Still unprepared, despite increasing risks
In the wake of the ‘post-COVID-19’ era, global conflict and the increasing reliance on technology, 2023 brings with it a plethora of challenges for directors and officers (D&Os).
FAnews spoke to Fasken’s Insurance team to get some insights on the risk trends directors and officers need to watch.
Risk trends in 2023
According to Fasken’s Insurance team, the digital age has introduced various risks for D&Os. “There is an ever-increasing amount of sensitive data being stored by companies with an even greater growing risk of data breaches and cyber security attacks.[1] D&Os therefore have a duty to ensure that their cyber security protocols are secure and compliant with data laws and regulations.”
“Due to the grave consequences of cyberattacks, D&Os bear the additional responsibility of ensuring robust cyber security and governance processes are in place.[2] In the event that it is alleged that a director was negligent in their implementation of cyber security governance, this may result in financial and reputational risk,[3]” they added.
In addition, Fasken’s Insurance team states that cyberattacks have resulted in hefty fines, significant financial loss, business interruption and damaged reputation.[4] According to the Interpol’s 2021 African Cyberthreat Assessment Report, in 2016 cybercrime cost the South African economy 573 million USD.[5]
Another trend to watch, according to the team, is climate change and environmental risks. “D&Os must be aware and considerate of the impact existing environmental risks may have on their operations and the environmental risks their operations might create.[6] This means that D&Os must assess the environmental risks their companies encounter and mitigate against them. These risks include but not limited to, climate change litigation (which is increasing dramatically), the constantly changing regulations, actions brought against D&Os relating to Environmental, Social and Governance (ESG) risks and greenwashing.[7]”
“Internal ESG identification and compliance is important, and D&Os must be cautious of the risk of mispresenting their ESG achievements. This misrepresentation is known as greenwashing and may lead to regulatory ramifications and possibly litigation.[8] In South Africa, ‘environmental criminals’ (including those who are accused of greenwashing) may be held liable for the benefits they accrue from their actions,[9]” they added.
A multitude of emerging issues
In addition, they said D&Os must be wary of the social risks included in ESG compliance. The social element involves a focus on diversity, employee well-being, transparency and inclusivity.[10]
Another risk, according to the team is the unstable economy. “As a result of COVID-19, the Russia-Ukraine conflict and the energy crisis this has led to high inflation rates and decreased international investment. Amidst the energy crisis in South Africa, businesses are unable to operate at an optimum level because of loadshedding which directly impacts business productivity and turnover, and as a consequence the future sustainability of organisations, more specifically the position of the D&Os. A further consequence birthed by an unstable economy is the risk of volatile stock markets which are already predicted for 2023.[11] Furthermore, D&Os face increased risk of insolvency and must understand the influence that state budgets and credit ratings of government debt will have on their companies.[12]”
“D&Os must also be responsible for ensuring that their companies keep abreast of any regulatory changes and that they are compliant with relevant laws and regulations. In dealing with this, D&Os may often procure the services of a skilled and qualified third party who will ensure that the required compliance activities are attended to. Although the third-party service provider in an outsourcing arrangement may also be an accountable institution in its own right, the organisation that procures the third-party services is not absolved from being held accountable.[13] It is, therefore, imperative that D&Os ensure compliance with the relevant laws and regulations throughout their organisations and strive towards achieving a compromise between development and regulation,” said Fasken’s Insurance team.
“As set out above, D&Os are faced with a multitude of newly emerging issues which brings with it the burden of unprecedented decision making.[14] This exposes D&Os to potential personal liability in the event that decisions are taken negligently or recklessly and without due regard to standard practice.[15] Furthermore, D&Os are expected to hold a high standard of skill in their decision making and performing of duties.[16] Therefore, D&Os must be aware of the risk of being held personally liable for their actions and possibly being declared a delinquent director,” they cautioned.
Still unprepared, despite increasing risks
According to the team, a crisis of confidence study conducted by Deloitte found dramatic gaps between companies confidence in their ability to respond to different types of crises and its level of preparedness for those crises.[17] In the same study, 24% of the surveyed companies cited the effectiveness of leadership and decision-making as BREAK one of the greatest crisis management challenges their organizations face.[18] This is concerning and illustrates that D&Os have much room for improvement in preparing for the risks. Risks are ever evolving and D&Os must constantly ensure that their risk mitigation measures are adequate.
“D&Os may lack proper information regarding the need for executive risk coverage, which may result in a hesitation to invest in executive risk coverage due to the added cost to their companies and questioning the necessity thereof.[19] Therefore, it is important that D&Os have a good understanding of the risks imposed on their companies and the measures put in place against such risks to ensure their coverage is sufficient.[20] This should provide D&Os with a reasonable level of comfort in respect of their level of risk preparation,” said Fasken’s Insurance team.
“The risks faced by D&Os in 2023 are unprecedented, expanding and evolving each day. D&Os should understand the importance of making well-informed decisions and ensuring that the mitigation processes in place are adequate to avoid financial loss and reputational damage,” concluded the team.
Writer’s thoughts
Unfortunately, due to global conflicts, the COVID-19 aftermath and ESG-related issues, D&Os are placed in a position they may have never been in before and placed under heightened scrutiny when making decisions. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
[1] https://www.continuitycentral.com/index.php/news/erm-news/8028-two-key-risk-trends-for-directors-and-officers-in-2023#:~:text=Cyber%20and%20ESG%2Drelated%20risks,Officers%20Insurance%20Insights%202023%20report and Directors and Officers (D&O) Insurance Insights 2023 by Allianz Global and Corporate & Specialty (AGCS)
[2] Note 1 above.
[3] Note 1 above.
[4] Note 1 above; https://www.news24.com/news24/bi-archive/ensafrica-hit-for-bad-online-security-that-cost-a-house-buyer-r55-million-2023-1; Hawarden v Edward Nathan Sonnenbergs Inc (13849/2020) [2023] ZAGPJHC 14; Protection of Personal Information Act 4 of 2013 and Cybercrimes Act 19 of 2020.
[5] Interpol’s 2021 African Cyberthreat Assessment Report October 2021.
[6] Note 1 above.
[7] Note 1 above; according to the Business News Daily, greenwashing “is when a company purports to be environmentally conscious for marketing purposes but actually isn’t making any notable sustainability efforts” - https://www.businessnewsdaily.com/10946-greenwashing.html
[8] Note 1 above;
[9] Recently, BP has been found guilty of environmental crimes in South Africa in the Uzani Environmental Advocacy CC v BP Southern Africa (Pty) Ltd [2020] JOL 47370 (GP) case. Currently, the court is still in the process of determining the fine BP will be charged for. In their decision making process, the court is considering the details of BP’s advertising which allowed the fuel company to sell fuel based on it being ‘green’.
[10] Note 1 above.
[11] Note 1 above.
[12] Note 1 above.
[13] Financial Intelligence Centre Act 38 of 2001,
[14] https://www.aon.co.za/insights/how-the-e-in-esg-impacts-directors-officers-liability-d-o-insurance
[15] Section 77(3)(b) of the Companies Act 71 of 2008 as read with section 22
[16] https://www.acumenmagazine.co.za/articles/risk-and-reward-walking-the-directors-tightrope-7200.html
[17] https://www2.deloitte.com/us/en/insights/topics/risk-management/crisis-management-plan-resilient-enterprise.html
[18] https://www2.deloitte.com/us/en/insights/topics/risk-management/crisis-management-plan-resilient-enterprise.html
[19] https://www.financierworldwide.com/roundtable-risks-facing-directors-officers-oct22#.ZAD_nz1Bxdg
[20] https://www.financierworldwide.com/roundtable-risks-facing-directors-officers-oct22#.ZAD_nz1Bxdg
