What your CEO wants to know about managing risk.

• Author: Drake, Lawrence L.
• Position: Cover Story

A decade ago, the CEO's involvement with a firm's insurance and risk-management program rarely went beyond the risk manager's annual presentation to the board of directors about the directors' and officers' liability coverage. Today, however, insurance and risk-management issues are clearly at the top of the CEO's agenda.

If your CEO calls you into his or her office for an update on your firm's risk-management program and the changing risk environment, be prepared. To help you plan ahead, here are five questions your chief executive might ask - and some suggestions for how you could candidly answer those questions.

THE CEO: What risks could put us out of business?

THE CFO: In the aftermath of huge asbestos, products-liability and derivative exposures, as a business we need to be concerned about the next time bomb that could threaten our existence. We could now face a number of potentially huge risks, including class-action lawsuits, employment practice lawsuits and dramatic reductions in market share from a product recall or natural disaster.

The widely reported Year 2000 problem could expose us to a myriad of lawsuits and huge costs from damages. It may require a costly and complex technical fix as well as a strategy to deal with potentially disastrous legal and financial exposures. Even if we do everything right, our systems can be contaminated by outsiders that aren't 2000-compliant and whose faulty data can cause costly business interruptions.

The widened use of just-in-time inventory systems and tightened interdependencies up and down manufacturing and distribution chains have enlarged operating risks for many businesses. In a large-scale natural disaster, critical alternatives such as computer "hot sites," which are fully equipped data centers available for emergency use, may not be available to all the firms that need them. In a regional disaster, demand for these sites could exceed capacity, so it is important for us to have alternatives tested and ready.

Social responsibility issues also represent an emerging business challenge. For example, "sweatshop" liability laws may imperil overseas production for some companies. Will failure to belong to the "No Sweat" Apparel Industry Partnership Agreement affect our sales, reputation and, ultimately, market share? Organized boycotts are another danger if large consumer groups decide not to buy our products or services.

Regulatory risks also pose potentially devastating problems. Marketplace regulatory changes have had broad effects on the financial services, telecommunications and utilities industries. Regulatory authorities also have affected product roll-outs, notably in the pharmaceutical and automotive industries. And compliance with new regulations poses other challenges. For instance, the plans of the Securities and Exchange Commission and the Environmental Protection Agency to accelerate the pace of environmental restoration could force us to fully recognize cleanup liabilities on our balance sheet.

Some serious risks may not be so obvious or...