CEO's Notebook

CEOs discuss lowering insurance costs; using employee committees to review potential clients; getting capital from clients; and mastering your supply chain. Plus: "My Biggest Mistake," by Al Shugart, founder of Seagate Technology.

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Bug Your Broker

Vigilance lowers insurance costs

By Ilan Mochari

Insurance costs are a nuisance for every small-business owner. Last summer they made Keith Alper reach the boiling point. His company, which had just under 60 employees, was spending $75,000 on policies. "We'd accumulated a lot of policies over the years, and at times we just paid our bills and didn't look at what we were paying for," says Alper, whose Creative Producers Group (CPG), based in St. Louis, produces videos and events for Fortune 500 clients.

All that overspending could have been avoided if CPG had simply asked its broker a few basic questions or notified him of certain changes. For a whole year CPG had been paying for coverage on four rental cars when it had only three. "When we asked, 'Why didn't you take that fourth car off the policy?' the answer was, 'You didn't tell us to," says CPG director of finance and administration Lee Gerstenhaber.

Amazed that they'd been paying needlessly, Alper and Gerstenhaber grilled their broker on all insurance-related spending. They were stunned at what they found. In CPG's workers' compensation plan, several employees were classified in higher risk categories than they should have been. Gerstenhaber says that the company had earlier made the mistake of basing such classifications on salary and position rather than on job activity. In other words, CPG executives who warranted a "clerical" classification didn't get one, since the company wrongly assumed that the category was just for administrative staff.

CPG also asked the broker to translate all policies into real English and categorize each one as a "must," "should," or "shouldn't." One policy, known as "bailee" insurance, didn't survive the translation test. In real English, a bailee is a person to whom property is entrusted for a special purpose and a limited period. Alper's broker explained that although CPG technically was a bailee when it stored clients' property, the bailee policy was redundant with the company's general liability coverage and was therefore unnecessary.

CPG found its biggest cost savings simply by asking the broker for lower premiums (and the resulting higher deductibles) on rarely used policies. At CPG's request, the broker created a grid for each policy, including a sliding scale of premium and deductible rates and a history of claims. In both professional liability and general liability, for which the claims were few and far between, CPG got lower premiums. All told, the company saved $10,000 in annual insurance costs.

But even more important to CPG's managers has been the newfound discipline of reviewing policies annually. "We've learned to be proactive and ask questions," says Gerstenhaber, "as opposed to just blindly accepting what they give us."

Beware the Venture Catalyst

Heard about venture catalysts? These newfangled matchmakers may have great connections to angel investors and venture capitalists, but they may also be breaking the law.

So warns Cynthia Sadick, a former counsel for the National Association of Securities Dealers and a partner at Sadick & O'Brien, in Boulder, Colo. Making introductions is one thing, says Sadick, but "we're running into quite a few situations where venture catalysts and money finders are out there negotiating deals for companies and getting paid for the transaction without knowing the securities laws."

The problem: the matchmakers are not broker-dealers. Basically, under the Securities Exchange Act of 1934, any person who negotiates the sale of stock and receives a percentage of the transaction as payment must be a registered broker-dealer. Those running afoul of the broker-dealer requirement are often "neophytes, investment-banker wanna-bes," says Sadick. But some violators are also experienced moneymen. The most famous: Michael Milken, who, even after he was barred from securities trading, negotiated a deal for which he received $42 million. In 1998 he was forced to give it all back with interest. --Susan Greco

Hot Tips

DWL, a customer-relationship-management company headquartered in Toronto, creates buzz with an unorthodox perk for its 150-plus employees. The company gives each worker $1,000 a year on the condition that he or she use it for fun only -- and take pictures so that everyone else can check out the results. The company's office (located in a converted piano factory) features a corkboard decorated with the "fun" photos. Sales VP and "director of fun" Mark Mighton approves the expenditures; no mortgage payments or retirement-fund contributions allowed. CEO Justin LaFayette says the employees like seeing the photos. But does the program work? Since its inception, in 1996, the company has boasted a 98% retention rate. --Jill Hecht Maxwell

Christine Comaford, managing director at Artemis Ventures, in Sausalito, Calif., has a method for making the most of an advisory board. She recommends choosing advisers for specific roles and then demanding genuine performance. She suggests limiting the board to six members, specifying a commitment of 10 hours a month from each, and ensuring that the board meets at least twice a year. She also proposes that each adviser receive a quarter percentage point of equity or less, depending on the stage of the company, vesting monthly over two years. "It's very important for you to manage your advisory board and not let them just sit back and vest," she says. --D.M. Osborne

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