Expert Risk Articles

The D&O landscape today

5 key market developments

  • Continued personal accountability pressure. Regulator activism on the rise around the world

  • Growing number of areas that can result in a company and directors being sued. Executive liability increasing in areas such as employment and data protection

  • Intensified shareholder activism; investors driving corporate behavior and defining culture

  • Third party litigation funders actively seeking out new jurisdictions. Activity expected to increase

  • Strengthened executive self-governance and compliance is vital to liability protection

In these times of rapidly-changing risks and increasing compliance, corporate leaders are under pressure as never before. The call for greater accountability of senior managers and boards has reached governmental regulatory bodies. Those who fail in their duty or conduct are more likely to face investigation and potentially be fined or prosecuted.

In 2015, a US Department of Justice (DoJ) directive, the “Yates Memo”, affirmed the agency’s commitment to targeting executives for corporate wrongdoing, marking a trend that has even taken root outside of the US.

The D&O landscape today

“Executive liability is increasing yearly, driven by a constantly evolving legal and regulatory environment,” says Paul Schiavone, Regional Head Financial Lines North America, AGCS.

“These are troubled times for companies and their executives. The ball keeps moving and each year brings the prospect of new shareholder or regulatory actions,” he says. “And this development is not limited to a few countries only,” adds Bernard Poncin, Global Head of Financial Lines AGCS. “It has become a global phenomenon that needs to be given top priority within companies’ internal risk management departments.”

A Willis Towers Watson survey [1] of 125 public and private entity senior executives found that one quarter had experienced a claim or investigation involving a director of their company. The respondents placed regulatory and other investigations at the top of their list of biggest fears.

“There are a growing number of areas that can result in a company and its directors being sued. There is much more sensitivity around governance and conduct, while regulators and shareholders now more actively pursue directors, even across borders,” says Schiavone.

“Regulations are being put in place to hold executives to account and increase executive liability. We have seen this prominently in financial services with questions over executive conduct, but we are seeing executive accountability increase in other areas like employment and data protection,” says Schiavone.
The US Securities & Exchange Commission (SEC) made a record payout in 2014 of $35m to just nine “whistleblowers[2], showing the extent to which it encourages cooperation from those being investigated.

“There is increased sensitivity around executive conduct and poor judgement. There is less tolerance in ethical areas like human rights or modern day slavery, while at the same time we see more shareholder activism and concerns about the inequality of executive pay,” says Schiavone.

“SEC chair Mary Jo White has made some very public statements about private institutions,” says Laura Coppola, Regional Head of Commercial Management Liability North America, AGCS.

“Some of the exposures public companies have traditionally taken the burden of having, and dealing with, will morph into a large private company exposure
as well,” she adds.

Increasing scrutiny is also growing in Asia. In May 2016, Singapore’s financial regulator, the Monetary Authority of Singapore, ordered the closure of the Singapore branch of Swiss BSI Bank for alleged breaches of money
laundering requirements. [3] “Regulator activism has been on the rise around the world. Regulators increasingly share resources and information both nationally and across borders,” says Damian Lynch, Regional Head Financial Lines Asia, AGCS.

“Some Asian countries have increased director obligations, while regulators have become more aggressive and fearless in attempts to stamp out corrupt practices,” he says.

Of note among Asian countries taking recent action against corrupt practices are the Chinese response to GlaxoSmithKline’s 2013 bribery case, for which the
company was fined nearly $500m [4], and charges of corruption against the Japan Transportation Consultants in 2014 for bribery activities in Vietnam, Indonesia and
Uzbekistan, for which the company was ordered to pay around $1m in penalties.

The litigation landscape

In the US, suing companies and their directors is big business and remains the key driver for large D&O claims. The plaintiff bar and litigation funders actively
seek the next opportunity to pursue companies and their directors on behalf of shareholders. “The frequency and severity of D&O claims has been increasing in the US. There is more money in bringing a lawsuit and lawyers continue to find new ways to make a fast buck,” says Schiavone.

“What’s behind this trend is heightened regulatory oversight by the SEC and other regulatory bodies who are paying more attention to corporate risk and even downright malfeasance around corporate behavior,” adds Coppola. “With mandates like the Yates Memo, which really puts a spotlight on how aggressive regulators are going to be, I think we are going to see a lot more shareholder activity in the future.”

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Shareholder activism

Shareholder activism, already robust in the US, is strengthening globally, as shareholders increase their influence on corporate conduct and directors and
management decisions.

Australia has seen a rise in shareholder class actions, due to much tougher disclosure rules, a strict liability regime for directors, regulatory support for collective actions and the introduction of litigation funding, with exposures in some cases matching those of the US. According to law firm Herbert Smith Freehills LLP, there have been over 20 shareholder class actions which have resulted in settlements ranging from $20m to $200m since 2000 [6] .

Shareholder activism has also spread to Asia. According to Activist Insight, companies headquartered in Asia faced over 40 public demands from shareholder activists this year at time of writing. Securities actions are growing in Europe, too, notably the Netherlands. In March 2016, Fortis (Ageas) reached a €1.2bn settlement under Dutch Collective Settlement Procedures, notable for its size which rivals some of the largest US shareholder class actions. The company reached an agreement with D&O insurers to contribute €290m to the settlement [7].

Dutch collective settlement procedures had previously been used by investors in Royal Dutch Shell to obtain a $381m settlement and is currently being used by
investors in a number of other high-profile cases. UK investors have been testing new legislation, using the Financial Services and Markets Act (FISMA), to bring
claims there. Section 90A of the Act enables investors to seek damages for financial misstatements or omissions in listing particulars and prospectuses.

Collective redress is being used in Germany under the German Capital Markets Model Case Act, which enables similar securities lawsuits to be combined in a
streamlined process.

The law has not yet been widely tested, but that could change if large claims like that filed by Volkswagen investors make it to court. Hundreds of investors filed
a suit in a German regional court seeking some €3.3bn in damages for alleged breaches of stock market duty related to evading emissions tests [8] .

The EU has looked to strengthen shareholder rights, but there aren’t many opportunities for shareholders to sue directors in Europe, according to Stephan Kammertoens, Global Head of Financial Lines Claims, AGCS.

“There is currently not a shareholder litigation culture in Europe, but a number of proceedings in Germany are moving in that direction. Large financial institution
shareholder settlements like that of Fortis are still not common,” he says.

According to law firm Clyde & Co, internationally, despite a slight dip in derivative claims, there is also a trend towards litigation by shareholders to seek a personal
remedy from the company and/or its directors for the infrinement of shareholders’ rights or for damage caused to the company. Potential routes are dependent
on the jurisidicion in quesion but include proceedings for the winding up of a company, derivative actions, shareholder oppression litigation and securities class
actions. This trend does not belie the fact that such actions may be unsuccessful.

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Compliance failings

There is a growing trend towards seeking punitive and personal legal action against officers for failure to follow regulations and standards – or conversely towards encouraging whistleblowing or early cooperation. As a result, threat of personal liability against individual officers if corporate fraud is uncovered within their organization is a concern. And not just in the US.

The focus on personal accountability is notable in Germany, where regulators, prosecutors and companies have actively pursued individual directors for conduct or compliance failings.

Corruption and bribery, together with competition and cartel investigations, have been some of the main causes of German management liability claims, where directors at
some of the largest German companies have been sued. “If you are appointed to the board of a German company you should take a close look at how the organization approaches corporate governance and compliance,” says Martin Zschech, Regional Head Financial Lines Central & Eastern Europe, AGCS. “Executive liability in Germany often comes down to having the right controls
and procedures in place.”

Although executives can recover legal costs and settlements from insurers, legally they must carry a personal deductible of one-and-a-half times their salary.
Most directors purchase their own insurance to cover the deductible and pay the premium out-of-pocket.

Executives in Germany may also find they are held accountable by their own companies. The German market is typified by internal liability claims, where the company sues executives for wrongdoing or compliance failings.

There has been a marked increase in such cases since the 1997 German Federal Court of Justice ruling in ARAG v Garmenbeck, which obliged German supervisory
boards to pursue executives where fiduciary duty breaches occurred.

For example, ThyssenKrupp was fined €200m by Germany’s competition watchdog for cartel allegations and the company sued, unsuccessfully, a director in a bid to recover the fine.

The court held that a fine imposed against a company may not be recovered from an individual and that a fine against an individual may not exceed €1m, whereas
against a company it may reach up to 10% of the annual turnover of its group. The court argued that it would undermine the legislative intent to fine individuals and
companies differently if a company were able to recover its fine from an individual. In this regard, an appeal has been filed to the Federal Labor Court in Germany against this decision. The outcome will be closely monitored by the German D&O market.

[1] Directors’ liability, Willis Towers Watson
2] Wiggin and Dana, 2014
[3] MAS directs bank to shut down in Singapore, Monetary Authority of Singapore
[4] GlaxosmithKline fined $490m by China for bribery, BBC News
[5] Consultants plead guilty to bribing Asian officials over ODA, The Japan Times
[6] Australian Shareholder Class Actions - What Directors Need to Know, Herbert Smith Freehills LLP, Lexology
[7] Ageas Reaches Settlement with Insurers and the Insured related to the Fortis legacies, Ageas
[8] Investors’ lawsuit seeks $3.3bn from Volkswagen, Bangkok Post