Board members and company executives can be held liable for an increasing number of scenarios. Inadequate responses to economic pressures, geopolitical issues, implementing innovative technologies such as GenAI, or environmental, social and governance (ESG) challenges are among the main factors driving the possibility that a company and its directors and officers (D&Os) may be sued in 2024, according to Allianz Commercial’s latest D&O insurance report.
Gloomy outlook prevails
Since the world eased out of lockdown from the COVID-19 pandemic, a new normal has not made daily challenges for companies any easier. Economic growth across the globe remains disappointing. Business insolvencies are expected to rise by more than 10% in 2024, according to Allianz analysis. Inflationary pressures remain, and refinancing of existing debt after years of low interest rates is a new test for many. D&Os are seeing fresh pressure on cash generation, and decisions around how companies finance capital expenditure and manage their debt profiles are under more scrutiny from stakeholders, the report notes.
In addition, businesses and their supply chains face considerable geopolitical risks with war in Ukraine, conflict in the Middle East and tensions around the world. Political risk in 2023 was at a five-year high, with some 100 countries considered at high or extreme risk of civil unrest, according to analyst Verisk Maplecroft, meaning there is greater pressure and scrutiny on directors to ensure their company is adequately prepared to withstand the impact of business interruption in higher-risk territories, in addition to ensuring the safety of employees.
See also: Biggest Business Trends for 2024
Everyone is talking about GenAI
GenAI (generative artificial intelligence) describes algorithms that are used to create complex content, mimicking human activity. Discussion around its use has been building as the expansion in its capabilities is now affecting how corporations think about their business processes. A third of organizations are using it regularly in at least one business function, according to a McKinsey global survey.
Litigation recently filed against AI companies has already highlighted privacy risks and copyright law violations. These cases, as well as the challenges noted above, have the potential to bring securities claims, intellectual property claims, breach of fiduciary duty claims, misrepresentation claims and shareholder and derivative lawsuits.
ESG claims from both sides
Regulatory action or litigation risks due to ESG-related issues are another major concern for boards, driven by increasing reporting and disclosure requirements around such topics, which could trigger claims in case of an inadequate response or non-compliance. The number of countries introducing ESG-reporting mandates has grown considerably in recent years, exposing directors to costs to responding to investigations, enforcement actions and potential fines and penalties for suspected non-disclosure or misrepresentation. Such requirements also expose directors to claims by private litigants, not only for alleged misrepresentation but also due to dissatisfaction with what the required disclosures reveal about a company’s commitments to ESG issues. Recent examples of claims have included allegations of failure to manage climate risk and alleged breach of duties by investing in underperforming funds that pursued ESG strategies.
See also: The ABCs of Agency Planning for 2024
Fallout from the U.S. banking crisis
The report also looks at the fallout from the March 2023 banking crisis in the U.S. Poor practices and rising interest rates resulted in several banks being dissolved or taken over. Securities fraud claims followed. An interesting aspect of this crisis was the role of social media. The depositors of one of the failed banks, Silicon Valley, were largely tech and healthcare startups, invested in by venture capitalists. When depositors started to withdraw funds, some venture capitalists advised their clients to start spreading their assets to other banks. This advice hit social media, leading to a run on the bank, which closed shortly thereafter. The power of social media to get large numbers of people to act in the same way at the same time means that bank runs can now happen too quickly to stop. The bank failure is also a reminder for D&Os how rapidly social media can exacerbate a crisis, the report notes.
The challenge for directors and officers for 2024 is to be prepared for headwinds, to not only be nimble but to have a strategy that can adapt when presented with an obstacle to the business. Diversity in the boardroom continues to allow companies to have varied approaches when presented with problems. To assist with the challenges ahead, the C-suite should push beyond the norm in their industry and allow themselves a better chance to be on the front foot for the future.
To read the full report, please visit: https://commercial.allianz.com/news-and-insights/reports/directors-and-officers-insurance-insights.html
