D&O litigation on the rise amid host of emerging risks

By Gavin Hinks

Yellow umbrella in a crowd of black umbrellas

As bankruptcies mount brought on by the current crisis, so the risk of litigation against directors and officers (D&O) climbs. But it is not just the pandemic bringing potential problems to the door of company directors.

A host of issues have emerged to heighten concerns of regulators and shareholders, leaving directors with greater exposure to litigation and regulatory investigation. As the world becomes more complex, so too do the risks.

“The role of directors has become riskier,” says Nepo Loesti, head of financial lines Europe at insurance company AIG. “They are under more scrutiny and are being held accountable for their decisions, but at the same time their responsibilities have been increasing in areas like cybersecurity and privacy; compliance, such as bribery and corruption laws; and a heightened focus on corporate social responsibility.”

A new special report—Board Directors’ Guide to D&O Liability Insurance—produced by Board Agenda in partnership with AIG, highlights the trends driving D&O litigation. They include record numbers of class action lawsuits in the US, including increased numbers against non-domestic firms; increased activity originating in other countries, such as Australia, and across Europe; increased event-driven claims, such as those prompted by cyber attacks or executive misconduct; and a tougher regulatory environment.

In Europe, the report warns, the trends point towards the emergence of a claims culture, and a general desire to hold directors responsible and seek compensation.

Insolvency, cyber and societal change

Experts point to a number of risks that have raised D&O concerns. These include insolvency claims; cybersecurity and data breaches; climate change and environmental issues; the #MeToo movement and other societal risks and merger objection litigation.

While insolvency is a risk as old as business itself, other risks have emerged in recent years to test directors.

One of these is cybersecurity, which companies have previously tended to see as an operational issue rather than rooted in governance. The report warns that boards should seek external advice and regulator briefings to ensure that companies are aware of the risks posed by cyber and new technologies.

Meanwhile, environmental issues are behind a number of D&O claims, a trend that is likely to accelerate. Societal risks also continue to evolve, with increased personal accountability, changing attitudes and the rise of social media meaning that directors are increasingly exposed.

“We should expect to see more claims in the future resulting from societal change,” says Geraud Verhille, head of financial lines UK at AIG. “People are now far less willing to put up with perceived injustices and failings in corporate conduct and culture.

“They are more willing to speak up and will find the lawyers waiting should they want to bring a complaint.”

That all places a premium on directors being prepared for things going sour. There are potentially ruinous costs involved in facing claims. Regulatory investigations can go on for many years before the directors are finally exonerated. Even when directors are innocent, claims can result in large and unexpected legal bills.

Board engagement with risk has never been so important. Directors need to develop a deep understanding of their liabilities and emerging risks, and to engage—in partnership with their risk managers and legal counsel—in regular reviews of their D&O liability insurance.

Click here to download the report.

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UK to review dual-class shares as part of consultation on listings

By Gavin Hinks

Stock market listings

Dual-class shares, long a point of friction in financial markets around the world, are set to become a battleground in the UK. The development comes after the chancellor Rishi Sunak included shares with special, or weighted, voting rights in a new consultation looking at a number of listing rules. The arguments have already begun.

On one side are institutional shareholders anxious not to see their influence diminished by the creation of super-powered shares. On the other are public markets keen to attract the listings of big tech companies whose founders are keen to retain a grip on control of their companies.

The UK debates was kicked off when the chancellor revealed a review of listings would be coming. The International Corporate Governance Network (ICGN), an organisation for institutional shareholders, responded with an open letter  to the chancellor spelling out why the very idea of dual-class shares should nipped in the bud.

The ICGN argues that 84% of their members oppose differential voting rights, while two-thirds believe they “negatively impact” corporate governance. The ICGN says dual-class shares “marginalise minority shareholders” and undermines the accountability of executives. Dual-class shares also “water down” investor influence and in conflict with the global drive improve stewardship, a phenomenon the CIGN dubs “regulatory schizophrenia”.

The body says it has evidence too. The French have used shares with double voting rights since 2014. The ICGN says studies reveal that companies with dual-class shares have a “high market to book ratio”—a measure widely seen as a proxy for overpriced shares; while other studies indicate companies with dual-class shares experience a higher cost of capital and lure fewer foreign institutional investors. Research in the US, the ICGN says, suggests companies with differential shares have lower governance standards, while another found “firm value” is negatively associated with “insiders’ voting rights”.

In writing to the chancellor, the ICGN says the introduction of dual-class shares would be “unwelcome”, adding that it would “lead to lower corporate governance standards and could threaten, not enhance, the reputation of the London Stock Exchange”.

Dual-class shares in the UK and beyond

Dual-class shares have become a point of conflict around the world, with the debate over London simmering since November last year. Companies such Pinterest, Lyft, Xiaomi, Snap, Alphabet, Facebook, Alibaba and LinkedIn have all made headlines by opting for dual-class structures.

In 2018 both Hong Kong and Singapore—territories anxious that tech entrepreneurs were listing elsewhere in the world—changed their listing rules to allow dual-class shares. Meanwhile the debate in the US has used emotive language. In a Financial Times editorial in May last year, Aeisha Mastagni, a portfolio manager for corporate governance at the huge US pension fund Calstrs, described Facebook’s capital structure as akin to a “dictatorship” and in conflict with the “American dream”.

When Snap announced an IPO with no voting rights at all for shareholders until the founders were dead, Anne Simpson, head of corporate governance at Calpers, said: “Telling us to wait for nature to take its course is a banana republic-style approach.”

It’s fair to say the Treasury recognises these problems in its consultation documents. But it also highlights potential benefits of dual-class shares. Its says a dual-class structure might “protect a company from initial takeover threats once going public”.

The Treasury wants to know if dual-class shares should be allowed and whether they should face limitations of some kind; whether is a demand for differential rights and how corporate governance standards could be maintained if dual-class shares are introduced.

Academic support

Some academic research supports dual-class shares. Writing for the Oxford Law School blog, Aurelio Gurrea Martínez, a professor at Singapore Management University, says dual-class shares are less risky in a “country with more sophisticated investors” because such markets tend to “punish” founders who badly run their companies.

“As a result, founders will have incentives to go public with dual-class shares only when they really think they can create value for the shareholders as a whole,” he writes. He also argues more protection for minority shareholders would reduce risk.

Other academics have argued that the risk from dual-class shares can be reduced with the use of “sunset clauses” which would stipulate when extra voting rights would end (one proposal is a seven-year limit).

Such a time-based sunset clause has attracted much support. Though some have argued the time limits are arbitrary and instead propose “transfer-based” sunsets, i.e. a change in voting rights when the founder dies or retires or if they sell their stake.

In the UK some have accepted that flexibility in UK listing rules could be useful. Carum Basra, a corporate governance advisor at the Institute of Directors says there “may need to be a recognition that some founders will want to retain greater control.”

However, the “floodgates” should not be opened to dual class shares and it should not be without strings. “Crucially, if we are going to allow more companies to issue shares with differential voting rights in the UK, they must sit apart from the premium segment. They should not benefit from passive investment flows intended for mainstream blue-chip companies with conventional  governance structures.”

The Treasury’s consultation is open until 5 January 2021. There will be much arguing until then—and after.

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Roadmap to mandatory TCFD reporting ‘should focus minds’

By Gavin Hinks

Melting ice cap

When it comes to mandatory climate-related risk reporting there isn’t as much time as recent headlines might suggest. The government has said the legal framework to make it compulsory will be in place by 2025. But a detailed look at government timelines reveals for premium listed companies the changes will come in as soon as next year.

“The real time scale is from next year and that should focus a few minds,” says Veronica Poole, head of accounting for north and south Europe at business advisory firm Deloitte. She adds that work on preparing climate-related risk disclosure should be starting now. “If it hasn’t started already, you’re way behind what you’re competitors are likely to be doing.”

The urgency comes after ministers revealed last week that the government would push ahead with mandatory reporting based on a framework published by the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD was set up by the G20’s Financial Stability Board (then led by former Bank of England governor Mark Carney) and revealed its reporting guidelines in 2017.

Image: Twocoms/Shutterstock

The guidelines were voluntary but many have been advocating for mandatory measures for some. Progress on adoption has been reasonable, though the TCFD has consistently called for faster action by companies.

In May this year Mark Carney, former governor of the Bank of England, said it was time for the reporting system to be mandated. The UK government had already indicated it was moving in that direction back in February.

It’s not hard to see why. There has been a growing sense that companies are not yet disclosing the right climate change information. Recently, the Financial Reporting Council (FRC), the UK’s corporate reporting watchdog, concluded in a report that companies were failing to meet investor expectations.

FRC chief executive Sir Jon Thompson said it was time to “raise the bar” in company reporting. An investor told the FRC: “There are too many conversations where the board doesn’t get it.”

TCFD reporting roadmap

TCFD is not the only sustainability reporting system available. There are a raft options for companies to choose. However, in recent months there has been movement. Five bodies (IIRC, SASB, CDP, GRI and CDSP) have announced a project to align their reporting standards. Elsewhere, the body that produce international financial reporting standards has launched a consultation on whether it should begin work developing new sustainability reporting guidelines.

At this point, however, the Treasury has thrown its weight behind TCFD and made clear that it will amend the Companies Act 2006, the UK’s most important piece of governance legislation, to enshrine the guidelines in legislation. But the timeline is tight.

A diagrammatic roadmap published by the Department for Business, Energy and Industrial Strategy (BEIS), says it will have the regulations in place for pension schemes bigger than £5bn, banks, building societies, insurance companies and premium listed companies by next year.

That means accounts departments will need to hit the gas if they are to be ready. And there is much to review. TCFD guidelines range across four areas: governance, strategy, risk management, metrics and targets.

When TCFD reported on their adoption in October it said energy and materials companies were leading the way; 60% of the world’s largest 100 companies were supportive and report in line with TCFD recommendations, while 700 more had become supporters in the past 12 months.

But there is also concern. While disclosure of climate-related financial information has increased since 2017, there is more to do. Specifically, more companies should be revealing the potential financial impact on their strategies. In fact, disclosures on the resilience of company strategies “was significantly lower than that of any other recommended disclosure”, said the report.

That implies openness about strategy is either particularly difficult to do, or a little too sensitive to confront. And that’s an issue. The key to TCFD reporting, according to Richard Spencer, head of thought leadership at chartered accountancy body ICAEW, is understanding that it’s not just a disclosure exercise.

“Good disclosure has to be rooted in good practice. It’s not really going to have anything to report if you aren’t taking account of the impact that dramatic climate change is having on you or your contribution to that problem,” says Spencer.

Behavioural change

For Veronica Poole, TCFD asks how companies have changed course after measuring and weighing climate risks.

“One of the things that is in TCFD is a recognition that you’ve got to change your business model. It says, ‘tell me how you think about your decision-making within the business, incorporating climate considerations,” she says.

And that may mean changing behaviours, placing a premium on urgent action for companies that have yet to engage with climate risks.

“The question starts really from: What is the TCFD? What does it really require me to do? Is it just a set of disclosures that we will have to comply with? Or, is it actually considerably more, is it an expectation of a behavioural change within the business?” Poole asks.

“The point with TCFD is that it is both. It requires both. You actually need to embrace, if you will, TCFD principles in your business before you can report.”

That means putting in place the right climate governance to identify climate risks and opportunities for strategic decision making, as well as deciding the right things to measure. That may make uncomfortable decision making, decisions that may not have been taken had TCFD not been around.

Poole says non-executives need to boost their knowledge levels on climate change, then identify how the board will lead its climate work: the whole board, a committee or an individual non-executive director.

While skills may be important, Spencer says data will be key. Some companies may have legacy systems collecting diverse kinds of data for different climate-related reasons, which all needs to be brought together in a coherent way to address TCFD questions. “It’s an enormous task,” says Spencer.

But companies must remain focused on avoiding a simple reporting checklist. “Whatever you’re going to report on in compliance with TCFD needs to be reflective of what’s actually happening in the business, it can’t be just be a climate disclosure checklist of some type,” says Poole. “It needs to reflect the actual governance process and decision-making process that is happening in the business.”

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Greiner Bio-One Announces Virus Stabilization Tube for SARS-CoV-2 Available for Healthcare Facilities

Critical product supply now available as COVID-19 cases continue to rise in many states.

MONROE, NORTH CAROLINA, UNITED STATES, November 23, 2020 /⁨EINPresswire.com⁩/ — Greiner Bio-One is announcing the availability of the VACUETTE® Virus …

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Technical Advisory Board (TAB) – Industry and Independent Members

By Debbie Wright

Technical Advisory Board (TAB) – Industry and Independent Members

Industry and Independent Members – Technical Advisory Board (TAB) Body: Technical Advisory Board Appointing Department: Home Office Sector: Regulation Location: London Skills required: Communication / Media / Marketing, Legal / Judicial, Regulation Number of Vacancies: 5 Industry Members and 2 Independent Members Remuneration: The Home Office will reimburse all reasonable expenses incurred in respect of […]

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