Safeguarding your business from risk

Do not put your business or yourself at risk unnecessarily. With new laws coming into effect in 2016 the consequences could be beyond dire.

By Kevin Kevany

Earthquakes leading up to the fifth anniversary of Christchurch’s deadly February 22nd quake – and a quake in Marlborough on the anniversary – were echoed in a recent pronouncement by RiskNZ chairman, Geraint Bermingham, that New Zealand businesses are going to have to be on their toes this year.

All that was prior to the new Health and Safety at Work Act which came into effect on April 4th. Non-compliance of the new workplace health and safety laws could lead to penalties of up to $3 million and up to five years imprisonment.

“The financial indicators have not been good so far this year,” says Bermingham. “With regard to deflation, businesses may have to accept that the abnormal has become the normal. Given the lack of experience of such an environment, businesses need to be taking time out to look into the future – even to run simulation exercises to understand the risks and opportunities.

“There is no doubt these are interesting times; times where to prosper, businesses and other organisations need to apply best practice risk management processes, keep thinking ahead and remain agile.”

Along with the Christchurch quake, the Pike River Mine tragedy in 2010 has proven to be among the seminal events in our overall natural disaster experience. Pike River demonstrated safety regulations surrounding workplaces were inadequate in New Zealand and this began the most comprehensive overhaul of workplace health and safety in decades. 

Val Graham, marketing executive for insurance company QBE, says the key points which affect SMEs, as employers, are:
• A higher level of compliance.
• A higher level of fines for non-compliance.
• The potential to pursue directors of unsafe workplaces.

“At a simple level, employers must ensure that they are operating safe workplaces and that those working must not be exposed to hazards arising from the work itself – or the environment. There must be policies in place to ensure that hazards are identified and employees are informed about, and trained, in how to handle the work environment,” says Graham. (This includes knowledge of safety equipment and devices.)

Those who are ‘Persons Conducting Business or Undertaking’ (PCBUs) must take every precaution to ensure that no worker is harmed in their work. Under the new law, the definition of worker includes employees and is broadened to include: contractor; subcontractors; employees of contractors and subcontractors; volunteers and trainees; outworkers and those gaining work experience. 

“This is much broader than ever before,” Graham says. “Similarly, the responsibility falls on a broader category than before.” 

Under the new law ‘Officers’ of the company have an obligation to exercise due diligence to ensure that the PCBU is compliant in its obligations, she says. Under the previous legislation, directors were only held liable where they could be seen to have taken a more direct hand in their company’s failures.

“The new legislation charges directors with actively ensuring they are managing safety in the workplace; ensuring the safety of fixtures, fittings and plant; and ensuring that protocols and processes are established and communicated,” adds Graham.

Insuring your key people
Moving from physical risk to the human factor risk in companies, ‘human capital risk’ as they term it in the industry, is an area sometimes ignored with disastrous consequences simply because it is harder to imagine. Unsurprisingly, many SME owners have the attitude “it won’t happen to me”. After all, that confident optimism is almost an essential characteristic that motivated you to start your own business in the first place.

Cecilia Farrow, MD of Triplejump, a company that pioneered business systems for risk advice, says “When it comes to human capital risk, businesses need to guard against informal, ‘handshake’ deals between mates, or a ‘let’s leave that until we have a going concern’ attitude.”

She believes there’s no such thing as a ‘settled in’ period; you are at risk from day one.

“Credible research consistently highlights human capital risk as one of the most substantial facing an SME. Being profitable, solvent and ‘soaring’ one minute, can turn into a plummeting jet the next, with the loss of a key person critical to the success of the business.

“It is tempting for us to think all who enter into business will exit it in a planned manner, but statistics tell us otherwise. Take the fact there is a 13 percent chance of anyone dying before the age of 60.

“If there are four partners involved in a business, there’s a 31 percent chance of one of the business partners dying before age 65, and a 46 percent chance of temporary disablement.

Farrow urges business owners who have shares in the business to get good legal advice on agreements for the buying and selling of shares, so major events, such as death or long term disablement of a shareholder, doesn’t throw the company into turmoil.

“Almost inevitably, adequate agreements haven’t been put in place and there are personal guarantees lurking in the background which have to be settled, come what may,” says Farrow, who provides further advice on shareholder agreements (see sidebox).

Case in point
Case studies, because of the inevitable commercial sensitivity or clients not wishing to be exposed, are hard to come by. It’s rare to get the CEO of a major insurance company to step forward too.

But here’s a case study in which Natalie Cameron, the reasonably-recently appointed head of the New Zealand operations of AIA, puts her husband and herself centre-stage.

“When my family and I first arrived in New Zealand last year, we somehow managed to find a rental house in a telecommunications dead spot. This led to a lot of yelling,” Cameron recalls.

“Sometimes it was me, yelling at family members abroad, assuring them we had not actually moved to some remote region of South America. For my husband, Iain, who had left behind an electrical business in Australia, it was a constant stream of repeated instructions yelled at his most senior employee, while he roamed from room to room, trying to get better service.

“Fairview Road. You need to call the owner at Fairview Road.  FAIRVIEW ROAD!  FAIR… VIEW… (expletive deleted).

“Eventually, Iain realised if he got in his car and raced to the top of a nearby hill, he could get reception. We were all relieved when we moved to our permanent house only a suburb over, which has excellent reception,” she says.

“Yet, while communication between Iain and his business improved, his ability to effectively manage remotely did not. Fuse Electrical is a business he set up in 2004, starting out as a ‘man in a van’. Success with online marketing and the ability to communicate complicated messages to customers quickly catapulted his business into one with several vehicles and tradesmen across Victoria. 

“It’s a business he lives and breathes, and which he never switches off from – no pun intended,” says Cameron. “Or he didn’t, until I made him move country and he had to run it remotely.

“Over the next several months, Iain made countless trips back to Australia. He was always working on Fuse when he was home in New Zealand – but it was like having both hands tied behind his back. Although his employees were excellent, they simply could not step up to replace his role as ‘CEO and Chief of Everything’.”

Cameron recalls she watched all this with a fair amount of guilt, and tried not to complain about the travel.   

“Perhaps for the first time I appreciated how Iain, and probably all SME owners, need to have octopus arms, a limited sleep requirement and nerves of steel. He is such a part of the business that it suffers and is incapacitated almost equally as much as he is.” 
 
Breathing space
Life’s events happen to everyone, says Cameron. “Maybe most are lucky not to be married to someone who asks them to move overseas, but all manner of unexpected events lie just around the corner for each of us. 

“In large businesses, we talk about certain employees being a ‘single point sensitivity’. In a self-managed business, that is a gross understatement with respect to both the owner and key employees.” 

One way to protect against the unexpected is insurance, Cameron reminds us. Companies like AIA offer a range of health and life insurance products, which include business interruption insurance. For example, a policy which pays a lump sum of up to $2 million if the owner-insured suffers a critical illness, like cancer or a heart attack. 

“The funds can be used to reduce debt, business expenses, succession planning or funding ownership buy-out agreements,” says Cameron. “In many cases, the cover just gives breathing space for owners to concentrate on their (often neglected) personal health, before deciding what to do about the business,” she says. 

“For example, we had as a client a 36-year-old builder who tore his shoulder badly. After battling on stoically for six-months with physiotherapy, he had surgery to repair his shoulder. For a few months afterwards, he was unable to lift anything, using that arm. 

“ACC paid weekly compensation and AIA paid three months of benefits while he recovered. The builder used the money to employ subcontractors, which enabled his successful company to keep running, and to complete the jobs they already had on, with no loss of revenue.” 

Cameron cites another example of insurance cover helping to replace key people for a period. 

“We had a 33-year-old chiropractor who injured her ankle and was not able to make her way around the medical practice without a massive moon boot. The cover allowed the owner to replace her with a locum for a month, while the original employee worked part-time on light duties. 

“It is a way to protect your precious livelihood, since no amount of planning or care can completely remove the risk of you becoming injured or ill. 

“In my husband’s case, he may actually have been better-off financially if he had broken his leg, so long as his business insurance was up-to-date,” says Cameron. “For me it was an education about how the survival of a SME can depend so critically on one key person. If he was struck down with a serious illness, his business would not survive at all without cover.

“Iain is still trying to commute and occasionally still yells expletives into the phone. If only there was insurance cover for demanding spouses like me,” she laughs.

Reality check
Finally, just when the rest of the country had put earthquakes back on the mental shelf, the Valentine’s Day 5.7 magnitude earthquake hammered Christchurch. More aftershocks followed.

“Not only must the people of Canterbury pondered their fate that afternoon,” says QBE’s Val Graham. “If nothing else, it’s a timely reminder that New Zealanders must always be mindful of the seismic nature of our country and always be prepared for seismic emergencies.”

And if you’re a business owner, always be prepared for every eventuality.