June 30, 2020

D&O Insurers: Bracing for Litigation By Hiking Your Costs

D&O insurance premiums jumped somewhere between 44% and 104% in the first quarter of this year, compared with last year. That’s according to survey data from Aon & Marsh cited in this WSJ article. The cause of the increase is the ever-expanding specter of securities litigation, including event-specific litigation and suits over emerging ESG issues, which Lynn blogged in January would be likely to influence rates.

The latest threat? Covid-19 reopening decisions. Lynn blogged last week on “The Mentor Blog” about what boards need to consider to manage reopening risks – if boards get it wrong, they’ll not only be facing remorse over upended lives and a struggling workforce, they’ll also become a litigation target. Some believe that rates will more than double in the wake of the pandemic, according to this “Business Insurance” article. The WSJ reports that on top of tough decisions about the business, companies are having to decide whether to change deductibles, policy limits or insurance budget. Here’s an excerpt:

According to Aon, no primary policies that renewed in the first quarter with the same limits and deductibles fetched a lower price. To contain the increases, nearly half of the clients changed their deductibles or policy limits, and sometimes both.

In a June 10 report, A.M. Best Co. said a spike in litigation caused by specific events, such as cyberattacks, the #MeToo movement and wildfires, was driving the increases. Companies also face potential litigation over “emerging exposures” such as Environmental, Social and Governance, or ESG, issues and climate change, it says.

Exchange Act reporting is a key factor in reigning in premiums and reducing risk. According to the Journal and insurance companies, some companies also are setting up captive insurance companies in places like Singapore or Bermuda – as wholly owned subsidiaries that provide insurance to the sponsoring company alone.

Earnings Guidance: Most Important for Smaller Companies?

In this recent 6-minute interview with Andrew Ross Sorkin, Barry Diller – Chair of Expedia and IAC – takes a pretty firm stance against giving earnings guidance, and says the companies he oversees will no longer be providing granular predictions of the near-term future. This article argues that guidance isn’t a waste of management’s time and outlines ways in which the practice can benefit companies – especially smaller companies. Here are some high points:

1. Volatility: Stocks are valued on expectations of future performance. Companies that give guidance help narrow the standard deviation of those expectations, and their words and numbers carry weight because they have the most information about their future. Volatility is less of an issue for widely-followed mega-caps, which have a “crowdsourced consensus on future value that can make guidance unnecessary.”

2. Visibility: For smaller companies, guidance is an important tool to enhance visibility on the Street. It makes analysts’ and investors’ jobs easier and shows management can deliver, which builds their credibility — the most valuable non-monetary asset on Wall Street.

3. Vulnerability: Companies that give guidance take the lead in shaping investor perception about future potential. Those that don’t leave a “consensus” opinion to a handful of research analysts who don’t have full perspective on the issuer’s culture, plans, and opportunities. Worse yet, management is nonetheless still held accountable by the market for hitting that consensus.

“All-Purpose” Securities Law Disclosure: Are We Reaching the Breaking Point?

As demands mount for “stakeholder”-oriented disclosure – and as the SEC faces understandable backlash about whether that type of disclosure is useful to investors – there’s a growing contingent suggesting that shoehorning extra info into an investor-focused disclosure scheme is a lot like two-in-one shampoo & conditioner: it simply doesn’t work. This article from Tulane Law prof Ann Lipton discusses whether the SEC has been a victim of “mission creep” – and why now’s the time to look at other avenues for required “stakeholder” disclosure. Here’s an excerpt:

The assumption — stated or unstated — that all public disclosure must necessarily run through the securities laws has distorted the discourse for decades. Academics, regulators, and advocates have conflated the interests of investor and stakeholder audiences, to the detriment of both. There has been little, if any, discussion of the informational needs of the general public, or when and whether businesses should operate under a duty of public transparency. At the same time, advocates for myriad causes try to flood the securities disclosure system with information relevant to their own idiosyncratic interests, overburdening the SEC and making it more difficult for investor audiences to interpret the information they are given.

How would this type of system work? Ann looks at the EU system “both as a model and a point of contrast” – and suggests that stakeholder disclosure would apply to these categories:

– Financial information – including issues pertaining to tax payments, anticorruption measures, and antitrust compliance

– Corporate governance

– Environmental impact

– Labor relationships – including diversity, working conditions, and pay practices

– Political activity

– Customer protection – transparency, safety, privacy

To minimize burdens on business, the initial system could focus on information that has already been compiled internally, such as reports that companies are already required to file with government agencies, or financial and governance information likely to be on hand. Doing so would spare companies the additional burdens of data gathering, and would go a long way toward standardization.

To be clear, this isn’t a call to “abolish” the SEC. Rather, it would emphasize the SEC’s focus on investors and use other ways to provide complementary info. However, we could see some ripple effects in SEC rules if something like this came to fruition, and it could expand the scope of work for people in our community, since we’re already involved with disclosure.

Liz Dunshee