Human Capital Risk Management: An Often Overlooked Element Of Risk Management

When business owners and executives consider the topic of risk management, it is usually in the context of commercial insurance. Many fail to adequately address a significant risk to their business – the temporary or permanent loss of a key employee(s).

The following article, “Cabot Corp. CEO Steps Down”, published on March 14, 2016 in the Boston Business Journal, highlights this point:

Boston-based chemical firm Cabot Corp. said that its CEO, who has been recovering from a stroke he suffered late last year, has chosen to step down as President and Chief Executive Officer. Patrick M. Prevost served as President and CEO for eight years and his resignation became effective on March 11, the company said in a statement. Prevost will continue to be an advisor of the company and will continue serving as a director.

“I would love to continue to lead this extraordinary organization, but while I continue to focus on my recovery, I am unable to devote the time required to be as effective as I would like,” Prevost said in a statement. “Therefore, it is in the best interest of our employees and our shareholders for me to resign as CEO at this time.”

The board of directors has appointed Sean D. Keohane to serve as president and CEO and to be a member of the board of directors. Keohane joined Cabot in 2002 and has held several key management positions including senior vice president and president of the performance materials segment.

On Dec. 2, 2015, Cabot issued a press release stating that Prevost had to take a temporary medical leave of absence, with the expectation of rejoining the company in January 2016. Prevost’s total compensation last year was USD $4.95 million, not including another USD $3.5 million in value realized from prior year option and restricted stock awards. In addition, Prevost owns nearly 300,000 shares of Cabot, worth an estimated USD $14.5 million as of Monday afternoon.

When the key executive of a company suffers a debilitating injury or illness, it can cause concern and confusion, both for the individual and for their employer. This is especially true for Patrick Prevost. Serving as President and CEO of Cabot for the past eight years, Prevost has been forced to step away as he continues to work towards recovery.

Cabot Corp. was fortunate that they were able to make a transition to a new President and CEO with an internal candidate. Many companies are not that fortunate and face the possibility of having to hire or appoint an interim CEO, the time and expense of hiring a replacement and the disruption in the operations of the company in the time it takes to remedy the situation.

This story could apply to almost any business in any industry where the business is reliant on key employees and executives for their ongoing operations. A well-developed enterprise risk management plan identifies ALL of the risks a company faces, including human capital risk.

There are a variety of strategies that can be employed to manage human capital risk:

Succession Planning
Smart companies and their Board of Directors create and maintain an executive succession plan so they can quickly react to the loss of executives critical to the company’s ongoing successful operation. The plan should go “deep enough” into the organization to not only address the loss of key executives but to identify up and coming talent in the organization to prioritize their development and advancement.

These plans should be reviewed by the Board at least annually or any time there are incidents that cause a temporary or permanent loss of key executives or new up and comers are identified in the talent/performance review process.

Insurance Solutions
Insurance and Risk management experts in Human Capital Risk Management have a variety of solutions which can be customized to the company’s need. Corporate-owned Key Man Life and Disability insurance can be used to mitigate the financial risks associated with the temporary or permanent loss of employees critical to the company’s successful operations.

In the case of short and long term disability, insurance benefits can be structured to pay for the continued compensation of the disabled executive, the cost of an interim or temporary replacement, recruiting costs associated with replacing the disabled executive, in a lump sum etc. These benefits can be customized to the needs of the business. AETHOS’ Risk Management’s group can advise on the design and execute High Limit Key Person Disability strategy with benefits payable to the corporation. For example to cover a healthy executive age 55, this coverage can be acquired for an estimated annual cost of USD $65,000 for a lump sum benefit of USD $10 million. These type of programs can aide in easing corporate disorder by providing benefits to replace lost revenue, satisfy salary continuation obligations, and recruit and retain an industry’s top talent.

Key Man Life Insurance can provide for a variety of solutions in the event of the death of a key executive. It can be designed to fund the buyout of the deceased’s spouse or other beneficiaries, to fund the replacement of the executive and the associated recruitment costs and to provide liquidity to give the company options during a difficult time. For example, for a healthy male age 55, a benefit of USD $10 million would cost approximately USD $7000 per year and could provide a solution to the aforementioned issues.

AETHOS Consulting Group’s Risk Management Advisory partners can help assess the risks surrounding your firm’s human capital and develop strategies to help mitigate or transfer these risks. This is an integral part of a rigorous enterprise risk management plan which addresses ‘traditional” risks like general liability, property, worker’s compensation, cyber-security. For corporations who rely on the unique talents of their key executives top leaders, it is prudent to anticipate the potential loss of key executives, either temporarily or permanently. The old saying “Failing to plan is planning to fail” could not hold more true.

Risk is everywhere in our businesses and our lives. However, taking the time to properly identify these risks and developing a plan which anticipates these risks is the key to your company’s ability to survive and thrive. The question you need to consider is “Has your organization identified and addressed its human capital risk exposures?”


Tom Bullen, New York
SVP - Logistics Solutions

[email protected]

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