Are Directors prepared for the emerging risks they face?

Article by John Shepherd, Chief Executive at Shepherd Compello

Directors are exposed to a variety of internal and external risks from stakeholders. Shareholders, investors, employees, regulators or third parties could all hold them liable for their actions or increasingly inaction. Reports show that senior management is exposed to a rising number of claims. Almost a quarter (23%) of directors have had a claim made against them at least once and a third (32%) are worried about facing legal accusations in the future.

As a chief executive and an insurance professional, I see the risks board members face and the insurance tools available to protect them – primarily a robust Directors’ and Officers’ (D&O) policy. However, based on my experience I wonder if senior managers understand the personal risks they face? Are directors assessing the right risks?

Traditionally, the responsibilities and powers relating to their positions are set out in their job description or terms of reference. If they are found to have acted outside of these, then civil, criminal or regulatory proceedings can be brought against them. In a fast-moving world, leaders face claims that they may think are outside of their remit and for which they may not be prepared.

Three emerging risks

The focus has tended to be on the ramifications of actions and decisions made by senior management. However, there is strong evidence to show that insurers are also concerned about claims appearing from other angles.

1.      Cyber

A recent cyber breach at Equifax led to criminal charges against the Chief Information Officer. He got sued not for the breach, but alleged insider dealing after he subsequently sold shares worth nearly $1m. The firm now faces 240 class actions and 60 regulatory enquiries. This example raises many questions about management, the board, whether the D&O cover is adequate or if the cyber cover itself is suitable. It is no longer a situation where a single issue can lead to a mismanagement claim, it is far more complicated.

2.      Corporate culture

Allegations against the film producer Harvey Weinstein drove the #MeToo movement against sexual harassment. This, along with gender inequality and the pay gap has put a focus on management and culture. Claims are possible against not just the company but senior management who could be held responsible for presiding over a toxic culture. One example saw a class action brought against Nike for allegedly promoting a hostile environment and pay disparity.

3.      Brexit

The business uncertainty that has arisen since the Brexit referendum has ramifications for directors. Some commentators have suggested that senior managers could be liable if they have not prepared adequately. For example, if business performance suffered as a result, then the directors could face scrutiny about the actions they took – or didn’t take – to mitigate the risks.

What does the future hold?

I believe the modern director needs to be able to multi-task against a range of risks that he or she faces. The traditional risks a D&O policy was designed to protect against have not disappeared. It’s just that emerging over the horizon are new challenges with potentially more costly claims. To prepare, survive and prosper directors need to manage and mitigate against these with risk management plans and policies which are fit-for-purpose.

If you would like to discuss the Financial Lines insurance coverages, or get any further information on how Shepherd Compello can help you as a director, please get in touch on info@shepherdcompello.com

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