From #MeToo to the move towards more collective redress regimes outside of the US to failure to manage cyber risk - exposures for Directors and Officers (D&O) continue to rise globally. Here are 10 developments boards will need to stay on top of in future.
The environment and landscape in which D&Os navigate on a daily basis is becoming more complex and risky. Regulator, investor and public expectation of boards continues to intensify, and personal accountability for not meeting these expectations is increasing. The shift from corporate responsibility to personal responsibility continues at pace. When these expectations are not met, the propensity to litigate is now given extra ‘fuel’ by the further emergence of collective actions, increased capital flow into shareholder activism and the growth of litigation funding, which is now seen as an alternative asset class producing high returns.
Boards operate under this spotlight in uncertain economic and political times where equity and asset price volatility is the norm. Here are 10 global and regional trends that D&Os need to stay on top of over the next 12 months:
- 1. Board culture is in the spotlight more than ever before. Boards are expected to set the tone for an organization’s culture and a poor culture is a key indicator for potential D&O claims. A major factor in many claims we see is compliance failings.
- 2. A failure of boards to recognize, manage and mitigate a number of Emerging Risks will result in both personal liability and securities claims. These include managing company cyber risk, protecting intangible assets and reducing intangible liabilities, protecting brand and reputation value and addressing climate change disclosures. For example, there have already been incidents where investors have sued boards for a lack of oversight following cyber events. At the same time, general disclosures to the markets are becoming more regular and with platforms like Twitter reactions are faster than ever before.
- 3. Cross-border trade, supply chains and international co-operation of regulators continues to make defending and settling D&O claims more complex and costly. At the same time, global rules around trade are in flux and navigating this environment is a challenge for management.
- 4. Boards face an increasingly digital world where efficiencies and productivity is measured. Strategic decisions and investments in the “Internet of Things”, blockchain and artificial intelligence are being made daily. These decisions and investments will be scrutinized by shareholders.
- 5. International Programs are growing in popularity and need as cross-border risk evolves with collaboration among regulators, insurance and tax entities. Ensuring the D&O insurance policy is fit for purpose in the local market can be crucial at the time of loss. This is of critical importance when a non-indemnifiable claim is made against a director in a country where non-admitted insurance is not allowed.
- 6. In the US, securities class actions had a record year in 2017 and the Cyan case, which disrupts a securities litigation system that Congress and the Supreme Court have developed over the past 85 years, will bring more cost to IPO litigation. Merger objection claims have hit all-time highs, as well. Meanwhile, the #MeToo movement is generating an increase in both individual and entity litigation for board failings to manage sexual harassment issues.
- 7. In the Asia Pacific region, directors leading ASX-listed companies continue to face “the perfect storm” of stringent continuous disclosure rules and a well-used and low-hurdle class action regime. A proliferation of litigation funders adds velocity to these actions.
- 8. In the UK and across Europe, we see a continued trend towards more collective redress regimes and more intense personal liability scrutiny from regulators and their own companies (particularly in Germany, with a two-tier board structure). Uncertainty around Brexit creates additional decisions for boards to make in how their European operations will look in future. The newly-introduced General Data Protection Regulation (GDPR) brings additional boardroom responsibility on managing cyber risks.
- 9. In Emerging Markets such as Latin America, we see more focus on companies through a lens of compliance and corruption. In Asia, we continue to see large corporations looking to attract more capital from outside the region which brings different stakeholders and jurisdictions into play, making this market more exposed to more western issues. In South Africa, corporate governance remains in the spotlight and a focus of integration of social, environmental and economic issues into reporting disclosures continues.
- 10. Claims teams and legal counsels will increase in value as D&O exposures evolve and increase. Experience is critical at these “moments of truth”. We see a trend of relationships being built pre-loss as part of an overall D&O risk mitigation strategy.
D&O market continues to evolve
D&O exposures are increasing as companies have grown in size and international reach, and the environment for directors and officers to navigate has become more treacherous. With exposures increasing materially, so will the frequency and severity of D&O claims.
From an insurance perspective, we continue to see an increase in international programs, a need for higher capacity and more focus on stand-alone Side A capacity. Companies are also buying standalone cyber, M&A and reputational covers to supplement D&O and address issues of executive concern.
Allianz is committed to the D&O segment and will continue to look to build new long-term D&O relationships, particularly in the US market where we are expanding our team.
This article is a global update to our recent report D&O Insurance Insights – Management Liability Today: What Executives Need to Know