Periodically during the year and at year-end, it is our practice to revisit the risk management policies and practices for certain areas of our clients’ business models.
So, in preparation for that and as a refresher of the material, we had an internal training session entitled:
“Risk Management at our Clients: Foreign Exchange Risks, Excess Cash Investment Risks, Insurable Business Risks”
As is the case with any risk review, we discussed the three general process steps to be followed:
Define – know what the risks are,
Identify – determine if and to what extent our client has these risks,
Manage – once identified, determine what can be done working with the client to monitor, eliminate or mitigate the risk.
Given that we have a diverse client base in technology and life sciences with rapidly evolving and expanding business models, we focused on three areas of risk to help our clients identify and manage. They are:
Risks related to foreign exchange:
At many of our clients, even those in the startup phase, their sophisticated business models often involve foreign operations.
The primary risk area in foreign exchange is transaction risk that is related to:
Current monetary assets and liabilities denominated in foreign currencies, and
Forecast, anticipated long and/or short foreign currency positions.
Risks related to investing excess cash:
Preservation of principal.
Provision of required liquidity to meet the needs and obligations of the business on a timely basis (i.e. according to the cash forecast) without having to liquidate investments before maturity or to use interim stop gap borrowings to cover cash shortfalls.
Provision of an investment yield that is competitive within the context of all the preservation of principal and liquidity needs constraints established.
Risks related to insurable business risks:
Lack of coverage for a specific risk.
Too little or too much coverage.
Limitations or deductibles in the policy that are not appropriate for the client’s business.
Exclusions in the policy that are not appropriate for the client’s business.
Specialized coverage missing – for example coverage for employment issues, proper coverage for foreign clinical trials, employee fidelity coverage, various types of cyber-security insurance, etc.
As we further discussed each of these risk areas, we focused on best practices that we can communicate to our clients and help our clients implement:
Foreign exchange risk:
Have a clear policy approved by senior management or the Board on how to manage the risk.
Develop a reporting system to identify exposures.
Assign one person or department to have the overall responsibility to monitor and manage such risks.
Work with an experienced, qualified bank, as needed, to evaluate potential hedging strategies and other risk management tools.
Investing excess cash risk:
Have a clear policy approved by senior management or the Board on how to manage the risk.
Choose experienced, qualified financial institution(s) to manage the portfolio in accordance with the client’s policy.
Insist on periodic reviews of performance, transparency of fees and costs of managing the portfolio, and appropriate disclosure of complaints made by other customers.
Insurable Business Risks:
A key ingredient in risk management in this area is to use the services of an experienced, qualified insurance broker.
Be aware of the constant changes in the risk environment, in insurance companies modifying their policy offerings and innovating new products, and in the changes in your client’s evolving business model.
Insist on periodic reviews of coverage, transparency of fees and costs of the coverage, and obtain the broker’s explanation of any changes in limitations, exclusions, deductibles, or new policy offerings.
And as always, please reach out to your team members at Murdock Martell with any questions or for support in assisting our clients!
Recent developments:
New guidance on the accounting for digital assets (“Crypto assets”) is coming and updates of related developments of various legal actions by the SEC and others. More to come on these important topics in our future training sessions.