Directors are asking questions, but are they the right ones?

By: Lwando Cwane, D&O underwriter at AIG South Africa Limited

Misconduct by large firms in recent months within the South African business scope has put corporate governance under the microscope.

And when corporate governance is questioned, people look to the company’s directors for answers. I think it’s true to say that South African directors are much more aware of the risks that they face when their company is found to be at fault. The necessity for D&O insurance is now well accepted and brokers specialising in this form of insurance are definitely spending more time briefing clients on what policies cover, and what kind of assistance the insurer can offer to mitigate the risks.

Recent cases that have had large scale repercussions have resulted in stakeholders and the public at large being more acquainted with their rights. Even though class action suits are not prevalent in South Africa, they are however on the rise. A current example is the on- going class action led against Tiger Brands in relation to the recent outbreak of listeriosis.

Directors of larger firms are particularly vulnerable as the impact of their decisions could affect the broader society. For instance, an unprecedented fall in a company’s share price could have an adverse effect on an investing pension fund. This could in turn result in the funds clients, who in this case would be the pensioners, participating in a class action against the larger company’s directors whose perceived negligence is thought to have contributed in the downfall. The possibility that lawyers are increasingly ready to pursue such cases on a contingency basis makes these class action suits more likely to happen.

INCREASE IN CLAIMS

AIG says that the number of D&O claims lodged with it grew by 20 percent between 2016 and 2017 and even though D&O insurance is being increasingly seen as a necessity by directors, there is also a need to be conscious of the rapidly changing risk landscape. A potential risk which he believes needs more attention is social media. Firms, their employees and directors are all likely to be active on at least one social media platform and irresponsible and regrettable comments could have severe reputational consequences.

Social media risk overlaps with the broader issue of cyber risk, to which companies are increasingly vulnerable. IT governance is clearly a board responsibility, but not all directors are fully up to speed on what it actually entails. Are directors asking the right questions and taking the right steps to ensure their governance cannot be questioned in the event of a breach, or a misstep on social media? Again, the question will be whether the company’s oversight processes put in place are sufficient.

It is also worth remembering that the Companies Act, 2008 mandates that boards are jointly and severally liable. This could possibly result in directors who were not involved in a particular decision or matter being included in the class action.

Considering the growing opportunities for risk, the need for good D&O cover has never been greater.