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Reader Profile

Terry Fleming
President
Risk and Insurance Management Society, Inc.

Editor's note: Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today. If you'd like to participate in this section in the future, please email Scott Chase.

From the Enron scandal to the downfall of AIG and to the product recall disaster facing Toyota, we have seen time and again how much risk management is part of board-level decision-making. And yet, it seems that boards can lose sight of this. When it comes to managing risk, what are the most crucial things board members and directors need to keep in mind?

We really are in a new frontier when it comes to board responsibilities for the recognition of exposures and opportunities associated with risk. It is apparent to most experts that the internal audit method of managing risk failed on a colossal scale. The rating agencies are amending their processes to ensure that risk management is being practiced enterprise wide, and that boards have a fiduciary responsibility to ensure that the organization has a risk management identification and mitigation program in place. I believe the most crucial item for boards to keep in mind is to recognize that there are risks outside the processes, procedures and guidelines that are part of an organizations structure, and it is incumbent upon the board to try to identify and manage those risks.

Executive liability concerns have been at a very high level in recent years, and the fallout from the Wall Street meltdown seems unlikely to abate this any time soon. What do you see as being the greatest executive liability risks at present, and what are some important risks you feel are on the rise?

I believe the lawsuit fallout from the financial meltdown has not really begun in earnest. There will be class action and stockholder suits for many years to come based on allegations that executives lined their own pockets at the expense of company stakeholders. Company executives must anticipate the litigation and take action to protect the organization (not themselves) from being adversely impacted. A comprehensive enterprise-wide risk management program should be implemented with the ERM committee reporting directly to the board of directors. Congress is currently drafting legislation that will require companies to do this.

D&O insurance has been a standard line of defense to protect against executive liability. With so many high-profile corporate disasters in recent memory, what are you seeing all of this doing to the liability insurance market? Do companies need to brace for increasingly expensive D&O insurance, more stringent conditions on insurance policies, or even reduced levels of available coverage?

All indications that I have read show that the D&O market is relatively stable with adequate capacity.

Executive liability is often seen as something only public companies need to be aware of. But how different is the need to manage these same risks for a private organization?

Most of the claims filed under D&O policies are employment liability claims. It is important for private organizations to have this coverage in place to protect management in the event of these claims. Even if the claims are spurious and are denied, litigation costs could cause a financial drain on the organization. D&O policies will provide for defense costs associated with the litigation. Also, many private companies have international operations. Since laws relating to management practices are different in other countries, it is important to protect against litigation and claims arising from those operations. Finally, more and more customers are willing to sue long-standing business partners for the financial failure of their firms. Private organizations should recognize that exposure.

To what degree must personal risk management play into executive-level decision-making? Executive liability lawsuits can and do name individual directors and officers, and without Side A coverage, those executives may find themselves on their own in a liability suit. How might this complicate an executive’s ability to decide what is best for the organization? Does it give rise to possible conflicts of interest between what risks the executive is willing to take personally versus what risks he or she might expect the organization to take?

In some states, companies are prohibited from providing Side A coverage for executives. Additionally, some companies choose not to provide the coverage for various reasons including not having the financial ability to do so.

Allegations of conflicts of interest are common in D&O claims, since many executives are also stockholders in the company. Care must be exercised so that a clear distinction can be provided to prove or ensure that decisions are made in the best interest of the organization versus the interest of an individual stockholder who may benefit by the decision.

What can organizations do to better train their executives to manage financial risk better? And why aren’t more organizations doing it?

Companies should be providing strategic level training for their boards on fiduciary liability and the responsibilities of individual board members to the stakeholders. I believe there is an increasing amount of training and strategic risk management taking place within organizations as a result of the financial crisis. In addition, Congress may be enacting legislation that requires companies to establish risk management committees reporting directly to the board of directors. One can only hope that these measures and a growing sense of corporate citizenship and ethics will lead to a more risk aware organization.

Terry Fleming is the director of the division of risk management for Montgomery County, Maryland, a position he has held since 1988.

As director, Mr. Fleming is responsible for all aspects of the county’s $100 million risk management program, including the purchase of insurance, risk financing, loss control, and management of the county’s self-insured property and casualty operation covering more than 50,000 employees, in a pool arrangement consisting of 13 public entity participants. He manages a staff of 12 employees.

Mr. Fleming has also served as risk manager at Fairfax County Public Schools, Fairfax, Virginia.

Mr. Fleming is currently president of RIMS and has been a member of RIMS board of directors since 2004. He has also served on RIMS Conference Programming Committee and Audit Committee.

Mr. Fleming also is a former president of RIMS Potomac Chapter and a former president of the Public Risk Management Association (PRIMA) Maryland Chapter.