The economic slowdown is contributing to a change in corporate governance norms across territories, litigation remedies are becoming readily available for stakeholders and tougher regulations are being passed all the time. Thus, directors and officers constantly walk a fine line, making difficult and complex decisions with potentially huge impact to stakeholders.
With oil prices at a 12-year low and an economic slowdown in China, global businesses are heading for challenging times. Senior executives agree that appropriate precautions against unexpected hazards are critical to the continuity of a business. However, as some risks are difficult to anticipate, many companies look to Directors’ & Officers’ Liability Insurance (D&O) as an integral component of their overall risk management strategy. With general greater uncertainty on the business outlook, D&O insurance tends to attract the attention of more board rooms than ever.
Changing risk landscape in MENA
Businesses inherently take on risk as a normal part of their operations, but with the advancement of global standards of corporate governance, companies in the MENA region should closely consider the particular risks associated with the personal liabilities directors and officers face.
Traditionally, the Arabic business culture takes a more pragmatic approach to disputes and has proven to be less litigious than the Anglo-Saxon or American business models. However, while the region might not have the same litigious culture as the US or Europe, the issues and dangers are no less real. With a multitude of highly publicised business dispute cases in the local press, such as the DFSA investigations into the “unauthorised transactions” following the IPO of Damas, the financial reinstatements at Mobily, the Al Gosaibi-Saad dispute affecting more than 100 banks around the world, etc, one can witness a shift in the attitude to resolving disputes.
Enhanced corporate governance norms and increasingly stringent legislation have necessitated a greater focus on compliance by companies and consequences for directors and officers associated with non-compliance. Regulators have become more vigilant, leading to increased investigation of corporations and the decisions taken by their executives. As companies continue their expansion into an increasingly global business arena, compliance is not just restricted to local laws but to laws of other countries as well, which can have far-reaching consequences. For instance, the US Foreign Corrupt Practices Act or the UK Bribery Act requires nationals from these countries to comply with the provisions of these acts, even if they do not work for an American or British company.
Closer to home, customers are becoming more aware of their rights and more willing to vocalise their grievances, including resorting to legal recourse. Foreign directors who are invited to sit on the boards of local companies are hesitant to do so unless they are provided with adequate indemnification procedures or insurance protection.
In addition to evolving regulation and legal frameworks, directors and officers are tasked with the responsibility to protect the company against modern risks such as cyber attacks. With companies becoming increasingly reliant on digital technology in their operations, the risks of cyber attacks are ever-present, and it is important that a company not only has appropriate cyber security protection, but also ensure that systems of control are in place to minimise the likelihood and mitigate the potential impact of cyber attacks. Where directors and officers fail to consider such risks, or fall short in protecting the company from cyber attacks either by implementing appropriate controls and/ or cyber insurance, they expose themselves to potential claims.
According to a recent Family Business Survey by PwC, over 80% of the businesses outside the oil sector in the Middle East are run or owned by families. This sector faces its own unique set of risks, particularly with regards to succession planning. Family businesses run the risk of not being able to survive through to the next generation, leading to potential claims scenarios from non-family business partners as the new generation of management takes over. A large family base involved in the business could also lead to conflicts or disputes which, in turn, could adversely impact the family business or even threaten to split it.
In recent years, stock markets in the GCC have opened up to foreign institutional investors, potentially bringing with them a more litigious mind set. Claims and allegations can include acts of fraud, abuse of power, mismanagement of the company, falsification of documents, disclosure of confidential information, or conflict of interest. Stringent laws and regulations can result in the imposition of significant fines and penalties and even imprisonment terms, modelled along the lines of those in the Western countries. Defence costs associated with claims, allegations and regulatory investigations are quite significant and can drain the resources of the individual director or officer.
D&O aims and coverage
The purpose of a D&O policy is to give personal protection to directors and officers of a corporation from claims brought against them alleging a wrongful act or investigations against them by governmental bodies, professional or trade regulators in connection with their actions as directors and officers.
The policy typically provides cover for the directors and officers of the purchasing entity, ie, the policyholder and of all its subsidiaries worldwide, for defence costs and damages (ie indemnities/ settlements). In addition, where it is required or permitted to indemnify directors and officers, the D&O policy provides protection for the companies’ balance sheet for claims against the company through what is commonly referred to as company reimbursement cover. Furthermore, the policy can be broadened to cater to shareholder claims against the company.
The company and its directors may have done absolutely nothing wrong but will still have to defend themselves against claims made against them. Important to note is that the policy responds to protect the directors and officers against actual or alleged acts. Typically, companies place a high value on D&O insurance as it assists to retain and attract talent. The policy allows directors and officers to claim directly under the policy, even if the company has gone bankrupt or insolvent.
The policy has several other extensions which aim to mitigate specific risks, of which some key ones are highlighted below:
• The policy extends coverage to employment practices violations, ie claims made by employees alleging violations of their legal rights as employees, and possible lawsuits including claims for sexual harassment, breach of employment contract, wrongful termination, discrimination and failure to hire or promote. Generally, such claims are brought against the company or against directors and officers in conjunction with the company.
• D&O policies provide for advancement of defence costs before final adjudication of claims. Since defence costs are advanced as they are incurred, directors and officers are protected from situations of financial distress.
• Claims include criminal proceedings against directors and officers as well as civil proceedings. The policy does not seek to cover fraudulent acts, however, defence costs are provided for until there is final determination that the intent was in fact committed.
• Legal fees and expenses for official investigations as well as pre-investigation costs are also part of the cover.
• The policy also provides cover for expenses incurred relating to bail bond and civil bond premium and any asset and liberty proceedings (proceeding that can lead to deportation, disqualification or confiscation of personal assets, etc).
• It also provides cover for expenses with respect to any proceeding brought against them for accidental homicide.
• Also, part of the cover is expenses of public relations consultants to mitigate the adverse effect or potential adverse effect on the director’s or officer’s reputation from a claim or investigation.
Governments in the region are increasingly committed to promoting good corporate governance, transparency, accountability and responsibility. D&O insurance can provide comfort and peace of mind to directors and officers who are making difficult and complex decisions in this challenging environment.
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Corporate governance and what it means in today’s context
One could define corporate governance as the relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.
(Source: OECD)
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Mr Alexander Blom is Head of Financial Lines MENA and Ms Annemieke Clancy is Financial Lines Senior Underwriter for AIG in the Middle East.