Thrill-seeking CEOs present dilemmas to their firms, families

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Sky-diving, plane-piloting, mountain-climbing CEOs look like they’re having a great time, but the families and members of the board who worry about them, not so much.

Wealthy and famous entrepreneurs are known for undertaking risky activities for the adrenaline rush. While it’s often not possible to persuade these individuals to change, some steps can help mitigate the potential impact on businesses and families, advisors say.

“What it boils down to is finding a balance between an individual’s rights to pursue their own personal interests and the family’s acceptance of the potential level of risk associated with that pursuit,” says family enterprise advisor Gerry Meyer, founder of the Meyer Advisory Group in Vancouver.

One family business Meyer has worked with had four primary shareholders. One of them was an avid scuba diver. The family worked together to set some parameters that would allow the diver to pursue his passion but provide some comfort to the other family members.

Meyer gives an example: “He only ever goes to dive resorts, and he and his partner never dive on their own. They always dive as part of a group, and a certified dive master is part of that. So he gets what he wants out of life and he manages the risk.”

Another family had a member who wanted to pilot his own plane between business locations. “The family said, ‘Totally fine, but you can only fly with an experienced pilot as your co-pilot and this person has to have X number of hours of flying time.’ … At least the individual was allowed to pilot the plane.”

Backcountry skiers might be required to carry a satellite phone, suggests Meyer.

The man with the golden share

Whether family discussions of this variety result in a formal agreement or document varies from family to family, he says. It might be included in a family constitution or code of conduct, or simply be a verbal agreement.

Families should ensure the risk-taking member of a business family not be the one holding the “golden share,” a special type of share giving a company owner more power than other shareholders in some circumstances, says Toronto-based Bill Tharp, who is a founding family member of Windsor Crescent, a multi-family office system, and CEO of the asset management and company-building advisory firm Tangerine Tango.

In a situation where it’s a family business, one good plan is to insure them while they’re young and before they become CEO and start to do these risky behaviours.

Jean Roy, David Forest Financial Services

Alternatively, the risk taker may be carved out of ownership of some sensitive family assets or parts of the governance structure, says Tharp.

Families need to perform what Tharp calls a “T1 analysis,” named for the tax form filed after one’s death, when considering ownership and risk.

“If somebody is going to go helicopter skiing, we’ve got a checklist in place everyone is aware of that says what happens if, or when, something happens. [So] people can say, ‘I’d be disappointed to lose Bob, but we’re okay back here. We’re a very stable enterprise.’”

The family might be happy for Bob to go heliskiing because he does his most creative thinking while on the slopes, adds Tharp. That applies if the business is a private family firm, he cautions – if third party capital is involved, that risk taking would be constrained.

Keep an eye on taxes

Another structural consideration relates to the family estate’s tax exposure in the event of an untimely death, says Tharp.

“We may say, ‘We recognize you have an appetite for risk, so your holdings in the family estate are going to be held through a trust.’ … We can put trusts and foundations in place. There are lots of structural ways to encourage that person to do what they do but not take risks with the estate itself.”

Life insurance and “key man” insurance can also be used to buffer the risk to the family business. But insuring an adrenaline junkie can be expensive or even impossible, advisors warn.

Michael Godsoe, president of Godsoe Financial in Toronto, says insurance firms go deep on the questions for prospective insurance applicants.

“You have questions like how often do you travel, do you participate in any hazardous sports such as hang gliding, scuba diving, helicopter skiing, bungee jumping. If any of those answers are yes, then there’s an alternative questionnaire to fill out – how many times do you bungee jump, and where have you done it?”

If the insurer thinks there’s too much bungee jumping and too great a risk the applicant will die bungee jumping, the insurer will refuse coverage, says Godsoe.

Some risky behaviour corrects itself with age, he notes. “The adventurous times of [age] 30 or 35 is one thing, but when you get over 40 or 45 with partner and kids … this stuff takes a back seat.”

Insure them when they’re young

Risk takers may not be insurable, or the specific risky activity they engage in may be excluded in a policy, say David Forest and Jean Roy at David Forest Financial Services in Montreal.

But they point out that risk is assessed only once when buying a life insurance policy, and a policy can be taken out on children and grandchildren in their youth.

“In a situation where it’s a family business, one good plan is to insure [children] while they’re young and before they become CEO and start to do these risky behaviours. It’s possible to insure someone at 10 or 15 years old,” says Roy, who is an actuary.

The insurance company can’t come back later and change the terms of the policy contract because the individual has taken up an extreme hobby.

The payout on life insurance in the event of an untimely death can buffer the family enterprise from an unexpected major tax bill, Forest says. Having that cash on hand gives the family options beyond having to sell assets or the company itself to cover the bill.

Beyond extreme hobbies, some families with holdings or business interests in unstable or dangerous locales also have to consider risk mitigation.

Tharp says families with this kind of business challenge may avoid risk altogether by proposing that face to face meetings happen outside the risky location. “They will say, ‘I’ll meet you in Tucson.’”

Advisors add that wealthy clients will also tap into a network of service providers, some with paramilitary training, which provide escort and bodyguard protection in dangerous places.

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