ALLIANZ: New-age corporate leaders are facing new and higher risks
Here are some of the most interesting findings of the report with regard to:
Executive liability exposures are becoming more complex and interconnected. Many large claims involve regulatory investigations and civil litigation in multiple jurisdictions. Emissions testing problems in the automotive industry are an example of a potentially systemic commercial D&O loss. Meanwhile, the Panama Papers leaks illustrate how a data breach can impact professional service providers and financial institutions, which could in turn spark multiple claims across several jurisdictions.
There is an enhanced focus on supply chain management. Emerging risks such as modern slavery, environmental pollution and climate change-related disclosures could result in reputational risk and shareholder activism, public outcry or governmental investigation. Activists are increasingly targeting companies and directors for not disclosing environmental data or risks to investors.
Data protection rules around the world are becoming increasingly tough as government agencies bolster cyber security. This significantly impacts businesses; penalties for non-compliance are increasingly severe.
A serious cyber incident can result in reputational and financial damage, as well as regulatory action. In more extreme cases a cyber security breach could cause a company's share price to drop.
In future it may be possible to claim substantial damages from directors if there has been negligence in any failure to protect data or a lack of controls. There is currently uncertainty around the issue of directors' cyber liabilities but it is likely that someone will make a successful argument that a director was negligent or had not paid sufficient attention to cyber security in future.
There are a wide range of scenarios in which a director could be considered negligent, such as a fund transfer fraud or where a vulnerable network is comprised, leading to significant business interruption, property damage or loss of intellectual property. Directors' cyber exposures are likely to grow further with increasing reliance on technology. Technology, data and algorithms can become corrupted. For an analyst using predictive models to advise customers, this could open up liabilities.
Insurance and Risk Management
Increased corporate governance means more D&O exposures. Insurance can cover claims resulting from managerial decisions that have adverse consequences. Policies cover the personal liability of company directors but can also reimburse the insured company's costs. Common risk scenarios range from employment and HR issues, to misrepresentation, to failing to comply with laws. Coverage does not include fraudulent or criminal activity.
Limits of insurance coverage purchased can range from $1m for SME companies to $500m+ for global Fortune 100 giants.
In order to tackle the increase in management risk in future, executives need to develop a first-class risk management culture. Examples include instilling sophisticated cyber and IT risk management, keeping records of all information relevant to a managerial role and maintaining open communication with authorities, investors and employees.
Executives should ask tough questions about compliancerelated topics such as sanctions, embargoes, tax haven registrations, price-fixing and fraud and learn more about "classic" D&O exposures such as M&A, capital measures and IPOs. D&O coverage can be complex, so ensure key risks are covered. Conflicts of interest between the directors and the company must be avoided.
A company's internal risk management and compliance structure should have all these points on the radar, and procedures in place that adequately address or prevent them. This is probably the only defense left for directors and officers if they face a problem in one of these areas.
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