Reforms Cause a Shifting Landscape
Governments across Europe, to varying degrees, have passed laws requiring new financial disclosures, enhanced shareholder protections, and greater transparency. Many have developed formal structures for collective action proceedings by shareholders or their representative. Previously thought a luxury of large companies, D&O liability insurance in Europe is primed for robust growth across companies of all sizes as it is increasingly viewed as essential. Changes to laws governing executive responsibilities, increased cross-border regulator vigor, and greater access to collective litigation will drive this growth.
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European D&O Insurance Market:
Reforms Cause a Shifting Landscape
REM, the rock band, proclaims in one of their hit singles "It's the end of the world as we know it and I feel fine", which could be the mantra of the European corporate culture. Relative to the US legal system and corporate culture, Europe had long conducted business in a climate of opaque management visibility and limited shareholder legal remedies. Accounting scandals and corporate governance shortfalls in Europe by companies such as Royal Dutch Shell and Parmalat, however, cost investors billions of Euros. The subsequent outrage led to tectonic shifts in governance standards and access to justice throughout Europe. The credit crisis, rife with scandals such as Madoff's Ponzi scheme, has further propelled governance changes promoting sustainability. Governments across Europe have passed laws requiring new disclosures, enhanced shareholder protections, and greater transparency, and many have developed formal structures for collective action proceedings. The progression toward implementing collective action mechanisms, and the degree of liberalization, is in varying stages by country. The clear trend, however, is toward a more collective-friendly civil legal system in most countries.
As European directors and officers are placed increasingly under the microscope of transparency, and as litigation remedies become more readily available for shareholders, the number of suits against corporate boards and managers is expected to expand. New corporate governance rules more clearly define responsibilities, providing more obstacles for directors and officers to trip over, revealing a maze of potential liabilities. Although many companies might respond to heightened transparency and the availability of more litigation remedies by becoming conservative, these new potential pitfalls amplify risks to directors and officers. Tougher regulations and refocused enforcement efforts brought about by the backlash to the credit crisis may result in increased claims.
Additionally, companies doing business in the US, and particularly those whose shares trade on US exchanges, are exposed to the dangers of the US class-action-prone legal system. The Morrison v. National Australia Bank Supreme Court decision may have limited shareholder lawsuits in US courts to those shareholders who purchased shares traded on US exchanges, but suits filed against European companies in US courts remain on the rise. The implicit foreign company protection assumed for so many years in the US has long passed. The Morrison case will, however, shift more lawsuits to other court systems, and the Netherlands is highly touted as an alternative to US courts.
Globalization has caught up with the European corporate culture, and it is indeed "the end of the world as we know it" with localized safe harbors for directors and officers vanished. Previously thought a luxury of large companies, directors & officers (D&O) liability insurance in Europe is primed for robust growth across companies of all sizes as it is increasingly viewed as essential. Changes to laws governing executive responsibilities, increased cross-border regulator vigor, and greater access to collective litigation will drive this growth. Most European corporate leaders and shareholders alike should "feel fine" about these changes, as this modernization of the corporate climate and legal systems should lead to more stable, sustainable growth, and perhaps serve as a model for potential US sustainability efforts.
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