D&O and Financial Institutions

From environmental issues to diversity and inclusion, we offer our international experts’ predictions on the opportunities and challenges that the directors & officers and financial institutions market may face in the coming year and beyond.

D&O and Financial Institutions predictions
#1 Environmental issues remain a top concern for the boardroom

Expect a continued focus on environmental factors in business decisions and an increase in enforcement action by environmental regulators. Public and shareholder expectations continue to place boards under pressure to examine supply chains and switch to more environmentally-friendly production (reducing plastic and waste). Meeting stakeholders’ values in this regard will be imperative to maintain a competitive advantage and ensure accountability. In the marine sector, environmental regulations should remain a key consideration for organisations hit hard by COVID-19 seeking to manage the financial impact. Careful planning will be required when opting to reduce costs by scrapping and decommissioning vessels. Cost effective international options for decommissioning (i.e. in developing countries) are likely to attract scrutiny and directors and officers may be subjected to regulatory investigations and exposed to fines, imprisonment and disqualification.

#2 Companies need to embrace diversity and inclusion

Boardrooms can no longer dance around diversity and inclusion issues; they must embrace change because their investors and customers demand it.  COVID-19 and the Black Lives Matters movement have brought into sharp focus the need for, and benefits of, diversity and inclusion and they present a real opportunity for change.  A University of Toronto study recently found diverse boards are ‘less prone to financial restatements and fraud’. This is an opportunity for boards to reimagine their structure, diversify their composition and draw on the talent of those who may otherwise have been excluded from executive positions.  Companies that fail to embrace change now risk potential claims, as already seen in the US, and more immediately, reputational damage and shareholder ire.

#3 Supply chain ethics must be core focus of board directors

The recent Boohoo scandal has highlighted the need for companies to monitor and investigate closely the pay and working conditions, not only of their own employees, but also of those in their global supply chains.  Companies will need to ensure full compliance with the provisions of the Modern Slavery Act by the company itself and also by all its sub-contractors.  Supply-chain ethics is of growing importance both for regulatory authorities and investors; companies committed to the fair treatment of their workers, providing them with appropriate working environments and adhering to ethical codes, are likely to rise above the rest.

#4 With the furlough scheme being extended, will the risk of claims for fraud also be extended?

The Coronavirus Job Retention Scheme has been a life-line for businesses during the COVID-19 pandemic. At its peak to date, over 9m people have been furloughed.  There have already been thousands of reports to HMRC of alleged fraud. Apparently £3.5bn of payments may have been claimed fraudulently or in error. Mistakes can be genuine but fraud is not, and HMRC will take a hard line to prosecute directors and companies. Furlough records must be kept for six years, and from December 2020 the names of businesses using the scheme will be published as part of anti-fraud measures. One risk for directors is that companies become insolvent, preventing access to documents, or businesses may simply close down and reopen under a new name. The Financial Conduct Authority has said it will clamp down on ‘phoenixing’ in these circumstances.  Given the scheme has been extended, these risks will not be disappearing any time soon.

#5 Health and social care providers will be a target for COVID-19 claims

The fast evolving environment created by the COVID-19 pandemic has presented unique challenges for directors and senior managers of care homes. Families of patients and employees who have died from infection are intimating claims for the alleged failure to protect them and contain the virus (i.e there was insufficient PPE, poor hygiene and inadequate social distancing within the care home). While personal injury claims are excluded under D&O  policies, claims for breach of director duties, including duties under the Companies Act 2006 and health and safety legislation, may potentially see directors personally exposed.

#6 2021 will see an increase in securities class action lawsuits

There was a downward trend in securities class actions against non-US listed entities in 2020 but this is likely just a blip so be prepared for a resurgence in 2021. From January to June 2020, securities class action filings were down 66% compared to the same period in 2019. It is not clear why but one possibility is COVID-19 slowing the plaintiffs’ bar along with the rest of the global economy. We expect to see a significant number of class action cases filed in 2021, with a renewed focus on entities based in Latin America. The pandemic will inevitably lead to economic uncertainty and boardroom pressures, and we expect this to be particularly prevalent in the natural resources industry.  The NYSE for 2020 lists over 20 Latin American entities in the natural resources sector. We predict an upwards trend in securities class action lawsuits arising out of the following key issues: environmental and governance issues which are increasingly important to stakeholders; climate change litigation; and delays to construction and energy projects due to economic uncertainty and the fall in crude oil prices.

#7 A US perspective: the number of claims against directors and officers relating to diversity will not match #MeToo claims

In 2020, shareholder actions were filed against directors and officers alleging a lack of diversity.  The allegations focused on the board failing to uphold their fiduciary duties with respect to diversity despite corporate policies promoting them.  There are similarities here to #MeToo claims.  The #MeToo complaints allege that directors and officers breached their fiduciary duties by creating a hostile work environment and were unjustly enriched by collecting significant remuneration despite alleged wrongdoing.  While complaints based on lack of diversity may increase, they are unlikely to come close to the number of #MeToo claims.

#8 An Australian perspective: more securities class actions will run to judgment in Australia

More securities class actions will run to judgment in Australia in 2021 as a result of two key decisions in 2020. In Haselhurst v Toyota, the decision saw ‘soft closure’ orders in class actions (that extinguish the rights of unregistered group members) abandoned and significant uncertainty introduced regarding how the claims of non-registered group members can be addressed in settlement negotiations. Australia also saw its second-ever securities class action run to trial, resulting in a liability finding in favour of the defendant in Crowley v Worley Limited.

#9 An Australian perspective: statutory unconscionability will produce a new wave of class actions

Class actions against NAB, ANZ, Westpac, IAG and Allianz regarding alleged statutory unconscionability in the sale of insurance have produced a new template for consumer class actions in Australia. Previously, mis-selling cases, in which the attributes and circumstances of each consumer differ, have traditionally not resulted in class actions. However, alleged systemic unconscionability has provided a statutory basis for consumers to identify common (or systemic) issues. This was seen in the recent A$138m settlement between group members and IAG over the mis-selling of insurance by car dealerships, one of many actions where statutory unconscionability is a primary cause of action.

#10 A New Zealand perspective: class actions and directors’ duties (still) under the spotlight in New Zealand

There are strong prospects of further claims under the reckless trading provisions of the New Zealand Companies Act. In Debut Homes, the Supreme Court suggested lesser conduct may trigger a breach of the Act and followed the High Court’s approach in Mainzeal on sums to award for breaches. The Court of Appeal’s impending reserved judgment in Mainzeal is also likely to highlight D&O claims. Compounding the issue, the Safe Harbour provisions regarding reckless trading provisions for companies facing liquidation due to COVID-19 expired in September. As a result, creditors may now look to fund liquidators’ claims to obtain some recovery.

#12 A German perspective: more CumEx to come

The so called CumEx scandal is probably the biggest financial scandal in Germany’s history. An unprecedented number of tax frauds have unfolded over the last few years, involving at least 100 financial institutions, national and international, active in Germany. The alleged financial loss of the state is estimated in a double digit billion Euro amount. Criminal investigations have developed very slowly but picked up speed in the last year. We expect faster outcomes in 2021 combined with financial consequences for many financial institutions and, consequently, for their directors too.

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