(INTER)NET GAINS AND LOSSES
The internet has made our lives easier, but riskier. From the man on the street to the celebrated occupant of the corner office, cyber security is everyone's fear. With good reason – the Allianz Risk Barometer 2016 shows it as one of the top three corporate risks, threatening companies' finances, operations and reputation.
Online attacks are becoming more sophisticated, a fact that companies are aware of. What they tend to underestimate is the cost of a technical failure, human error or even the actions of a rogue employee. With data protection laws becoming stronger, compliance gaps could prove expensive.
“Cyber and privacy is the number one emerging risk for directors and officers, but awareness and understanding of the risk is not always high,” says Schiavone of AGCS.
Major cyber breaches almost always hurt the company's stock price. Investors who face losses could turn their wrath on directors. “It may be possible to claim substantial damages from directors if there has been negligence in any failure to protect data or a lack of controls,” says Emy Donavan, Regional Head of Cyber Liability North America at AGCS. Example of scenarios in which a director could be found negligent are a fund transfer fraud or where a vulnerable network is compromised, leading to business interruption, property damage or intellectual property losses.
France and Italy have already taken steps to make directors liable if they don't move to prevent data breaches.
A detailed strategy for combating cyber risks is set to join the to-do list of company boards, with privacy and network security increasingly being seen as a board issue. Going forward, it may become more difficult for directors to escape liability if the company faces a serious loss. With technology making greater inroads into corporate processes and operations, this threat cannot be ignored.
DEALING WITH DEAL MAKING
The market for merger and acquisitions was strong globally in 2015. There are signs that 2016 and 2017 will also post impressive deal making numbers. But M&As are stressful times for companies – both acquirers and targets - and their executives. Target companies usually experience heavy scrutiny for past wrongful acts by executives. “Mergers and acquisitions, but also divestitures, belong to the riskier moments in the life of a company,” says Bernard Poncin, Global Head of Financial Lines at AGCS. “Expectations are always high, and synergies are easier planned than realized.” As buyers and sellers don't always lay all the cards on the table, post-deal disputes often arise. Transactional liability insurance offers financial protection for the company and shareholders in such cases. The use of transactional liability insurance has more than doubled between 2011 and 2015, highlighting the increasing risks that deal making poses.
GREEN, CLEAN AND NOT MEAN
Think pollution in Beijing or Delhi or modern slavery in third-world countries doesn't affect you as an executive? Think again.
Gone are the days when the quality of a product or service was enough to keep investors and customers happy. Supply chain management is under the lens more than ever before. From modern slavery to environmental pollution and climate change, there are many non-business issues that put the spotlight on a company, and not always in a good way. Consequences could include reputational damage, shareholder activism, public outcry and even governmental investigation.
As corporate social responsibility becomes increasingly important to all stakeholders, companies and directors could be targeted for not disclosing environmental data or risks to investors. In the future, claims related to such disclosures are not impossible. If a company provides inadequate or misleading information, its directors could also face claims - breaches of statutory or fiduciary duties or compensation for lost corporate value being just a few reasons.
As for ethical issues, modern slavery including forced and compulsory labor poses a risk for large companies' supply chains. For example, the United Kingdom's Modern Slavery Act 2015 requires commercial organizations with a global turnover of more than 36 million pounds and any part of their business in the UK to publish an annual statement confirming that modern slavery is not taking place in its own business and supply chains. A director has to sign this statement. While legal sanctions for non-compliance are limited at the moment, repercussions could include reputational risk and 'public shaming'.