In the bustling world of business, where opportunities and risks intertwine, risk management is critical—but it's changing. Simply understanding the financial health and performance of a company is just the beginning. What once seemed like a clear-cut process of reviewing financial statements and performance metrics has evolved into something much deeper.
The reality is that in an ever-changing environment, knowing a business’s financial performance is only part of the story. To truly assess business risk, you need to look beyond the numbers on the balance sheet and understand the people behind the business. The directors often make critical, high-stake decisions, and if they have a history of poor performance—whether it's past bankruptcies, county court judgments, or unresolved debts—their track record can offer valuable insights into potential risks, directly influencing a company’s stability and the likelihood of its success.
In an age where information is vast yet fragmented, relying solely on traditional business financial performance data can leave gaps in your risk assessment. It’s like having a map with missing sections—helpful, but incomplete. This is where the story of effective risk management begins to evolve.
Imagine this scenario: A fast-growing company with impressive revenue growth and glowing financial reports is looking to secure a new supplier or business partner. On paper, everything looks ideal—profits are up, the company’s market presence is expanding, and its financial statements are solid. But here’s the catch: one of the company’s directors has a history of financial instability, including past bankruptcies and ongoing legal disputes related to unpaid debts.
This is where the hidden risk lies. While the business’s financial health may appear sound, the personal struggles of those running it could quickly unravel that stability. Directors make key decisions that steer the direction of the company, and if they are dealing with personal financial challenges, those issues can bleed into their business decisions—potentially leading to poor judgment calls, riskier behaviour, or even financial misconduct.
In today’s fast-paced environment, where decisions need to be made quickly and accurately, overlooking these personal factors can expose your own business to significant risks. That’s why understanding the performance of individuals within a company is no longer optional—it’s essential.
The risks of neglecting the personal performance of directors are not hypothetical—they've played out in real-life scenarios that have had disastrous consequences for businesses. One high-profile example is, once the largest printing company in the UK, which entered administration in 2016. The company had long-standing financial difficulties, but its collapse was precipitated by the poor financial decisions made by its directors. Polestar was owned by Sun European Partners, and its executives had a history of involvement in struggling businesses that failed to turn around. The lack of thorough due diligence into their prior financial mismanagement and business performance meant that critical warning signs were missed. Polestar’s eventual collapse caused a significant impact on its workforce and the many clients that relied on its services.
Similarly, the downfall of BHS in 2016 demonstrates the risks of failing to thoroughly investigate the financial background of those in charge. Sir Philip Green’s sale of BHS to Dominic Chappell, a man with a history of bankruptcies and no retail experience, was a turning point for the struggling department store. Chappell’s personal financial instability and poor decision-making directly contributed to the retailer’s demise, which left 11,000 people without jobs and resulted in a £571 million pension deficit. A deeper understanding of Chappell’s financial history could have prevented the transaction, avoiding a high-profile collapse that reverberated across the UK retail sector.
These examples highlight a fundamental shift in how businesses must assess risk. It’s no longer enough to focus solely on a company’s financials—scrutiny of the financial health and integrity of those in charge is crucial to safeguarding against unforeseen risks. Understanding both the numbers and the individuals behind them is the key to making better, more informed decisions in today’s complex business landscape.
Comprehensive risk assessment
Traditional financial analysis alone is not enough. To truly understand and mitigate risk, you must also evaluate the personal financial health of the directors. Their financial instability can significantly impact their business decisions.
Integrate personal financial checks
Implement procedures to regularly check the personal financial backgrounds of key individuals within the company. This should include looking into past bankruptcies, county court judgments, and any ongoing financial disputes.
Conduct thorough due diligence
Before entering into partnerships, acquisitions, or significant business decisions, ensure that due diligence extends beyond the company’s financial statements. Assess the personal financial history and potential red flags of those at the helm.
Implement risk mitigation strategies
Develop strategies to address any identified risks related to personal financial issues. This might include contingency planning, additional financial oversight, or setting up safeguards to manage potential impacts.
Stay informed and updated
Regularly update your risk assessment criteria and practices in response to evolving business environments and regulatory changes. Staying informed helps you adapt to new challenges and protect your business from unforeseen risks.
By adopting these practices, businesses can enhance their risk management processes, safeguard against hidden risks, and make more informed decisions that contribute to long-term stability and success.
Today, having a clear understanding of risk is more crucial than ever. Poor due diligence on directors' financial performance can expose your business to significant risks, especially when dealing with individuals with a questionable financial track record. For risk management to be effective, it requires understanding the financial health of those making key decisions.
AMLCERT Verify provides essential predictive data and insights on both the business and its key individuals in a single search, allowing you to quickly identify potential risks with ease. With business performance insights and publicly available information on directors' financial backgrounds at your fingertips, AMLCERT Verify provides you with a unified source of truth. No more navigating multiple systems, with key information a few clicks away, you can make informed decisions that protect your interest, with significant efficiency gains and cost savings.