Willis Warns Directors of Risks in Serving on Boards

August 7, 2012

“Increased regulatory, shareholder and media scrutiny combined with volatility in the global economy means that serving on the board of a company has never been so risky,” according to a report from Willis Group Holdings – its latest “Boardroom Guide on Executive Risk.”

Willis stressed the “almost unparalleled financial instability, corporate crises, increasing regulation and public resentment over the perceived power of business executives,” as the driving forces behind the increasing scrutiny focused on the “directors of large companies (especially in the financial services sector).”

Willis said its “Executive Risks: A Boardroom Guide,” compiled in cooperation with “powerhouse global law firms,” explores in-depth the “whole range of risks and responsibilities that accompany the role of a director. It provides up to date information to help educate and inform directors about the many risks they face.” It also “focuses on legal developments for directors in 18 key jurisdictions around the world and also has six special focus chapters addressing issues with global reach.

“In addition to a detailed breakdown of legal developments by country, highlights include of the report include a list of the “ten key questions to ask before joining a board.” There are important, issues a potential director should consider before joining a company’s board of directors, “particularly considering that your personal assets could ultimately be at stake.”

Willis’ Guide sets out the “top ten” concerns for directors. The bulletin highlighted four of the main areas as follows:
— Directors’ and Officers’ (D&O) cover for US governmental investigations: The costs incurred by governmental investigations in the US can be immense – often running into millions of dollars. But recent federal cases have thrown into doubt whether some of the costs incurred in responding to such investigations are covered by D&O insurance.

— Why directors should be concerned by cyber risks: In 2011, companies of all sizes struggled with “cyber incidents”, ranging from malicious intrusions to employee negligence. The expanding online universe has introduced new financial risks that may not be covered under standard insurance policies. As a result, corporate directors and risk managers must ensure that they buy appropriately tailored policies that provide protection against the rapidly expanding risks to which they are vulnerable.

— Cross border risks: Directors and officers are looking more closely at the language and enforceability of their D&O policies and questioning whether the traditional “one global policy” approach to insuring D&O liabilities leaves them exposed.

— Effective board oversight of risk management: In light of new disclosure requirements, directors are increasingly asking what the proper role of boards is in corporate risk management. Willis’ report explores in detail what they need to know including concerns around incentivizing risk-taking and monitoring risk appetite.

Elsewhere in the report, and in comments on overall market dynamics, Willis said that the “global D&O insurance market has grown in capacity, while a number of new insurers have entered the market for international excess. The effect of this has been to keep pricing of D&O insurance relatively stable in most areas, despite the economic turmoil and the heightened threat of litigation.”

Mark Wakefield, Executive Director of FINEX Global, Willis’ Financial, Executive Risk and Professional Liability business, added: “Overall the market has so far weathered the economic storm if not intact, then without any major disruption.

“Courts generally take the view that directors have a duty to gain a sufficient understanding of the nature of all the major risks facing their businesses. Against this backdrop the D&O policy has had to move with the times, as buyers and brokers seek cover for new and previously untested areas of liability.”

Source: Willis Group Holdings

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