The duties and liabilities of European directors are under increasing scrutiny, but are they aware?
The ever-lengthening arm of the regulator, emerging risks and an increasingly complex and uncertain world are just some of the exposures facing directors and officers (D&O). Good corporate governance has always been essential, but now more than ever the checks and balances that boards put in place and the corporate culture they encourage could protect them from being held personally liable if something goes wrong.
And yet, research carried out by AIG and the Association of Risk and Insurance Managers in the UK (Airmic) shows that there is a huge lack of awareness of directors' personal liabilities. Just 18% of the risk managers surveyed said they believed their directors were aware of the risk they could be held personally accountable if something goes wrong. Only 14% were confident their directors had read and understood their D&O insurance policy.
It suggests a complacency within the boardroom, according to Nepomuk Loesti, head of financial lines, AIG Europe. "Directors can no longer hide their heads in the sand and hope it won't happen to me'," he says. "Given the trend towards increasing regulatory action, directors need to fully understand the liabilities they face, the events that can lead to claims and what they need to do to mitigate the risk, both at an organisational and personal level."
The power to probe
Across Europe and beyond, regulators have shown themselves to be increasingly willing to cooperate across borders to achieve an outcome. New laws and regulations have extended their extraterritorial reach and investigatory powers. Whether the issue is anti-trust, insolvency, bribery, data breach or environmental impact, enforcement agencies have heightened authority to investigate both organisations and their directors.
Some new laws speak directly to the accountability of senior executives, while others are less explicit but potentially burdensome for company D&Os. In the UK, the option to enter into deferred prosecution agreements (DPAs) is a recent development for instance. While DPAs can help organisations avoid lengthy legal proceedings, there is concern their introduction could heighten the exposure for individual company directors.
At the same time, legal defence costs are ramping up. This is in part due to the expense associated with lengthy regulatory investigations, which can take an average of five to seven years to resolve. There is also a growing appetite for third-party funding in Europe, with US litigation funders setting up local offices amid growing appetite and mechanisms for collective shareholder appetite in Europe.
"The best defence is a good offence," says Loesti. "Corporate directors and NEDs need to set the correct tone for their organisation and put in place robust processes to ensure they are compliant with the law. They need to maintain a close dialogue with their risk and insurance managers to ensure they better understand their personal liabilities and what cover is in place to indemnify them in the event of a claim."