Nearly two in five privately held companies report that it is likely their directors and officers will be sued by shareholders, customers or vendors in 2004, according to a survey sponsored by the Chubb Group of Insurance Companies.
Executives at 37 percent of the companies surveyed anticipate that customers will sue their directors and officers in the coming year, while 30 percent say vendors and 21 percent say shareholders may sue.
According to the Chubb 2004 Private Company Risk Survey, 18 percent of private companies report that the company or its directors and officers were sued by customers during the past few years. Seven percent of the companies surveyed report being sued by vendors and 6 percent report being sued by a shareholder.
“The Chubb Private Company Risk Survey supports what we’ve been seeing as an insurer over the last few years: Private companies – large and small – and their directors and officers are not immune to lawsuits from customers, investors and other parties,” said Lisa McGee, a vice president of Chubb & Son and Private Company Customer Group manager for Chubb Specialty Insurance. “If anything, the problem appears to be worsening.”
More than 30 percent of the companies surveyed said the Public Company Accounting and Investor Protection Act of 2002 has a direct or indirect effect on private companies.
The act, also known as Sarbanes-Oxley, has redefined corporate conduct and the relationship between directors, officers, accountants, attorneys and analysts. Although the legislation was intended for publicly traded companies, legal experts say that many of the standards it sets are now being applied to private and nonprofit companies. The majority of the respondents (54 percent) reported they were not sure what impact Sarbanes-Oxley or similar legislation at the state level had on their companies.
The survey also shows that many private companies appear to be responding to the growing threat of lawsuits against their companies and directors and officers.
Thirty-six percent of the companies surveyed plan to conduct a risk assessment of executive protection-related exposures, including directors and officers liability, in 2004. Also, 36 percent of the companies report that they have a published corporate governance program already in place.
“Although many private companies are still not thinking about ways to reduce their exposure, it was refreshing to see that so many others are taking steps to control their losses,” McGee commented. “Yet, many of these companies need to reevaluate the depth and quality of their loss-control measures in light of the heightened exposures. In particular, smaller firms, which are less likely to be able to withstand the financial shock associated with a lawsuit from a customer, vendor or shareholder, should consider a comprehensive loss control program and possibly insurance.”
Impulse Research Corp., a market research firm in Los Angeles, conducted the survey in November 2003. The firm interviewed the chief executive, financial and other top officers at 300 privately held companies.
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