You’ll Be Just Fine: a reflection on succession planning
I was on a plane above Colorado’s gorgeously snowy stretch of the Rocky Mountain range when I came across an article on Inc.com about Warren Buffett’s plan of succession. His message to shareholders was as stark and stern as it was optimistic—“You’ll be just fine without me.” For those of you reading this that own or operate advisory practices, I would imagine that you desire to communicate the same thing to your clients and your stakeholders. There are several ways to think about this situation from a risk management perspective, and it seems to me that the major takeaway from the article is that it is important—whether you are 29 years old, or 89 like Warren—to actively reflect on the impermanence of your current situation. Part of acting from a position of strength in whatever professional situation we find ourselves in is reflecting on and planning for changes in that situation, as uncomfortable or awkward as it can be to do so.
It’s helpful, I think, to think about the various forms of organizational risk, and the perception of organizational risk will vary depending on who is perceiving it. Those perspectives would include shareholders/stakeholders, clients, firm employees, and the families of each of these categories of people. It’s a big Venn diagram with a lot of overlapping arcs. We don’t know what the future holds, by definition, but by studying the past we can categorize some key scenarios in order to plan for these eventualities.
The most drastic or dramatic eventuality, of course, is that you are the principal of a firm and that you became incapacitated. Maybe there wouldn’t be any fatal repercussions the day of the tragic misfortune, but what if your incapacity lasted weeks, or months, or led to your death? This is where succession planning in the way that Mr. Buffet describes in his article becomes vitally important. And though we don’t need to know the intimate specifics of the plan Warren has implemented for Berkshire, we are comforted by the knowledge of the presence of a plan, no? And would we not be discomforted by knowledge of the absence of one?
This form of risk management does not necessarily entail cost, in terms of spending money on insurance to transfer risk, but I would encourage you to at minimum outline a plan for those key risk eventualities. Then, equally or perhaps even more importantly, communicating with the trusted team that would be responsible for executing that plan (we’ve all heard the estate planning horror story where a beneficiary is empowered to execute a Living Will but has not been apprised of the code to the safe that contains it).
When we succession plan from a business insurance perspective, we swiftly encounter the concept of what is known universally as “tail coverage.” This common-language term “tail coverage” is actually a different piece of language in the legal contracts themselves, and that term is the “Extended Reporting Period.” There are all sorts of rights and responsibilities built into your current insurance contracts that deal with this topic. I’d humbly submit that you should make certain you’re aware of the key responsibilities entailed with a change of ownership, or with purchasing or selling a portion of a book of business. The reason for this is that because most succession planning includes dealing with some degree of ownership transfer, and ownership transfer often triggers specific responsibilities that need to be addressed by specific dates (this structure is required because your professional insurance contracts are on a “Claims Made” basis, instead of an “Occurrence-based” one).
If you hold principal ownership of a firm in a transitional situation, you will also want to make sure the proper people and entities have coverage. By this, mostly, I mean your spouse, and your estate. This fact became acutely important to a client of mine here very recently. The situation that unfolded was that my contact at the client firm had passed away unexpectedly, and that the firm had been in the process updating their CRM software when he died. As I worked with the firm’s key leadership and the deceased principal’s spouse to manage the insurance requirements, we discovered that some long-term client accounts had been incorrectly reported. This defect was found to be primarily due to the updating of the CRM platform. It also obviously meant potential claims situations as the firm needed to disclose the accounting irregularities to its clients. My client’s death had triggered a buyout clause, but before the buyout clause could be enacted, the firm was required to resolve any known situations that could become a potential claim. Further complicating things, my client’s spouse did not work at this firm, or the advisory industry in any capacity—and now found herself in primary ownership of the firm, and thus needing to be defended as the legal responsible party for the accounting regularities. Fortunately, in this case, the coverage contract was structured properly so that the insurance carrier was able to defend the spouse, and the situation was resolved and the buyout clause was carried out.
The long and short of all of this is: fortunately, you don’t need to know the intimate ins and outs of the world of professional liability insurance, but you should certainly make sure you are working with the guidance of a specialist vendor who does. Guidance in this sense means both in selecting the right coverage and guidance in the event of the terms of the contract being triggered in a claim situation. Just like clients come to you for your specialized knowledge and experience, form a relationship with a specialist advocate and make sure the key people in your organization are wired in with them as well.
Written By: Chad Ramberg
Today’s BPI Advice: Succession planning is vital for your firm. Whether transitions are planned or unexpected, make sure you have communicated with key team members who the key specialists are that will protectively support your organization through a transition no matter its size or shape.
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