Zurich Japan chief underwriting officer Alex Morgan outlines what the future could hold for D&O
An increasingly litigious environment, a crackdown of global regulators and a broadening scope of risks and exposures. It’s easy to see why some people argue that we’re heading into a perfect storm when it comes to directors’ and officers’ (D&O) liability.
While no one can predict exactly how or where the changing exposures will come from, it’s safe to say that the spotlight will continue to shine brighter on directors for perceived failings in corporate governance.
But first let’s look at the two main drivers that will continue to underpin D&O claims. First, things that have material adverse impact on the share price, such as an earnings surprise or downgrade, or even an insolvency event. That is, when people lose money from investing in a business, they will often look to sue.
The second key driver of D&O claims is regulatory investigations.
Regulators took a kicking in the aftermath of the nancial crisis, but they’ve found their voice and they’ve got teeth.
From royal commissions to other public enquiries, and a growing body of heavy-handed regulators such as the Environmental Protection Agency, the Securities and Exchange Commission, the Financial Conduct Authority, and the Australian Securities and Investments Commission, there are an increasing number of players looking to show their worth and keep directors on the hook.
What all this means is that the exposures that are borne by company directors and officers in the future could look vastly different from how they look at the moment.
Gone are the days when a board could simply rely on their chief financial officer to tell them that their accounts made sense and wipe their hands of responsibility.
In the wake of the global financial crisis, board members now have a proactive responsibility to have a basic understanding of, and be asking appropriate questions about, their company’s financials.
It is likely only a matter of time before the same will be said for cyber, environmental and technology-related risks.
While no one is suggesting that board directors of the future will need to be cyber experts, they will need to ask the right questions to ensure their company puts in place the appropriate technology, people and processes to ensure the business is protected from the risk.
Environmental liability is another area that we expect to see more from in relation to D&O claims. There are many recent and well-publicised cases where public outcry over companies harming people or the environment has led to political pressure to hold individuals to account.
Another major driver of D&O claims in the future will be related to technological change, which will leave many companies behind. When this happens and they begin to struggle nancially, this is where you often see companies exposed to behavioral issues – the very kind that can be the linchpin of a D&O case.
Take Blackberry as an example. Only a few years ago, it was one of the dominant players in the mobile phone industry. Today its market share is zero.
These things happen so quickly – a company’s ying high, it’s raising money, it’s spending money and then the market fails and it’s gone.
Or a company’s been there for 100 years and then all of a sudden, disruptive technology makes it obsolete. That means the company no longer has the same value and how the board manages that delicate transition and communicates their plans to stakeholders will be critical in their good standing with shareholders.
While it is clear that the exposures to directors and of cers will change to some degree, what will stay consistent is the basic premise that if you are going to sit on a board, you need individual protection.
As a purchaser of insurance, directors need to make sure that the insurer that they’ve chosen, and the coverage that they buy, maximises the protection that they’ve got available as an individual.
Of course, there are certain things that no board can control or change.
But what it can control is keeping the market informed of the risks that the company is facing and the strategies that it is implementing in the face of those challenges in an attempt to future-proof the business.
Now, more than ever, clear and consistent communication and transparent corporate oversight will be put to the test.
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