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Study finds executives at risk due to increasing anti-corporate litigation culture

Cyber incidents, data privacy, rising regulation, litigation funding, and shareholder activism are putting corporate leaders under more pressure than ever to fall foul of investigations and prosecutions over alleged wrongdoing, a new report has found.

Analysis published by Allianz Global Corporate & Specialty claimed that directors and officers are ‘walking a managerial tightrope’ as executive liability increases annually.

The Allianz report, entitled ‘D&O Insurance Insights: Management Liability today’, found that non-compliance with laws and regulations is the top cause of director and officer claims by number, followed by negligence and maladministration costs.

The average claim for breach of duty costs over $1m however in large corporate liability cases, director and officer claims can be valued in the hundreds of millions of dollars.

The report further observed a general trend for director and officer claims to be dismissed or resolved more slowly, meaning lengthier litigation, increased defence costs and higher settlement expectations, where the average US securities class action case takes between three and six years to complete and legal defence costs average around $10m, rising to $100m for the largest cases.

The influence of third party funding in litigation has also created a shift in the disputes environment, as it has become a commonplace tool for bringing collective actions against financial institutions and commercial entities.

Notably the report flagged the need to tackle the increase in executive risk where future directors need to develop a highly sophisticated risk management culture. Executives would do well to consider asking tough questions about compliance related topics and educate teams about classic director and officer exposures such as deals done, capital measures and IPOs.

Tom Melbye Eide, general counsel for Shell’s upstream business told Legal Business: ‘More generally our goals are based on legal risk assessment we think we will face. The obvious one is lower oil prices, which means there will be heightened focus on credit risk. But there is also a bigger focus on fraud risk at the moment, and that is something I am making sure the legal team is taking a lead on. It’s the type of risk area where I think the skill set of company lawyers can actually make a big contribution to the strength of the group. Robust fraud checks are rarely implemented in legal teams.’

Eide (pictured) adds the GC is becoming more important in the corporate setting. ‘They increasingly have a presence at the board of directors and are involved with sub-committees – the GC is now more present in an organisation than ever before. Second, the GC is now more of a risk partner. In-house lawyers were always involved in legal risks but more general risks are becoming important to the advice we give. Increasingly at senior level it is more important to assess business risks rather than just looking at legal.’

Data released by Thomson Reuters in September showed the banking sector now accounts for 56% of the total provision for legal liabilities among FTSE 100 companies, up from 54% in 2014. Meanwhile, the natural resources sector (oil and gas, and mining companies) falls in second place for anticipated legal liabilities, constituting 25% of the £31.3bn total, with legal provisions of £7.9bn.