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SCMP Reporter

WITH GLOBALISATION  bringing increasing risks of litigation and the demand for more transparency in corporate governance in Hong Kong and elsewhere, company directors and executives have been pushed to shelter under the umbrella of insurance.

'The environment today is even more ripe for directors to buy the insurance because there are more risks existing today than they did 10 years ago,' said Deborah Ansbacher, regional vice-president, Financial Lines, at American International Underwriter (AIU).

'The changes in the industries and globalisation have presented new risks to the directors,' Ms Ansbacher added.

Bearing this trend in mind, AIU decided to extend its insurance coverage by launching Directors and Officers Liability Insurance in 1999 in order to meet the new risks posed to such professionals.

'Some areas we have added are pollution, security entity and insured-versus-insured which is when one director is sued by the other director,' Ms Ansbacher said.

AIU also added a crisis management fund last year into the director's insurance, out of which the insurer pays the cost for hiring consultancy and media experts when a crisis arises.

'The last thing the director wants to worry about is what they are going to tell the press or employees. With the crisis management fund they can concentrate on resolving the situation,' said Ms Ansbacher.

Directors and executives are usually left to fend for themselves as regular insurance bought by companies is unable to protect them in most lawsuits and claims.

Potential litigations may arise from areas such as employment-related issues, breach of trust and regulations, financial performance of the company, dishonesty and fraud.

In all developed economies and business centres, when business activities get complicated and people become more aware of their rights and obligations, there is an increased need for directors' insurance.

Such insurance covers claims brought against the directors and executives of a company, including the expenses incurred, said Carlye Tsui, chief executive of the Hong Kong Institute of Directors.

The threat of personal litigation comes from an ever-widening source, including customers and clients, environmentalists, regulators, competitors and even fellow directors.

'Directors face claims in areas such as breach of trust, neglect and errors. For executives, it is sexual harassment, age and race discrimination and wrongful termination,' Ms Tsui said.

AIU claimed that, as yet, not many companies had bought directors' insurance, but the business was growing slowly.

Ms Ansbacher said the reasons for this were growing minority shareholder interest and corporate transparency reforms, which had affected how the company operated and, most importantly, changes in the regulatory environment.

Ms Tsui said: 'In recent years, there is an increase in litigations, with claims brought against directors and officers of a company for actual or alleged breach of duty, neglect, mis-statements, errors or omissions.'

The widespread global consolidation of industries, with aggressive mergers and acquisitions resulting in massive lay-offs, had also brought about plenty of practice claims against directors, said Ms Ansbacher.

The strict regulation by the local financial watchdogs, such as the Securities and Futures Commission and Hong Kong Exchanges and Clearing, have exemplified the Government's efforts in making a strong point about corporate governance.

'They [local authorities] have realised that the directors have to ensure that proper procedures are operating in their organisation. If you don't have decent corporate governance, chances are people are not going to invest in the company and that's a big lure for companies to improve,' Ms Ansbacher said.

'Now, even if you are trading in the Hong Kong exchange, shareholders are becoming more aggressive and are demanding much more from the board of directors than they used to,' she added.

Further, with minority shareholders becoming more important and their rights being recognised, there is an increasing need for family-owned companies to buy director and executives insurance, Ms Ansbacher said.

She cited the example of a new action group, the Hong Kong Association of Minority Shareholders, that is pushing for the creation of a statutory body to fight for the interests and rights of minority shareholders. 'In Hong Kong, many are family run businesses, and directors would be much more careful when making decisions on behalf of the company.

' Currently, the minority shareholders do not have that much of a right, but when that action comes into force then the interests of minority shareholders would be much more protected. I am sure there'll be a lot more action coming from minority shareholders,' Ms Ansbacher said.



Insurers respond to directors' need