Increasing risk factors raise concerns within the industry
The nature of business is that the business environment is dynamic and ever changing. But there is a difference between a positive change and an uncertain change. One of the facts which is becoming ever increasingly clear is that the South African business environment may have an element of uncertainty. This has resulted in increasing risk factors which companies need to come to terms with in order to find a way to cope with the challenge.
One such challenge is the increasing risk factor of directors and officers liability (D&O). The South African insurance industry is typified by large scale insurance companies, many of which are listed companies.
The directors of these companies are not only responsible to their staff and customers, but also to shareholders. Decisions made by these directors every day can have a significant effect on the industry.
A sad case of one wrong decision
Regulatory changes are one of the biggest contributors towards this increased risk for companies. Government has signalled its intention to provide increased protection to the public against companies who in the past have taken advantage of the naivety of certain members of the South African public when it comes to the financial services industry. This resulted in many cases of theft and fraud which casts a bad light on the industry.
One wrong decision can potentially cause financial or reputational harm to a business and its stakeholders, whether it is due to a poor decision made intentionally, or reasons out of the business's control, such as a fraudulent supplier. However, a number of industry ombudsmen have stood firm on their outlook on the industry saying that companies need to have sufficient systems and processes in place in order to detect fraudulent activities.
Simon Colman, Litigations Risk Executive at RBS, points to an example earlier this year where an Executive Director of a listed South African company became publicly embroiled in a bribery and corruption scandal.
"Such an incident can have serious repercussions for a company, whether it is related to its reputation or a loss of business, which will both ultimately have a negative impact on revenue. While the facts of the alleged illegal activity are not yet fully known and the legal processes are still underway, when the news broke to the public, the stock price of the company fell by almost 25%, meaning many shareholders lost a quarter of their investment in one day,” says Colman.
It feels that this was not the first and will not be the last company to experience this, and one just has to look at the recent fines implemented in the banking sector to see that companies are willing to try their luck in certain aspects.
"Unfortunately, corruption currently seems to be rife in many spheres of South Africa's public and private sector. Businesses therefore need to ensure that they have sufficient strategies in place, such as Directors and Officers Liability (D&O), which aims to protect individuals against litigation.”
Where does the buck stop?
The key question that we need to ask ourselves is where does the buck ultimately stop? The purpose of the increased protection to consumers is that the industry is now given more accountability. Industry participants who are looked up to as experts in their field must now live up to this view in word and deed.
But the systems and processes which are supposed to be put in place does not indemnify the company as they do not condone fraud and corruption. "D&O policies are designed to respond to issues of negligence rather than intent, and do not cover deliberate breaches of duties, or remove any obligations for the insured individuals to conduct themselves both ethically and within the confines of the law.”
This will become a key aspect of the industry in the coming months. A number of determinations handed down by the Office of the Financial Advisory and Intermediary Ombudsman (FAIS Ombud) has indicated that the brokers and intermediaries of companies cannot BREAK act irresponsibly as it will ultimately be the company that does pay a certain price for their negligence. As a representative, an agent - whether tied or independent - is an extension of the company. Therefore, the company should have a handle on the actions of its agents.
What protection is offered to companies?
While D&O policies are becoming important, one has to look at the extent of the coverage and what protection companies are actually receiving from their policies. Colman says that there is a distinction between what is covered by the policy and what the directors and / or officers could conceivably be liable for.
"While D&O policies do not cover deliberate breaches of duties, underwriters will often go so far as to cover criminal defence. It should be noted however that if a guilty verdict is handed down, they will withdraw from the matter and seek to recover any legal fees from the convicted director.”
It must be noted that the line is very fine in this instance. You might be found guilty by a court of law, but the reality is that you are only guilty by implication. If we have to apply the outlook of the FAIS Ombud to a smaller insurance company, there is no excuse that a company cannot keep up to date with the action of their agents. But what if it is a large company that has hundreds of agents, both tied and independent?
Colman adds that while some may argue such a policy removes some of the financial repercussions which are meant to deter directors from behaving negligently, he says that this argument holds no more weight than the argument facing doctors who cannot practice without medical malpractice insurance. "The environment that business leaders operate in is fraught with potential liabilities. Many directors would not wish to take up their positions on boards if they were left without any protection. A D&O policy also offers some form of safety to stakeholders in that they have a guarantee in recovering losses where negligence is the cause of the action,” concludes Colman.
Editor's Thoughts:
The fact that companies are being held accountable for their actions is a step in the right direction to root out some of the fraud and corruption that South Africa has unfortunately become synonymous with. Will the fact that companies are being held accountable for the actions of their agents make a difference? Or will the FAIS Ombud still be facing many determinations this year? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
Comments