Risk Management and Business Investigations Q & A

Next to the centuries old debt and equity financing advisory services, risk management and business investigations is likely to be the second oldest formally recognized client service that CSC Capital’s offers. This advisory industry claims to have it origins dating back to 1850 with the founding of the Pinkertons, who still today practice security management, risk management consulting and corporate investigations doing business as Pinkerton Consulting and Investigations Inc. Pinkerton like Clearwater interestingly also approaches risk management and recovery-based investigative services in a holistic manner. Though unlike the “original private eye” we only focus on risk management and business and financial investigations without conducting criminal detective work (as they original did) or providing protective and security measures (as they do today).

What is clearly different between Clearwater and our competitors is that, as an affiliate of CSC Capital, we employ the firm’s rich restructuring-based risk and investigative services with detective-like business expertise into each analysis and due diligence, every design and application of risk solutions, and deep investigation of corporate or personnel matters. Outside of protective surveillance and implementing security measures, our pedigree, we submit, anchors Clearwater’s focused insight into what is truly relevant for corporations today – an application of holistic risk management and prevention techniques and business intelligence and investigative solutions through a restructuring-based methodology.

What is the difference between risk management and risk prevention?

While the words manage and prevent implies a stark difference between the two, there is in reality a continuum and trade-offs between the two phrases. At its base, risk is uncertainty and businesses always have aspects of uncertainly, large and small. Capital risk, credit risk, liquidity risk, performance risk, operating risk, interest rate risk, compliance risk, geopolitical risk and so on. Therefore, in its most absolute sense risk prevention is not taking the risk at all. For example, a business may not offer credit to its business customers thus eliminating the risks of collection problems or bad debt. However, if the competition provides credit to its customers, the risk of losing sales and performance risk is an outcome of avoiding the collections risk. In the end, taking business risks is often seen as a strategic trade-off between opportunities and costs. Opportunity cost simply represents the net benefit lost by rejecting some alternative course of action.

The management of business risks can be understood as corporate procedures that manage and thus limit a company’s exposure to various types of risks associated with doing business. This is done through a combination of internal policies and procedures, both external and internal contractual arrangements, insurance policies, or having other parties participate in the risks.

Are business risks more numerous today because of market volatility? Are there new risks on the horizon?

Yes! Today’s business climate is the most volatile since the heights of the Great Depression. But let’s not stop with just market volatility, economic and political uncertainty both domestic and globally adds to the overall mix of business risks. Even for those companies that have seemingly weathered the economic storm of past few years, we believe that businesses are far from done with dealing with overall market and strategic volatility. In fact many business leaders have indicated that the financial, strategic, operational, and compliance risks could become even more uncertain in the next few years.

Moreover, in addition to the traditional economic and markets risks, new risks have entered the risk management environment – social media and cyber-security risks to name two. Some consider these new risks as two of the core business risks in the future. And while risk management technologies have advanced dramatically over the past few years when combating these new risks, decision-makers will need to take a closer look at these risks in association with managing the traditional risks.

What is Clearwater’s approach to these new business risks?

We view these new risks as strategic. In this way they are elevated in visibility within each company’s risk management profile. Also because of the uncertainty of the scope and size of these risks in the future, top management must understand the enormity of the monetary risks involved by inaction. At Clearwater our holistic approach is well suited to assist our clients in managing these risks.

First, we emphasis efficiency and transparency in tools for tracking, documenting and reporting technology based risk information to reduce costs while improving the information’s reliability and timeliness. Second, we seek to increase awareness and alertness within an organization of signs for risks events, both within and external to the business. Our process integrates information across management boundaries allowing for quicker response. Third, modern business analytics tools can help extract valuable insights from operational data allowing companies to develop quantitative metrics to help discover the likelihood of a risk event and assist in identifying unconnected risk factors that might not normally be discovered. Organizational this means that the Information Technology Department is on the front line of risk management, with the Chief Information or Technology Officer being in close collaboration with the other risk officers.

What are some reasons to use an external business investigation firm over conducting an internal financial investigation?

Generally companies lack the internal resources to conduct serious internal investigations, such as workplace or sexual harassment cases and probes into embezzlement and financial fraud. Even large organizations with an internal investigations staff sometimes should look outside for assistance. The main reason is that different cases require different skill sets. This is especially true for financial investigations which by nature are complicated and require skills outside the typical internal auditor. Also investigations of high level staff that a normal financial investigation would require would be difficult to conduct internally because of vested interests and objectivity concerns. Work relationships have often formed teams, some even cross-functional that can impair perceptions and objectivity and emotionally people are sensitive to “digging deep getting all the facts,” due to future alienation from co-workers.

Finally, to add insult to injury, the consequences of conducting an inadequate financial investigation could on the one hand perpetuate the continuance of the wrong-doing, or could expose the company to legal issues and claims with stockholders. On the other hand, an internal investigation conducted with pre-determined biases and without justifiable preliminary evidence of suspicion could result in litigation between the company and the person(s) investigated.

What are the value-added benefits of using Clearwater’s asset recovery services?

The disposing of inventory and hard assets in the most efficient and rewarding manner and the recovering of near default account receivables and bad debt are tedious, frustrating and time-consuming. Distressed clients have little time to devote to these activities since they are already over-burdened with multiple higher priority projects, thus it is most likely that without assistance these endeavors would never be satisfactory completed. And in some instances this could be the monetary bridge needed to turnaround the company. Therefore, it is worth understanding the importance of employing experts in the field. There are two major value-added benefits of engaging Clearwater:

  1. Time is money. As mentioned it allows clients the time to engage in more pressing and urgent matters, regarding creditors, financing, employees, customers and good-will public relations. Also Clearwater is entirely client focused and our immediacy to the asset recovery process demonstrates urgency to all employees within the company and all external factors. Often without the sense of urgency and persistence the parties, including once willing participants in the asset sales process and the debtors, become increasingly reluctant to cooperate. We control the entire process; from setting the liquidation and sales timetables to bird-dogging the participants to negotiate. In collection activities we inform all debtors of a collapsing window of opportunity to make full payment at a discount or agree to a payment plan with interest. To us business debt owed to our client amounts to a form of corporate theft of product or service, and the longer it takes to resolve the matter the more expensive the consequences.
  2. Experience is money. Clearwater has the resources and experience to conduct comprehensive asset recovery operations as well as steer clear of the many obstacles and roadblocks that frequently cause long delays and problems within the liquidation or collection process. Also our business acumen in restructuring, turnaround management, and bankruptcy proceedings speaks volumes when negotiating asset sales or engaging in collection activities. It becomes apparent quickly to all parties we contact that our depth of knowledge and services goes well beyond typical liquidation specialists and collection agencies. Our ethical intensity in resolving our client’s immediate liquidity issues through the most sophisticated of methodologies is unmatched in the asset recovery industry.

Is corporate intelligence worth the cost of outsourcing?

Of course, it depends upon the cost. But given that the cost of services is reasonable and competitive for the services provided, the answer is yes! Rarely do businesses have intelligence departments like in the military, though management and sales personnel should keep tabs on the competition. However corporate intelligence is more market driven than competitor driven. Thus true corporate intelligence is a broad-based investigation into accomplishing a general and/or specific corporate development strategy or the appropriate screening of top management candidates through extensive background checks. However, investigative corporate development activities such as in mergers and acquisitions, alliances, joint ventures, even the appointment of partners and board members, as well knowing in-depth knowledge of suppliers and vendors, is typically out of the skill-set of owners and top management teams. And human resource personnel are not trained in investigative techniques nor investigative by nature. Therefore, the cost of conducting the investigative due diligence for a corporate development project incorrectly must be weighed against the outsourcing of these activities to experts.

Sherlock Holmes once remarked that: “It is my business to know what other people don’t know.” And if Francis Bacon was correct when he wrote that: “Knowledge is power,” it is essential that companies planning to undertake expensive corporate development projects seek top level advisory services first. The cost of acquiring or merging with the wrong competitor could become a “death blow” compared to the pennies on the dollar spent on some sage advice. On this last point, typical mergers and acquisitions firms and investment bankers will do the “deal” for fees even if the strategic integration is impaired or unlikely to succeed. Summit Mergers & Acquisitions working with Clearwater will ensure clients that the “deal” is worth doing, and CSC Capital Corporate Restructuring will conduct the successful integration. This is true synergy!