Directors and Officers Liability insurance protects the company from claims pertaining to management decisions and their effect on company policy, financial reporting and, of course, performance. More and more, Boards of Directors and C-suite officers are targeted for literal or figurative payback when problems arise.
What is the best risk management for these types of losses? Other than finding the skill to predict the future or purchasing adequate limits of D&O insurance, auditing decisions for compliance and efficacy is the best.
Just as a Certified Public Accounting audit uncovers potential problem areas and relieves some of the burden and responsibility from the Board, operations and procedures audits point to compliance and process issues.
Your options include internal and external audits.
External audits have the advantage of bringing in people unfamiliar with your company, with no pre-existing thoughts, to rethink procedures and compliance. Typically, businesses grow and do not change management styles or procedures until problems arise. Sometimes a total re-engineering is required; sometimes a few tweaks do the job. A fresh perspective helps.
Internal audits have the advantage of cost, but familiarity can blind people to the issues at hand. The process investigation should begin with raw materials and end with shipping. Why? That is the pertinent question.
Why this supplier? Are others available either to supply or back-up the first supplier? This situation is a potential D&O claim: no contingency suppliers lined up. Why not? Tradition most likely.
Corporate memory and tradition are valuable, but modernization is too.
One more audit method is worth mentioning. Ask the first person in the process line how they would improve the system. Go to the next and so on. Many employees have good ideas but are hesitant to rock the boat. Find those employees and mine those thoughts. You might be surprised.
Engaging the employees has an additional benefit: happy, engaged employees who feel some sense of ownership are less likely to sue for employment practices claims, a rising cause of D&O losses.