From diversity in the boardroom to international corporate scandals, we offer our international experts’ predictions on the opportunities and challenges that the directors’ & officers’ and financial institutions market may face in the coming year and beyond.
1. Senior managers must continue their efforts to improve greater diversity in the boardroom
Since the Financial Reporting Council’s 2018 Code introduced the requirement that all FTSE companies report on the gender balance of those in senior management, there has been a strengthened effort to embrace boardroom diversity in the UK. Despite initial fears that companies would adopt a tokenistic or tick-box approach, early evaluation suggests that companies are incorporating diversity inclusion into their strategic planning, recognising that diversity can drive innovation, growth and give a competitive edge. However, while diversity targets are now being met by many companies, there is still significant room for improvement, with gender pay gap reporting providing further scrutiny. Senior managers need to retain their focus on this issue through continuing monitoring and succession planning.
2. International corporate scandals and the availability of litigation funding are fuelling Europe’s appetite for class action-style redress
The US and Australia lead the way when it comes to class actions but pressure is now building in Europe to follow suit, particularly in the wake of international corporate scandals such as VW’s Dieselgate. Eager to yield lucrative returns, powerful US plaintiff law firms and litigation funders are making inroads in Europe, where nations are expressing the political desire to embrace class action-style redress as a means of providing “access to justice” for mistreated consumers. England’s Consumer Rights Act 2015 introduced an opt-out collective redress regime permitting a claimant representative to bring a group action following a competition infringement decision; Scotland’s Civil Litigation (Expenses and Group Proceedings) Act 2018 introduces an opt-out class action procedure which will come into force once the Scottish Government has approved secondary regulation; and Germany has a regime for use by specific consumer not-for-profit agencies. The European Commission’s “New Deal for Consumers” package launched in April 2018 is also paving the way for group actions with its proposal for a new consumer collective redress regime to protect consumers where EU consumer law has been breached. While nowhere close to matching the class action activity in the US and Australia, Europe’s acceptance of the value of class actions in the consumer arena will see claims activity increase significantly.
3. Climate change matters more to directors and officers
Public pressure and shareholder activism highlights the need for early recognition at board level that all firms are vulnerable to risks associated with climate change, whether or not they are operating in an environmental sector. Management boards are now expected to understand, analyse and manage the financial risks from climate change and integrate this issue into decision-making. Individuals may be held to account if they are unable to demonstrate that risks have been appropriately assessed, mitigated and disclosed. The Prudential Regulation Authority has extended the Senior Managers and Certification Regime (implemented on 9 December 2019) to incorporate climate change reporting obligations and, in the worst cases, a finding of a regulatory breach might be severe, including criminal prosecution, fines and penalties, and disqualification as a director. Corporate pressures around climate change have been expected by boards and their insurers for a few years – it’s now a day-to-day reality and scrutiny of investors, auditors and regulators is likely only to increase.
4. Innovative technology will introduce new ways of working and new enterprise risk
Digital asset and blockchain technologies are two examples where financial institutions (FI) have pushed forward the innovative use of products which involve third party vendors who are not themselves the subject of the same regulatory scrutiny as their FI clients. Without product development by FI underwriters, unexpected gaps in cover will appear where losses occur, whether through disruptive IT system attacks or technology outages, which involve such innovative products in a relatively unregulated environment. Underwriters will need to consider the extent to which the increased enterprise risk should be accepted under FI products.
5. A US Perspective: Directors’ & officers’ liability related to privacy violations will increase
The past couple of years have seen directors and officers in the United States subject to alleged liability in connection with 1) the failure to provide properly for and oversee an information security program or 2) failure to give customers prompt and accurate information in disclosing a breach. With laws in Europe setting the basis for a corporate penalty, the upcoming enactment of the California Consumer Privacy Act in January 2020 may lead to disputes about directors’ and officers’ compliance obligations and those exceptions in response to deletion requests from Californian residents.
6. A US Perspective: Securities class actions will continue to be filed against US public companies at a record-setting pace
Despite the last several years seeing the US stock market surge to record highs, securities class action filing against public companies and their directors and officers has continued to soar and will continue to be filed at a record setting pace. Between 2010 and 2016, an average of just over 230 securities class action lawsuits were filed against US listed public companies. In 2017 and 2018, that number almost doubled, to over 430. In 2019, the number of securities class actions filed against public companies will eclipse the prior year’s record – and this trend is likely to continue into 2020, despite the US stock market’s record highs.
7. An Australian Perspective: The appetite of litigation funders and class action lawyers will not abate despite a favourable 12 months for defendants
Despite defendants experiencing a relatively positive 12 months with a series of favourable interlocutory decisions regarding competing class actions, the recent landmark Australian Federal Court decision in the Myer class action and litigation funders being squeezed by plaintiff law firms taking on class actions on a ‘no win-no fee basis’, it seems clear that litigation funders and plaintiff law firms are becoming more adventurous and have an appetite to take on class actions well beyond the securities sphere. The post Hayne Royal Commission environment has spawned numerous class actions which confirm that group proceedings will be a prominent feature of Australia’s litigation landscape regardless of whether or not legislative reform occurs in the securities arena.
8. An Australian Perspective: Directors’ & officers’ wordings are poised to undergo a substantial tightening in response to the lack of insurer appetite to write side C cover
Australian directors’ and officers’ (D&O) wordings are broad with many of the safeguards in respect of pre-contractual disclosure and wilful or dishonest conduct heavily qualified or waived. This will change as listed Australian companies seek side C entity cover to protect their balance sheets but are met with a substantially decreased appetite from the D&O insurance market. The Australian experience is likely to mirror what occurred in the US in the mid 1990s with wordings tightening significantly as D&O insurers attempt to confine and share the risk with their insureds.