Without a doubt, directors and officers are becoming the whipping boys of the financial world. Whether the market rises or falls, asset valuation and expectation drives lawsuits towards those in corporate governance and top management.
Directors and Officers Liability is one of the fastest growing areas of liability claims and settlements. Why? Largely because directors and officers must make critical decisions without perfect knowledge while those impacted by these decisions can reflect on outcomes with hindsight’s perfect knowledge.
Since Sarbanes-Oxley laws were enacted, financial reporting requires attention to minute detail, impeccable accuracy, and transparency. If values and regulations were not subject to change, this accounting would be easier.
In the case of the real estate bubble bursting over the stock market, values dropped in the real estate and stock markets quickly and sharply. Is it realistic to believe the trustees of your retirement account should foresee this economic disaster? Should stockholders be compensated when outside forces decrease the stock value so dramatically?
According to the trends in liability lawsuits, many employees and investors believe so.
When the stock market rises to record levels, the trustees are held to account if their investment returns lag behind the optimal numbers, or even the average returns.
Company stock prices are expected to rise with the market, regardless of which sectors are advancing.
So what can directors or officers do?
Even contracting out the governance of retirement accounts does not remove the liability from the board.
The only solution to this problem is transferring the risk through insurance contracts. Assuming the board and officers are doing a better than average job, too many outside influences can change the financial landscape for a company.
Claims frequency and severity are on the rise. The directors and officers, as a group, need protection from litigation, including costs of litigating. The company cannot afford timid officers or directors lacking confidence. Nor can it afford indecisive leaders with one eye on the deposition.
The proper risk management decision includes high limits D&O insurance with proper monitoring of the documents for decision making. What circumstances drove decisions? What were the compelling reasons for changes in direction or maintaining the course? These documents and notes will help in the long run.
