Business Risk Management during the Current Pandemic

Learn why business risk management is important and how it can help your company prepare for catastrophes like the current COVID-19 pandemic. 

The ongoing COVID-19 outbreak has everyone scrambling to comply with the authorities' ever-changing Enhanced Community Quarantine (ECQ) and General Community Quarantine (GCQ) standards. As a result, in order to survive, company owners and their firms must adapt and adjust their business practices. 

Business Risk Management is one of the best business practices that a company can employ in this time of pandemic. This can assist the corporation in anticipating possible difficulties that could have a significant impact on the company or cause it to go out of business, such as the ongoing COVID-19 pandemic in this case.

Business Risk Management and Black Swan Events

What is the definition of business risk management? In layman's words, it's all about recognizing business difficulties (also known as "risks") and devising solutions to minimize or eliminate those risks. The traditional risk management steps are as follows: 

Detecting Threats 

Assessing the Risks: Using a scoring system, score the identified risks (e.g. high, medium, low or critical, important, and acceptable) 

Treating Critical and Important Risks: mitigating, reducing, transferring, or accepting the risks through a strategy or action plan.

What are Black Swan Events, and how do they work? 

As a risk management professional, I feel that the present COVID-19 outbreak is a Black Swan—an event for which we are woefully unprepared. A black swan, in the context of corporate risk management, is an unforeseeable and improbable event that has the potential to have serious effects. 

The epithet "Black Swan" comes from the Western notion that only white swans exist; however, this belief was disproved when rare black swans were discovered in Australia. Nassim Taleb, a finance professor who wrote about it, popularized the term. As a result, Black Swan events are distinguished by their rarity and severity. The breakup of the Soviet Union, the 2008 financial crisis that paralyzed the world's financial markets, the September 11 terrorist assault (911) that rocked the United States, and, possibly, the sinking of the unsinkable Titanic are all examples of historical Black Swan events.

There are many more such incidents, but it's worth noting that a Black Swan event is also known for being highly evident in hindsight — that is, assuming we given much thought to the possible risk signs leading up to the event. 

What Business Risks Should You be Aware of?

The continuing epidemic of COVID-19 in our country and the entire world has trapped numerous companies unprepared. However, we can still foresee and assess the Black Swan Risks that we currently face. This is especially critical because the more extreme hazards have a high likelihood of occurring and having serious, adverse implications.

The following are the top three main dangers faced by local Philippine companies during this pandemic period, in my opinion: 

Cluster Infection Risk: comprises widespread infection of a large number of corporate employees, culminating in a business shutdown. 

Business Closure Risk: This refers to the possibility of a company closing due to a lack of revenue caused by the pandemic for a variety of causes (e.g. customers are unable to go to the stores, company products are not prioritized because of other urgent needs by customers, etc.). 

Pandemonium Risk: comprises unbridled disturbance, uproar, and commotion among those who have been significantly impacted by the COVID-19 epidemic (e.g., monetarily or due to a lack of access to food and basic supplies), which might lead to widespread looting, thieving, and other negative events. 

Risk of Infection Clusters 

The first risk, Cluster Infection Risk, can, in my opinion, be readily controlled because organizations can take a variety of steps to avoid it. The following action plans, among others, can be implemented or put in place:

Policies in place at companies to control the spread of COVID-19 in the workplace: specific measures to reduce the risk of infection. Work from home arrangements, frequent hand washing, social distance, no touching of the face, installation of alcohol sanitization stations, avoiding large gatherings or meetings, and a regular schedule for disinfecting the company premises, equipment, furniture, and communal items such as doorknobs, toilets, and bathrooms are just a few examples. 

Random COVID-19 testing of staff and visitors using government-approved testing kits, installation of temperature scanning devices, and adoption of strict quarantine policies, such as requiring workers to report if they or any of their family members are sick or infected, and mandating affected employees to be isolated for at least two weeks. 

Strict Return to Work regulations for employees who were exposed to COVID-19 and/or infected: individuals who have recovered from COVID-19 or who have been identified as Patients Under Investigation (PUIs) must undergo PCR or antigen testing before being allowed to return to work. Those who tested positive should be placed on a 7-day quarantine and retested until they are cleared. 

Risk of Business Closure 

The following risk, the Business Closure Risk, is especially difficult to resolve. However, the following recommendations can help to alleviate the problem:

Companies should find a method to adapt their business models to the changing times: an indoor restaurant, for example, may become a meal delivery service or an outdoor eating attraction. Businesses with physical storefronts may be forced to go online. To market their brand, companies may need to hire "influencers" rather than salespeople. Fashion clothes and accessory companies, on the other hand, can create fashionable PPEs, face masks, and shields. However, in order to be successful, you must guarantee that the new business model you are adopting is closely tied to your current business. 

Companies can also consider a temporary halt of operations to save available resources and weather the pandemic; however, this option requires business owners to be honest and forthright with their employees about the potentially terrible situation they are in. Management should do a Cost-Benefit Analysis study to identify the benefits and drawbacks of a shutdown before proceeding. A shutdown will also cost the corporation money in terms of employee separation compensation, loans and advances, and company dole-outs to help displaced staff. When deciding whether a temporary shutdown is the best option versus continuing to operate with a skeleton workforce throughout the epidemic, the expenses of re-opening or re-starting operations should also be considered. 

Risk of Pandemonium 

Finally, we must thoroughly examine the Pandemonium Risk. This is a serious concern since it will damage not only individual enterprises but the entire country. In anticipation of this risk, it is hoped that suitable action plans can be put in place ahead of time and as quickly as feasible. Because of the nature of a Pandemonium Risk, the government and the business community must work together to combat it.

The following are some potential mitigation strategies to consider in order to avoid this from becoming a reality: 

The government should immediately prepare or implement plans to make food and basic necessities cheaply available for people who are less privileged in our society  (by controlling the prices and establishing food equipment), effectively handle medical emergencies (other than COVID 19 patients), and provide for the sake of race equality.

To help disadvantaged communities get by during the epidemic, the business community and those who can afford it should share and give food and basic supplies; firms should also beef up security on their facilities to avoid unexpected situations. Stores, restaurants, banks, government buildings, and financial organizations should all be on the lookout. Failure to handle the Pandemonium Risk will almost certainly lead to anarchy and unrest, bringing our country to its knees. I hope we never get to that stage.

Probably, during this pandemic, there are many other issues that concern companies. I think, however, that the above three risks are the most crucial of all. In this regard, companies should take the action plans needed to tackle these risks immediately or we may all be facing the devastating consequences. 

Let's give ourselves some favor and manage our businesses' risks.

Keep safe, everyone.

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Is Creating a Family Office Right for Your Family?

Aside from running a business, it is critical to understand how to manage your money. Juancho Robles teaches you the fundamentals of a family office—not a literal office space—and whether it's the right fit for you.

I was recently in Singapore on a personal trip. I contacted a close friend, who later introduced me to the CEO of a highly regarded family office in Singapore that caters to Ultra-high-net-worth individuals (UHNWI) and affluent families. We eventually discussed the possibility of providing similar services in the Philippines. 

We also discussed the peculiarities of local family businesses, in which future wealth distribution to family members is not really planned for or discussed. I am aware of a few large local family businesses in the Philippines that have made succession plans, but they still fall short in the areas of family governance and wealth management. Our discussions also include how family offices can help wealthy families better plan and manage their wealth so that their children and subsequent generations do not waste it—interesting topics, to say the least. 

Family Offices, Defined

Family offices are still a "new" thing in the Philippines. A family office, in general, is a privately held company or consulting firm that handles investment management and wealth management for affluent people with more than $100 million in investable assets. Most “local” family offices (if you can call them that) in this country are set up internally by the patriarchs or founders of the families and run by trusted individuals—usually senior officers employed by the family business.

The problem is that these senior officers may not have the necessary skills and expertise to optimize the family's wealth potential. Furthermore, they may be unfamiliar with dealing with the complexities of running a full-fledged family office. There is also the issue of confidentiality, as family members may prefer that their wealth be managed discreetly by themselves. As a result, wealth management receives insufficient attention because trusted individuals or even family members are more concerned with operating and running the family business. 

The Benefits 

A good family office is usually made up of professionals who are experts in a variety of fields, such as investments, family relationships, and even family conflicts. They will have legal experts, psychologists, and even health professionals on board, in addition to investment advisors, to address the various expectations and mindsets of each family member. These professionals work closely with families to help them design and execute the strategies necessary to protect family members and assets both now and in the future. They also offer support services by assisting families in professionalizing the administration of their relations, including privately-owned businesses and private wealth arrangements. 

Affluent families in Asia, including the Philippines, have traditionally held their investments through holding companies or Special Purpose Vehicles (SPVs). Many times, this was motivated by the desire to ensure the confidentiality and the perception of ease in establishing a business in tax haven jurisdictions. In many cases, the ultimate goal of these SPVs is to reduce taxes (as a tax planning tool). Families are increasingly discovering that the use of these complex structures can become cumbersome (due to unconsolidated management and reporting) and exposes them to a slew of risks from tax authorities.

According to a Credit Suisse report from 2018, there are more than 50,000 people in the world with a net worth of more than $100 million. Many of these people manage their investable assets on their own. In 2019, the Philippines had approximately 15 billionaires, and the number of our local UHNWIs with more than $30 million was approximately 569. (according to a Statista report). Credit Suisse estimates that there are between 6,500 and 10,500 individual family offices in the world. Recently, there has been a growing trend of family offices in other jurisdictions, such as South America, where family offices began to cater to families with excess investible funds ranging from $1 million to $10 million, with a focus on early-stage investment opportunities. 

What Does a Family Office Do? 

To put it simply, a family office is a wealthy family's single point of contact for managing a variety of issues depending on their focus. A family office, for example, can handle the following:

Wealth planning encompasses succession planning, business continuity planning, estate planning, life insurance, prenuptial agreements, living and last wills and testaments, and lifetime gifts. 

Investment strategies and asset allocation, private equity, investment advisory services, and consolidated wealth reporting are all part of wealth management. 

Tax planning services include tax advice, international relocation structures, real estate structures, and double tax treaty planning. 

Family governance includes the formation of a family constitution, a family council, family assemblies, internal family rules and regulations, equitable family wealth distribution, and family dispute resolution. 

Trust and Corporate Services: incorporations, trust administration, nominee services, family structures and shareholding arrangements, real estate management, yacht and aircraft vehicle property management 

Charity and philanthropy include strategies for gift-giving, grant-making, donations, and foundations. 

The Most Important Takeaway 

As you can see above, a wealthy family has a lot of options for preserving their legacy and wealth. Rather than having to deal with and communicate with a plethora of individual professionals, working with a reputable firm that provides family office services or can assist you in establishing your family office will simplify a plethora of things for family members. This allows your family to focus on running the business, or it may allow you to relax and even retire knowing that your family's wealth is in good hands.

Whether or not you decide to set up a family office, the most important goal for a family is to stay together. This includes developing meaningful relationships with family members and refraining from burdening one another with squabbles over inequitable wealth distribution. If family relationships are not in order, wealth protection and accumulation will be futile. 

“A family that plans together, stays together,” as my own saying goes.

Keep safe, everyone.

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