Know your risks: a crucial part of a Board's risk management strategy must be assessment and evaluation of its directors' and officers' personal liability.
A recent survey of boards of directors of TSX-listed companies found that Canadian directors consider their current risk of potential claims to be high, with future risk even higher. The study shows some remarkable results for Canadian companies This is a list of companies from Canada.
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Current Companies compared to their U.S. counterparts.
The survey was commissioned by Bishop Phillips and conducted by the CIBC CIBC Canadian Imperial Bank of Commerce
CIBC Centres Interinstitutionnels de Bilan de Compétences
CIBC Commonwealth Institute of Biological Control (Trinidad)
CIBC Commercial International Brokerage Company Centre for Corporate Governance Corporate Governance
The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy, and rule of law. and Risk Management at Simon Fraser Simon Fraser may refer to:
D & O essentials
Respondents say they expect that changes in Canada's business climate will result in increased litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute.
When a person begins a civil lawsuit, the person enters into a process called litigation. and mounting legal costs, with the greatest potential claims arising from inadequate or inaccurate disclosure. The greatest source of those claims, respondents say, will be from shareholders and large institutional investors Institutional Investor
A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. .
The respondents strongly agree that Directors and Officers (D & O) insurance is important for the recruitment and retention of qualified directors. And with 60% of current directors due to retire by 2009, the recruitment of new qualified directors is paramount.
As one survey respondent said: "Ten years ago we said, 'If you conduct yourself in a prudent manner you don't need D & O insurance.' The outside environment has changed. You will not attract good directors without D & O."
The chances of being sued, the cost of defending claims, the ease of class actions, and the size of settlements have all soared in recent years. The survey showed that reporting Canadian companies receive claims against directors at about the same rate as U.S. companies. Boards need to evaluate whether their company's indemnities and insurance are providing adequate coverage.
As Elissa Sirovatka, principal of Tillinghast, a risk-management consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee
business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a owned by Towers Perrin Towers Perrin is a global professional services firm.
It was established 1 March 1934 as Towers, Perrin, Forster & Crosby. The umbrella name of Towers Perrin was adopted in 1987. , points out: "The inclusion of directors' and officers' personal assets in the Enron and Worldcom settlements accelerated the number of inquiries from boards. Board members now recognize their accountability and are questioning their own levels of coverage."
According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. the new Canadian New Canadian
Canad a recent immigrant to Canada survey, 25% of independent directors engaged an insurance consultant to review their policy coverage and close to 40% requested changes to their policies including special clauses, extra coverage, and changes in policy language. These figures are high compared to the U.S. and are another sign that Canadian directors are increasingly paying attention Noun 1. paying attention - paying particular notice (as to children or helpless people); "his attentiveness to her wishes"; "he spends without heed to the consequences"
attentiveness, heed, regard to their personal risks. Sixty-eight per cent of the companies who responded to the survey engaged the services of an insurance consultant with special expertise in D & O insurance; 62% of respondents have their corporate counsel review the annual application and policy with 42% of respondents retaining external legal counsel.
A common fallacy fallacy, in logic, a term used to characterize an invalid argument. Strictly speaking, it refers only to the transition from a set of premises to a conclusion, and is distinguished from falsity, a value attributed to a single statement. is that all D & O insurance policies are alike. When asked "Do you think that most D & O policies sold in Canada offer generally similar terms and use substantially similar language?", 63% of the survey respondents said yes. The truth is, there is a huge disparity in exclusions, extra cover and definitions. D & O policies are complicated. As one respondent pointed out: "The D & O policies are almost incomprehensible (and I am a corporate lawyer!). It is almost impossible to deal with issues such as priority of payments, allocation, insured versus insured exclusions, cancellation rights, non-renewal, extended reporting and a number of other exclusions."
Sarah Robson of Marsh Canada and Trevor Mapplebeck of Mercer Oliver Wyman in Toronto point out in the March 2006 issue of Canadian Insurance: "In the current marketplace, coverage is negotiable, D & O coverage is extremely complex, and no two wordings are alike so it is essential that a detailed coverage analysis be completed to understand the nuances in the various coverage offerings."
Risk ranges: Canada and the U.S.
The survey also revealed that just over half of the respondents know if their coverage will still be valid if the company's staff or other directors provide inaccurate information or omit key information in the annual application for insurance. And only 28% say their company has financial reserves or money in trust to cover directors' legal fees or liability incurred before D & O policy deductible is exceeded.
Often directors assume that, since they are covered by the same policy as the CEO, they have first-class protection. The truth is that rarely do CEOs get involved in evaluating the quality of their D & O policies. They often rely on a non-legal employee or corporate counsel who negotiates one D & O policy a year. Match that with an underwriter who negotiates policies every day of the year and you have an unfair advantage in favour of the underwriter, which can lead to harsh results for the insured.
Another fallacy is that the majority of lawsuits are made against very large corporations. According to AIG AIG addressee indicator group (US DoD)
AIG American International Group, Inc
AiG Answers in Genesis (religious group in defense of Scripture)
AIG Artificial Intelligence Group
AIG Australian Industry Group , in 2004, only 1 in 18 companies facing a class action lawsuit class action lawsuit
A lawsuit in which one party or a limited number of parties sue on behalf of a larger group to which the parties belong. For example, investors may bring a class action lawsuit against a brokerage firm that has actively promoted a tax was a Fortune 500 company. The overwhelming majority are companies with sales of less than $100 million.
Understanding the risks and ensuring insurance policies cover those risks is crucial. A 2004 study indicated Canadian directors are twice as likely as U.S. directors to have the insurer deny coverage of a claim (14% in Canada compared with 7% in the U.S.). But that number is on the rise. In the most recent study, although the actual number of claims was small, a staggering one-third of the coverage was disputed by the insurance company.
This presents a serious problem for companies trying to recruit directors. Do you tell a prospective director that if there is a claim, there's a 33% chance the insurance company may not step up to cover it?
And that's not the only issue Canadian directors and officers face. Being a director of a Canadian company carries a much wider range of risks than U.S. directors. Canadian directors are personally liable for unpaid taxes, unpaid wages, and environmental damages. If a company's operations have resulted in contaminated contaminated,
v 1. made radioactive by the addition of small quantities of radioactive material.
2. made contaminated by adding infective or radiographic materials.
3. an infective surface or object. water and the company goes insolvent, directors are personally liable for clean-up costs. Statistically it doesn't happen often, but Canadian directors seem unaware that they are personally liable under a range of laws that is much more extensive than those affecting directors of U.S. companies.
But things are changing. Eighty per cent of survey respondents reported taking measures to strengthen the role of independent directors, to improve transparency in reporting, and to strengthen audit and risk management committees. Although this may be prompted more by new compliance legislation designed to boost investor confidence, this actually offers greater opportunity for enhanced performance. As Robson and Mapplebeck say, this can "create meaningful information about the business that the board and management can use to ensure risk management is about more than mere compliance, but about advantage."
Melanie Woodard McGee, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , agrees. In her November 2005 CMA CMA - Concert Multithread Architecture from DEC. Management article she notes: "Although compliance requirements Compliance requirements are a series of directives established by United States Federal government agencies that summarize hundreds of Federal laws and regulations applicable to Federal assistance (also known as Federal aid or Federal funds). may be the catalyst for leaders to address the issues of risk management, effectively managing organizational risks carries with it the potential to yield significant benefits. Indeed, properly identifying, measuring and managing organizational risks offers real opportunities for improved performance."
Clearly, boards need to review all aspects of their D & O risk including: corporate indemnity (a necessity whether or not there is D & O insurance); qualifications of insurance broker or consultant; reputation of the insurance company; terms of the existing policy; and key issues in making a claim.
With a solid D & O policy in place, companies can confidently attract and recruit the most qualified directors.
Paul Reynolds Paul Reynolds may refer to: