Top executives need cover as risk is greater in a globalised world

With the growing risk of legal liabilities arising from shareholder and other stakeholder claims, including potential class action suits, managements of Indian companies are exposed to many adversities.

 

Tighter enforcement of legislation in India and exposure to foreign jurisdictions arising from globalisation of businesses have resulted in the top management being subjected to even closer scrutiny by shareholders, customers, employees, suppliers, regulators and other interested parties.

Directors, given their position of power, have very demanding legal obligations to uphold. They also have a fiduciary duty to exercise skill, care and diligence. Furthermore, even independent and nominee directors are being held equally accountable to stakeholders.

This managerial risk gets further enhanced as Indian companies foray into the global marketplace to sell their products and services or to mobilize capital and subject themselves to governance, accounting and regulatory standards prevalent in those countries.For instance, a large Indian company faced a class action suit in the US resulting in a settlement payment of several crores of rupees to its American stakeholders.

There are have been a number of cases globally and even in India where directors have been held liable for their decisions or for acquiescence in the deeds of fellow directors.The Companies Bill 2011, tabled in Parliament recently, provides for class-action lawsuits, which can allow a large number of people with common interest in a matter to sue or be sued as a group. Section 245 and 246 of the Bill contain these provisions. Under these sections, class-action suits may be filed by investors if they are of the opinion that the affairs of the company are being conducted in a manner prejudicial to the interest of the company and its shareholders.

Further investors and depositors can claim damages or compensation or demand any other suitable action for improper conduct, misleading statements and fraudulent or illegal acts by the company or its directors. Such suits can also be filed against auditors and any expert or advisor or consultant associated with the company. The new bill once passed also allows for NGOs (non-governmental organisation) or any other organisation to file a suit on behalf of all aggrieved parties against a particular company.

There have been several instances in the recent past of capital markets regulator Sebitaking cognizance of investor complaints and banning listing of such companies on the stock index. Even top listed companies have not been exempt from the shareholders ire. Recently, minority shareholders won a case against a leading FMCG company which had to revise and pay a higher price for their shares.

It is thus advisable for top management to opt for protection from legal liability for their managerial decisions and actions. ‘Directors and Officers Liability Insurance’ (or D&O insurance) enables company managements to perform their duties and discharge their responsibilities efficiently and effectively without fear of burdening themselves with unforeseen consequences. A unique aspect of a D&O policy is that it also insures the spousal and legal estate of directors.

Not just large companies, even managements of the small and medium enterprises (SMEs) are exposed to huge risks arising from managerial actions that negatively impact one stakeholder or the other (that is, customers, shareholders, regulators, so on). A lawsuit against managements of SMEs can cause a huge loss to them as their personal net worth is often tied to the financial well-being of the company. Hence, various companies have started offering a packaged D&O insurance in order to meet the needs of the small- and medium-sized enterprises.

D&O insurance ensures that companies (and their shareholders) are served by knowledgeable directors and officers who take strategic risks based upon the information reasonably available to them at the time the decision is made, without the threat of personal liability. By doing so, it is believed that corporations will continue to attract qualified, intelligent and reasonable directors and officers to manage the operations of the company. Not only would this result in better returns for shareholders but also benefit society in general.

The writer is managing director and chief executive officer of Tata AIG General Insurance Company

Gaurav Garg http://www.dnaindia.com/analysis/column_top-executives-need-cover-as-risk-is-greater-in-a-globalised-world_1647642