatens to place unsustainable pressure on public resources and hamstring society’s ability to respond to natural disasters, which show no sign of slowing down or tempering.

A related threat, the combination of a failing infrastructure and increasing storm severity, marks our third MDER. This MDER looks at the largely uninsurable risk of business interruption that results not from damage to your property or your suppliers’ property, but to publicly maintained infrastructure that provides ingress and egress to your property. It’s a danger coming into shape more and more frequently.

As always, our goal in writing about these threats is not to engage in fear mongering. It’s to initiate and expand a dialogue that can hopefully result in better planning and mitigation, saving the lives and limbs of businesses here and around the world.

2018 Most Dangerous Emerging Risks

Critical Coverage Gap

Growing populations and rising property values, combined with an increase in high-severity catastrophes, are pushing the insurance protection gap to a critical level.

Climate Change as a Business Interruption Multiplier

Crumbling roads and bridges isolate companies and trigger business interruption losses.

 

Reputation’s Existential Threat

Social media — the very tool used to connect people in an instant — can threaten a business’s reputation just as quickly.

 

AI as a Risk Multiplier

AI has potential, but it comes with risks. Mitigating these risks helps insurers and insureds alike, enabling advances in almost every field.

 

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]