The Importance of Proactive Risk Management in the Company - Research Paper Example

 In its most common and basic form, risk is the chance of financial loss. (Gitman 57) In the management of a petroleum products pipeline company, the risk of loss can extend across a gamut of ranges; environmental issues, financial issues, human resource practices, and more. The purpose of this risk management plan is to anticipate potential risks faced by a petroleum products pipeline company and provide a framework for mitigating those risks through absorption, transfer, or elimination. The framework of this plan will be based on the following broad categories: Board of Directors, Executive, and Corporate Risk Property and Casualty Risk Human Resources Management Risk Compliance Risk Each of these categories contains specific risks and mitigation strategies as noted in each section. Corporate Risk. Good risk management begins at the very top of the organization and extends downward to departmental and individual exposures. To protect the company’s viability and financial security, it is necessary to erect a strong barrier between potential risks and the assets of the company. The first way to accomplish this is to establish a proper corporate structure. In this case, using a “C” Corporation model affords the most protection to executives and board members by erecting a “corporate veil” between management as well as the board of directors and potential litigants seeking compensation for damages. In fact, it has been noted that while it is possible to pierce the corporate veil, this is becoming more difficult "as the courts refuse to look behind the corporate veil in any circumstances other than actual fraud." (Dine 47) In addition to proper structure, the company should transfer its risk exposure for misconduct, errors in business strategy or execution, as well as general liability protection against potential lawsuits involving accidents. To protect the Board of Directors and the officers of the corporation, the company should purchase a D&O policy that prevents any potential litigant from attaching personal assets to any claim made against the company. For the petroleum products pipeline company, however, it should be noted that "although directors' and officers' insurance is widely available, its coverage tends to be limited, with important categories of claim, such as in respect of environmental liabilities, being excluded."(Ferran 237) Thus, such insurance might exclude environmental damage done by the company’s operations in the event of a spill or leak in the pipeline. To protect the stakeholders from exposure to any malfeasance or outright criminal activity in regard to financial management, the company should bond all managers with spending authority or control over the company’s assets. This would particularly apply to the CFO, Controller, and senior accounting staff. Finally, as an extra layer of protection, the company should take out an umbrella liability policy. This insurance is relatively inexpensive as it serves as a second-payor in the event that a plaintiff successfully presses any particular claim that exceeds the underlying policy limits. For example, should an employee driving a company vehicle have an accident, be at fault in that accident, and the claim exceeded the personal injury policy limit, e.g., $ 500,000.00, the umbrella policy would cover any awarded amount over that amount to the limit of the umbrella policy itself. For this reason, many companies use umbrella liability policies in face amounts of tens of millions of dollars; affording significant peace of mind for all stakeholders should the worst case scenario become reality. Property and Casualty Risk. The company faces the same types of risk to its property as any other; fire, theft, accidents, etc. To mitigate this risk, it is transferred to an insurance policy that covers all corporate structures and their contents, as well as equipment, cars and trucks owned by the company. (Neave 289-290) As a result of the various costs and fact-sensitive nature of most P&C policies, e.g., policies written on the Gulf Coast carry extra premium costs and higher deductibles—standard deductible plus 2% of structure value—the company should plan to absorb some of these risks by setting deductible values that are low enough for the company to afford, but high enough to reduce the premium to a level at which the company is willing to pay. The cash reserves needed to cover such deductibles should be placed in a segregated investment account where the funds can accrue interest until actually needed. Unless working capital demands are unhealthily high, the cash and its accumulated interest actually helps the company’s balance sheet by reflecting as liquid assets on the balance sheet. Human Resources Management Risk. Of all areas of risk exposure, this area is arguably the most important, and represents an area of significant risk for any company. Litigation is a fact of life in the modern business world, and HR management is rife with liability exposure. Often, it takes only one successful civil lawsuit to literally wipe out many companies, and management must take all reasonable steps to prevent this from happening. There are three key areas that will be considered here in terms of HR risk management. They will systematically start at the front door (hiring), move through the company (policies and performance), and end at the back door (termination). Front Door. Identifying, attracting, and hiring the right talent has always been a challenge, but today the process can seem even more difficult due to legal concerns. It is important, however, that management not concentrate on litigation risk management in hiring to the exclusion of actually hiring the right person. (Rosse and Levin, 61) Risks of lawsuits (or other adverse consequences) are part of most corporate decisions, but HR managers must understand that the risk of litigation needs to be weighed against the potential benefits of the hire. The risk involved in hiring the right person for a role in the day-to-day operations of any small corporation is far greater than the legal risks during hiring, as long as management follows basic practices for reducing and managing risks of hiring. In general, Equal Employment Opportunity (EEO) regulations prohibit any discrimination based on “protected characteristics.” An employer may not refuse to hire an individual based on: Race, color or ethnicity; Gender; Religion; National origin; Age (those over 40); or Disability. (Equal Employment Opportunity Commission n.p.) At its most fundamental level, discrimination is making distinctions between applicants based on the foregoing reasons rather than on their qualifications to perform well on the job; after all, the entire reason for effective hiring is to find the most qualified individual. Company. The first thing the company should create is a policy or HR manual. I should both new hires and current employees with the company's philosophy while setting forth guidelines for employees to follow. An employee manual is a necessary and vital document that will protect the organization from possible litigation; every company should have one, no matter the size. The HR manual for the petroleum products pipeline company will cover all areas of potential risk for the company. For example, the manual will clearly communicate management’s expectations regarding sexual harassment. In doing so, it will present a clear definition of what constitutes sexual harassment in the work place, management’s expectations of employees in this regard, and the penalties and disciplinary processes associated with violations. The definition and penalties for discrimination will also be also clearly communicated. Management will ensure that each and every employee signs a simple document affirming that they have read and understand the manual prior to placing the employee in the workplace. Another area that needs to be clearly communicated is the process of promotion and demotion in the organization. The company will establish regular performance reviews, document the review on paper, and provide the employee with a copy of the review. The rules for advancement follow the same general rules of hiring in terms of being fair and non-discriminatory. They should be performance based, and clearly set forth the requirements of advancement. Back Door. Disciplinary procedures will be set forth in the manual based on the following requirements: 1. Minor Infractions a. Verbal warning on first violation. b. Written warning on second violation, signed by both the employee and the manager. c. Temporary suspension on the third violation. d. Termination upon any further violations. 2. Major Infractions a. Written warning, signed by both the manager and the employee. b. Termination 3. Egregious Offense—Defined in the HR manual as creating a hostile workplace environment through hate speech, harassment, or gross insubordination. These are policy violations that are cause for immediate termination. Such behaviors as sexual harassment or racial/ethnic slurs are on the top of that list. There have been many companies sued over this issue when management chose to simply warn the offending worker and a subsequent incident occurred. It is vital that the risk manager ensure these procedures are set forth clearly in the manual. In terms of discipline, the employee may refuse to sign written warnings because s/he disagrees with management’s position. In these cases, the manager should simply write the words “refused to sign” on the signature line. Further, if a contentious disciplinary meeting is contemplated, a second manager should be present for the purposes of witnessing the event. In most states, these meetings can be recorded by audio or video as long as all parties—including the employee—are informed that the recording is being made. In addition to providing a fair, non-hostile working environment, the company will also provide certain benefits to the employees. It is anticipated that company-provided health insurance will be prohibitively expensive. Accordingly, the company will offer a group policy that the individual has the right to join if they so desire, and the company will contribute $ 100 per month towards the employees’ premiums. The company will not provide disability or life insurance to employees, but will establish a 401(k) or other qualified retirement account to which employees may contribute. This account will not be self administered, but will be placed in the trust and administration of a qualified retirement benefits company. The company will reserve the right to contribute to the retirement plan as a year-end company performance bonus (profit share), up to 15% of each employee’s contributions for that year. In this way, the company can offer a retirement benefit without being contractually bound to contributions in years where there has been poor performance. Compliance Risk. There are several regulatory compliance points that affect this company. The first is Workers’ Compensation, “a combined governmental and private insurance program that provides benefits to most workers who suffer work-related injuries and disabilities.” (Lencsis 1) As this company is of an industrial nature, with petroleum products and pipelines, it is important to anticipate injuries and have the required insurance in place both from a compliance perspective and a risk management view. Both absorption and transfer will mitigate the risk of injuries in the work place. The company will absorb part of the risk compliance by taking all necessary measures to make the workplace as safe as possible. This includes best practices of safety management and compliance with the Occupational Safety and Health Administration (OSHA), including the maintenance of required postings, appropriate labeling of dangerous areas, e.g., “Hard Hat Area,” and documentation of safety and compliance efforts. Maintaining a safety file “is a critical means of maintaining a written record of…activities. You need this record to manage safety and health and to prove compliance with OSHA regulations.” (OSHA 37). Accordingly, the company will have policies and procedures in place to document all pro-active safety efforts as well as injury reporting requirements. These will mandate that any employee injured on the job must immediately report to his or her supervisor, who will then take the appropriate steps to insure timely treatment of the injury, contact the safety officer of the company, and document all aspects of the injury including date, time, place, conditions present, worker’s conduct, accident, injury, and all efforts undertaken to care for the worker. This injury report will be due from the supervisor no later than 24 hours after the injury has occurred. Another area of compliance for this company will the Environmental Protection Agency (EPA) which oversees the operational processes of any product that has the potential to harm the environment. It is axiomatic that oil and other petroleum products can greatly interfere with the environment. From the Exxon Valdize accident in Alaska to a number of petroleum plant leaks, environmental considerations are significant and the public is becoming more aware and concerned about such practices than ever before. Accordingly, part of the risk management plan for this company will include ensuring compliance with EPA standards, passing all EPA inspections, and working to be a good corporate citizen in environmental practices. Statutory and regulatory risk is largely mitigated by compliance with the law; this company will make every effort to always be in compliance with federal, state, and local regulations addressing the operational activities conducted. Conclusion. The importance of proactive risk management in the company cannot be overstated. A systematic evaluation and periodic review of the risks faced by the company will be the cornerstone of the petroleum products pipeline company’s risk management process. The periodic review of the entire risk exposure of the company and all steps currently in place to mitigate that risk will be conducted every six months. The evaluation will be as comprehensive as possible for the obvious reason; unless management is aware of the risks to which it is exposed, proper decisions cannot be made regarding either the amount of risk stakeholders are willing to bear or the exposure to liability issues faced by the company. This is a review of the macro environment, internal and external. Macro environmental risk is about awareness of the events, developments, trends, and growth within the operational environment. While many aspects of risk management can be automated, e.g., a clear Human Resource manual, environmental risk must be a continuous process. Accordingly, with the above noted risk mitigation strategies, the petroleum products pipeline company will be able to conduct its operations in a safe and profitable manner. Transferring as much of the risk as possible to insurance companies will protect the company as well as its physical assets. Best practices HR policy and administration, along with those benefits the company can afford to provide, will ensure a healthy and happy work environment. Compliance with all statutory and regulatory authorities will prevent legal issues and fines from burdening the company. The regular review of external and internal risks—and those policies and procedures inside the company that mitigate them—will protect the company from future risk. Accordingly, with its risk management policies in place, the company can focus upon profitable operations and a good return on investment to its stakeholders. Works Cited Dine, Janet. The Governance of Corporate Groups. Cambridge, England: Cambridge University Press, 2000. Equal Employment Opportunity Commission. Federal Equal Employment Opportunity (EEO) Laws. 2 March 2009 Ferran, Eilis. Company Law and Corporate Finance. Oxford: Oxford University Press, 1999. Gitman, Lawrence. Principles of Managerial Finance. Boston: Pearson, Addison, & Wesley, 2006. Lencsis, Peter. Workers Compensation: A Reference and Guide. Westport, CT: Quorum Books, 1998. Neave, Edwin. Financial Systems: Principles and Organization. London: Routledge, 1998. OSHA. “OSHA Record-Keeping and Posting Requirements.” Journal of Environmental Health 62.1 (2000): 37-40. Rosse, Joseph and Levin, Robert. The Jossey-Bass Academic Administrator’s Guide to Hiring. San Francisco: Jossey-Bass, 2003. Viscusi, W. Kip. Fatal Tradeoffs: Public and Private Responsibilities for Risk. New York: Oxford University Press, 1992. Read More