According to Woodruff Sawyer’s recent report the D&O insurance market remains buyer friendly, but perhaps not quite to the extent that it has been in recent years. The report notes that D&O insurance premiums peaked in Q1 2021 at 4.7x Q1 2018 levels. In 2022, the market turned dramatically as new entrants drove pricing down, and by Q2 2024, premiums had dropped to 1.9x 2018 levels. This excerpt says that this downward trend in premiums is expected to continue in 2025, but companies may need to change carriers in order to realize additional savings:
Although we’re still in a soft D&O market, the rate of decline in premiums for both newly public and mature companies has decelerated and will likely continue to do so in 2025. Underwriter sentiment predicted the hard market in 2021; their response to whether rates will continue to go down today and moving forward should not be ignored. Over the last three years, fewer and fewer underwriters have predicted premiums would go down (40% in 2022, 30% in 2023, and 21% today).
Our own forecast is that all public companies will continue to have an option for D&O program cost savings—but more likely from new market entrants than their incumbent insurance carriers. Established carriers will work hard to keep rates at what they deem reasonable to avoid the dynamic of underpricing today only to then be forced into hard market pricing or leaving the D&O market altogether. In 2025, we’ll continue to see new carriers take more risk to build market share while established carriers will carefully defend their turf, all while keeping a watchful eye on claims trends.
There’s more good news – Woodruff Sawyer also says that most D&O buyers were able to renew policies in 2024 with flat or lower self-insured retentions, and that this trend is expected to hold for 2025 as well.
Providing appropriate oversight of the key risks that companies face is one of the board’s most important roles, and one that is made increasingly difficult by the challenges presented by artificial intelligence and other emerging technologies. This Skadden memo offers some guidance to help boards ensure that an appropriate oversight program is in place for AI-related risks.
The memo surveys the current regulatory landscape for AI and the risk management tools available to corporate boards, and offers up the following guiding principles for AI corporate governance:
– Understand the company’s AI risk profile. Boards should have a solid understanding of how AI is developed and deployed in their companies. Taking stock of a company’s risk profile can help boards identify the unique safety risks that AI tools may pose.
– Be informed about the company’s risk assessment approach. Boards should ask management whether an AI tool has been tested for safety, accuracy and fairness before deployment, and what role human oversight and human decision-making play in its use. Where the level of risk is high, boards should ask whether an AI system is the best approach, notwithstanding the benefits it may offer.
– Ensure the company has an AI governance framework. The board should ensure that the company has such a framework to manage AI risk, and then reviews it periodically to make sure it is being properly implemented and monitored, and to determine the role the board should have in this process.
– Conduct regular reviews. Given the rapid pace of technological and regulatory developments in the AI space, and the ongoing discovery of new risks from deploying AI, the board should consider implementing regular reviews of the company’s approach to AI, including whether new risks have been identified and how they are being addressed.
– Stay informed about sector-specific risks and regulations. Given how quickly the technology and its uses are evolving, boards should stay informed about sector-specific risks and regulations in their industry.
The memo points out that the specific AI-related risks that companies face, and their legal and regulatory obligations, differ across industries. Furthermore, the regulatory framework for AI is evolving rapidly and does always provide consistent approaches or guidance. Further complicating matters is the fact that the nature and extent of regulatory obligations also often depend on whether the company is the developer of an AI system or simply deploys it, and that line may be difficult to draw.
In our latest “Understanding Activism with John & J.T.” podcast, my co-host J.T. Ho and I were joined by Greg Taxin, Founder & Managing Member of Spotlight Advisors, to discuss the current environment for shareholder activism. Topics covered during this 34-minute podcast include:
– What motivates activists and how do companies know what activists are really seeking?
– How can board members most effectively participate in a company’s response to activism?
– What are the hard and soft costs involved in activism — for the company and the activist?
– How do different groups of investors respond to activism?
– What are the unique challenges presented by first-time activists?
– What are the most effective strategies for increasing retail voter turnout?
– What will be the major trends and challenges in shareholder activism over the next few years?
Our objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
Our 2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences are less than three weeks away! Liz, Dave, Meredith and I can’t wait to see you in San Francisco on October 14th and 15th, but if you want a place to sleep, you need to act fast. That’s because TODAY, Wednesday, September 25, is the last day to secure your exclusive hotel room rate at the Hilton Union Square – and you can do that by using this link.
If you haven’t registered for the Conferences, now is a great time to take care of that too. You definitely don’t want to miss out on the critical guidance that you’ll need for proxy season. Here is the agenda and speaker list. Remember that you can also sign up to attend virtually if traveling isn’t in the cards. And either way, you’ll get access to on-demand replays for a year after the Conferences. You can register by visiting our online store or by calling us at 800-737-1271.
SpencerStuart recently issued its “2024 S&P 500 New Director & Diversity Snapshot”, which provides information on the expertise and demographic characteristics of newly-added directors at S&P 500 companies. Here are some of the specific findings:
– S&P 500 boards continue to seek top-level executive experience and financial expertise, with CEOs and directors with financial backgrounds comprising 29% of the incoming class. Fewer P&L leaders were appointed as directors this year.
– The proportion of next-gen new directors (those aged 50 or under) has increased after a sharp drop last year. They account for 14% of the incoming class of 2024, up from 11% in 2023 but below 2022 levels (18%).
– The increase in next-gen directors may be due to growing board interest in tech expertise. Nearly a third (29%) of this year’s next-gen new directors have backgrounds in technology/telecommunications, up from 14% in 2023. In addition, the majority (89%) of next-gen directors are actively/fully employed.
– About a third (34%) of the class of 2024 are first-time directors. Directors in this group are much more likely to be actively employed (67%) than retired. They are also much more likely to be actively employed than directors who are not first-time directors (43%).
– This year, 58% of new director appointments have been filled by diverse executives, down from 67% in 2023 and 72% in 2022. However, diverse individuals still make up a significantly bigger share of new director appointments than a decade ago.
– The percentage of new directors who are women has decreased from last year: 42% of appointments, down from 46% in 2023. It is also a decrease from five years ago, when the proportion of female new directors was the same as in 2023 (46%). However, it is a significant increase from a decade ago, when the proportion of female director appointments was 30%.
The report says that the most common industry background for the S&P 500 director class of 2024 is technology and telecommunications, followed by industrials, consumer goods and services, and the financial services sector.
We’re accustomed to seeing the SEC announce the resolution of some high-profile enforcement proceedings shortly before its September 30 fiscal year end. We expect the same this year, but it’s possible that this year may be a little different that years past, as the SEC continues to sort out the implications of the SCOTUS’s Jarkesy decision for its enforcement program. This excerpt from a recent Seyfarth guest blog on “The D&O Diary” discusses how Jarkesy might affect the agency’s decisions around fraud-based enforcement actions:
Jarkesy will likely have a significant impact on the SEC’s appetite and ability to litigate securities fraud claims going forward. As Justice Gorsuch noted in his concurrence, since the Dodd-Frank Act, the SEC has won significantly more of the enforcement actions it brought in administrative proceedings than those it brought in federal courts (Jarkesy, 144 S. Ct. at 2141 (Gorsuch, J., concurring)).
While Jarkesy left a number of open questions, it unequivocally required the SEC to bring securities fraud actions seeking civil penalties in federal court rather than in administrative proceedings. Therefore, Jarkesy will likely result in the SEC being more selective in its enforcement of securities fraud, primarily bringing the more serious fraud actions. The increase in resource usage required to bring an action in federal court will likely reduce the SEC’s ability to pursue smaller fraud cases, which may incentivize it to either settle those cases or bring lesser charges involving non-fraud claims and seek equitable remedies in administrative proceedings. This trend should provide an advantage to counsel representing entities or individuals in SEC investigations and settlement negotiations.
The blog says that while these changes will improve the fairness of outcomes to defendants by subjecting the SEC to the more demanding procedural and evidentiary standards required by federal courts, they will also reduce the SEC’s ability to bring these cases and potentially embolden bad actors.
“The Mentor Blog” has been pretty much dormant for the past couple of years, but I’m excited to announce that the blog is returning to active status today and our that Contributing Editor, Meaghan Nelson, will be blogging there Tuesday through Thursday of each week. There’s a story behind this decision, so please bear with me for a moment while I share it with you.
When Broc started The Mentor Blog, it was intended to serve as a platform for advice to help readers advance their careers. Over the years, however, it drifted away from that objective, and often just served as a place for blogs that didn’t make the cut for inclusion on this blog. That’s not exactly the kind of “value add” that we thought our members were looking for in a members-only blog, so we eventually let it go dormant.
That’s when Meaghan entered the picture. The idea of possibly bringing the Mentor Blog back entered my mind the first time I saw Meaghan’s resume. I think she’s the ideal person to provide insights to help readers manage their careers. Not only is Meaghan a super-smart person who has taken the lead on updating all of our handbooks this year, she’s also enjoyed a diverse and high-achieving legal career before joining us.
Meaghan’s worn a bunch of hats – she’s been at BigLaw firms on Wall Street and in Silicon Valley, worked in-house at public companies and startups, and is now teaching law school in addition to serving on our editorial team. What’s more, she also has a young family and is dealing with the same challenges of balancing career and family that many of you are facing.
We’re really excited that Meaghan is going to be contributing her insights on the Mentor Blog, and we think you’re going to enjoy reading what she has to say. Members of TheCorporateCounsel.net should be sure to check out her first blog, which she posted this morning. Not a member? We can fix that – email sales@ccrcorp.com to sign up today and get access to The Mentor Blog – or sign up online.
Deloitte recently published the results of a survey of CFOs of North American entities with more than $1 billion in revenues. The survey focused on identifying issues that CFOs were concerned about, and – aside from the impact of the US presidential election – respondents reported that they were worried about how talent shortages, wage inflation, and recent regulatory changes and proposals could impact their ability to manage and retain a skilled workforce. Survey respondents also identified external and internal risks that were keeping them up at night. This excerpt summarizes those concerns:
When asked to select the three external risks that worry them the most, CFOs put geopolitics near the top (52%), trailing only inflation (57%) and the economy (54%). After the election, a shift in foreign policy—or trade policy—could impact organizations with extensive overseas operations. But beyond the impact on their organizations, all three of the top three risks can directly impact key elements of the CFO’s remit: risk management, budgeting, and forecasting.
So, too, can the arrival of breakthrough technologies. Nearly half (49%) of respondents named technology transformation as one of their top three internal risks. A nearly equal amount (48%) ranked efficiency and productivity as a top internal risk, likely related to the adoption of innovative technologies. Curiously, generative AI—the most cited internal risk in our 2024 second quarter survey—fell down the list (44%) and out of the top three. The drop may have to do with CFOs now seeing gen AI as a critical enabler or element of larger concepts like tech transformation and enhanced productivity.
Overall, the CFOs surveyed were pretty downbeat about the current business climate, with only 12% of CFOs saying that now is a good time to be taking greater risks, compared to 26% in the second quarter and 41% in the third quarter of 2023. That’s probably not surprising given election year uncertainties, but public company disclosure committees and others involved in drafting SEC filings ought to take a look at the results of this survey when considering risk factor updates and trend disclosures in their upcoming 10-Qs.
In addition to the results of Deloitte’s CFO survey, you might want to keep this recent Fenwick blog in mind when you think about what might need to be updated in your “Risk Factors” disclosure. This excerpt includes a few of the specific potential risks outlined in the blog:
Risk related to Chevron and related decisions – As previously noted, we have observed that life sciences companies are adding risk factor language in response to the U.S. Supreme Court overturning the Chevron Doctrine and related decisions. Companies in life sciences or other highly regulated industries should consider whether it is appropriate to include such disclosure. Please see our alert for an example of such risk factor language.
Ongoing risk related to CrowdStrike outage – Companies impacted by CrowdStrike’s defective software update should consider updating their risk factors and forward-looking statements about systems downtime and/or reliance on third parties to operate critical business systems. Remember to revise relevant hypothetical language about outages or systems downtime to indicate that such risks have already occurred. Finally, impacted companies should also consider discussing any material impacts (if any) in the management’s discussion and analysis section of their next Form 10-Q.
In addition, software and technology companies that similarly update systems, including automated updates, should ensure their risk factors cover risks associated with errant updates, and that their boards have oversight visibility on how those risks are mitigated where it may be deemed mission critical to the company. Please see our alert for more information.
Risk related to AI – As a reminder, the EU AI Act entered into force on August 1. Companies should review and update any relevant language in their AI risk factor to reflect this development. Note that the Securities and Exchange Commission (SEC) and the plaintiffs’ bar also continue to focus on AI washing. In a recent video about AI washing, SEC Chair Gary Gensler reminded companies that “any claims about prospects should have a reasonable basis and investors should be told that basis.”
Other potential risks noted in the blog include inflation and interest rates, trade tensions between the US and China, new export control rules and – inevitably – the US presidential election.
Labrador recently announced the winners of its 6th annual disclosure transparency awards. Here’s an excerpt from its press release:
Intel, Dow, and Mastercard have emerged as champions, securing top honors in the 2024 U.S. Transparency Awards unveiled today by Labrador, a leading global communications firm specializing in transparent corporate disclosure documents. The rankings are based on a rigorous evaluation of corporate disclosure documents among the top 250 companies in the S&P 5001 and recognize companies dedicated to building investor and stakeholder trust through clear, concise, and effective communication.
The Transparency Awards celebrate the 10 most transparent U.S. companies, the top three leaders in 11 industries, and the best performers in individual disclosure categories—from best overall transparency, proxy statement, and ESG reporting to Form 10-K, investor relations websites, codes of conduct, and plain language usage.
Be sure to check out the Transparency Awards website for more details about the awards and the companies that received them. University of Michigan alums in the audience – including our own Meredith Ervine – will no doubt recognize the reference to the Wolverines’ fight song in the title of this blog. That’s intentional, because as many of you know, our former colleague & Michigan alum Broc Romanek has been leading the charge on disclosure transparency for Labrador for the past couple of years. Here’s Broc’s 8-minute video announcing the winners of this year’s awards.
Those of you who know Broc probably won’t be surprised to learn that he remains the hardest working man in show business. In addition to his Labrador gig, he’s recently joined the folks at Cooley where he’ll provide corporate governance guidance on the firm’s new “The Governance Beat” blog.