Corporate leaders are facing heightened risk of executive liability due to new cyber and data privacy threats, tighter regulations and shareholder activism, according to a recent report by Allianz Global Corporate & Specialty (AGCS), D&O Insurance Insights: Management liability today.
It noted that there is a growing trend towards seeking punitive and personal legal action against executives for failure to follow regulations and standards which could result in costly investigations, criminal prosecutions or civil litigation putting the company’s assets, or their own, at risk.
Increasing shareholder and regulatory activism
“While the legal landscape differs strongly from country to country, increasing shareholder or regulatory action has become a global phenomenon that needs to be given top priority within companies’ internal risk management departments,” said Mr Bernard Poncin, Global Head of Financial Lines, AGCS.
Increasing scrutiny is also growing in Asia. Damian Lynch, Regional Head Financial Lines Asia, AGCS said that regulator activism has been on the rise globally as regulators increasingly share resources and information both nationally and across borders. “Some Asian countries have increased director obligations, while regulators have become more aggressive and fearless in attempts to stamp out corrupt practices,” he added.
Non-compliance top cause of D&O claims by number
Litigation against companies and their officers is on the rise. Many Asian countries such as Japan, Hong Kong, Thailand and Singapore are also moving towards a more litigious environment owing to changing attitudes towards corporate governance and accountability as well as increased regulatory activity and a growing compensation culture.
According to AGCS analysis, non-compliance with laws and regulations is now the top cause of D&O claims by number, followed by negligence and maladministration/lack of controls.
Cyber risks on the board agenda
The landscape for executives is further complicated by a number of emerging perils, such as liability around cyber-attacks and data privacy. Data protection rules around the world are becoming increasingly tough, with severe penalties for non-compliance. Consequently, AGCS anticipates cyber security-related D&O litigation in Europe, the Middle East and Australia.
Highly sophisticated risk management required
In order to tackle the increase in executive risk in future, directors need to develop a highly sophisticated risk management culture. Examples include instilling first-class cyber protection, 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 compliance related topics such as sanctions, embargoes, domicile registrations, price-fixing and fraud and also learn more about “classic” D&O exposures such as M&A, capital measures and IPOs, said AGCS.