Why You Need Operational Risk Management at Series C

Reasons to Prioritize Operational Risk Management

Operational risk losses increased rapidly after the 2008 financial crisis and have remained elevated. However, data availability and analytics have recently created an opportunity to transform operational risk detection from qualitative, manual controls to data-driven, real-time monitoring. The idea is to achieve transparency from product development to the end of life to make better product decisions, leading to stronger brands, better investments, and greater customer loyalty.

At Series C, a company has built a reputation that it needs to protect. So, effective late-stage risk management can attract a steady flow of investors and lenders while helping prevent incidents that could damage the company’s brand, such as data breaches or service disruptions.

A solid risk management framework active at every level of a company also means greater identification of process inefficiencies, which can result in cost savings and improved operational performance. And as Series C companies are often subject to evolving regulations and compliance requirements, operational risk management prepares a company to avoid risk, potential penalties, and fines.

For example, take Coca-Cola Femsa’s comprehensive risk management process or JPMorgan Chase’s approach. They have a dedicated department for operational risk management and believe it is critical to every aspect of business, “from developing trading models to structuring financing for M&A transactions.” The success of the firm’s operations has largely depended on these strong practices embedded into each area of the organization.

Risk Management Considerations for Late-Stage Companies

The following are common exposures most late-stage startups face at some point in their life fundraising journey. Each risk is worth reviewing separately, so let’s dive in.

Management Liability

Shareholders, competitors and investors can sue a company’s directors and officers, putting their personal assets at stake. The average total cost of losses for companies without Directors and Officers (D&O) insurance is $394,000. If your company is experiencing rapid growth, funding, and hiring, Management Liability Insurance can protect your personal assets and company from lawsuits alleging leaders of wrongful acts. Often, a management liability package will cover D&O liability, fiduciary liability and employment practices liability (EPL).

Take this example of why this late-stage insurance is needed. Following the US Supreme Court decision to overturn Roe v. Wade, some companies implemented protocols to assist employees in gaining access to healthcare services, perhaps unavailable in their own states. However, D&O risks could easily arise from newly implemented state law violations.

Employment-Related Issues

Any company with employees faces the risks of allegations, such as discrimination, wrongful termination, misconduct (such as harassment) and breach of contract. To remedy this, you need employment practices liability (EPL) insurance.

But to further assess human-factor risks, many companies are investing in objective, real-time risk indicators to supplement or replace subjective assessments.

You could opt to visualize malicious intent, inadequate respect for rules, and lack of competence in heat maps — they provide risk managers with information to develop appropriate training, incentives, and intervention programs tailored to high-risk groups. Alternatively, advanced analytics models can monitor the behavioral patterns of thousands of employees to identify anomalies before they become serious problems.

Recruitment Challenges

At Series C, you’ll encounter plenty of recruitment risks, including false credentials, negligent hiring, and employee turnover. Negligent hiring claims can be made against employers accused of knowing information about an employee’s background that may have indicated a dangerous or criminal past. And more often than not, employers will lose these cases.

For example, imagine you hired a new business analyst but didn’t get a criminal background check. At a business lunch, a disagreement with a customer leads to an assault. You could be liable for the attack because you failed to investigate the employee’s history of violence.

Moreover, around 78% of job seekers misrepresent themselves — or at least think about it — on job applications and resumes. Whether it’s a degree or a smaller certification, credentials should be verified before an offer of employment is sent. We’d recommend doing background checks, credit reports, and identity verification.

ESG Controversies

Throughout 2022, regulation and disclosure rules meant organizations felt increasing pressures to focus on environmental, social, and governance (ESG) practices. Also, negative ESG situations are becoming more costly and harmful: Over the last seven years, The Bank of America Global Research team estimated that more than $600 billion of market cap for S&P 500 companies had been lost to ESG issues.

At Series C, businesses face new risks as investors, consumers, employees and partners demand greater corporate accountability and sustainability. They want to know how your organization impacts the environment and treats employees and clients. This can include data points such as a company’s carbon footprint, water usage, waste disposal, greenhouse gas emissions and impact on deforestation.

Stakeholders also want to see that a company respects human rights, safety conditions, wage equality, ESG disclosures, tax compliance and other policies and standards. Take what happened to Volkswagen as a warning. In an attempt to meet US environmental protection standards, they falsified emissions tests, resulting in the recall of millions of cars and roughly $34 billion in fines and penalties.

Introducing New Technology

Technology can help offset risks traditionally associated with manual involvement, improve customer experience, boost company efficiency, and reduce costs, among many other benefits.

However, the deployment of new technology and automation also means more risk.

Therefore, all Series C companies should develop a technology risk management plan that considers the business model and stakeholders. Independent of the company structure, effective management of technology risk requires the collaboration of individuals from the bottom to the top of an organization. In fact, onboarding new board members and senior management with relevant technology risk management backgrounds is vital.

Companies must establish accountability structures to oversee technology management risk and develop metrics to follow the success of risk management programs. Natural language processing (NLP) can also monitor adherence to requirements with new technologies.

Cybercrime and Fraud

Cybercrime is becoming more destructive, driven by organized criminals and geopolitical tensions. Meanwhile, a 2022 report estimates that the average organization loses 5% of its annual revenue to fraud. More fraud cases happen at private companies than public, with most occurring in operations, accounting, upper management, or sales. And the majority of fraud is now cyber fraud.

Whether you receive a fraudulent transaction or face identity theft and phishing scams, the opportunities for fraud and cybercrime are endless. Crime insurance can guard your company against damages, along with other advances too.

Traditional risk detection tools centered on self-assessment have been ineffective in detecting fraud, misconduct, money laundering, and other risks. On the other hand, machine-learning models are one step ahead and can identify fraudulent transactions and reduce false positives.

If you’re unsure whether your operational risk management program is adequate or you’re looking to adopt late-stage insurance, find out where you stand with help from a Founder Shield expert. We can assess your current risk profile and provide direction on a management liability program custom-built for your company.

Want to know more? Contact us at info@foundershield.com or create an account here to get started on a quote.