What the haze and the FTC mean for Singapore directors

On the surface, the Indonesian haze and the US Federal Trade Commission (FTC) have very little in common. But for Singapore-based company directors, they highlight the increasing risk of running a domestic or international company at the highest of levels. For Singapore directors, company risk is becoming personal—no matter where the problem manifests.

For those running companies, Directors & Officers (D&O) insurance policies are, or should be, top of mind because, as we have recently seen, a wide range of liabilities are now being placed on the boardroom table.

Responsibility for employee conduct, cyber-attacks, and forest fires

Although corporate scandals are not part of everyday commercial operation in Singapore, there is a growing trend which exposes local businesses to increased risk. Global recalls, conduct investigations, and legal action by various (and numerous) regulators are the public face of the issues facing businesses—including financial institutions and manufacturers. As Swiss banks (and FIFA) have found over the last few years, legal action and investigation can come from anywhere.

As Singapore looks to develop a wider pool of company directors (including a push for more female directors), these individuals need to be aware of the personal risks of holding such positions. Singaporean directors should be asking themselves how well protected they are from director-targeted legal action. Additionally, the areas risk directors now have to take note of include technical skill-sets traditionally delegated to experts…cyber security, for example.

Recently the FTC succeeded in legal action against the Wyndham Worldwide hotel chain for not securing customer information. If you are a Singaporean business operating in the US, you are now legally required to protect client data. A successful cyber-attack is not just bad PR, it is now a matter of corporate and director-level liability. US regulators have already shown with the banking sector that they will look internationally to lay blame if US customers and interests are impacted.

In Singapore, the recent haze season has also turned attention squarely on companies with agribusiness interest in Indonesia. Asia Pulp & Paper had products pulled from Singapore stores and management has been 'asked to explain' in relation to both actions on their land holdings and remedies undertaken.

All over the world boards of directors are being held to account for the actions of their companies. The days of just managing the strategic side of the business are over. And liability no longer stops at the border. Just ask the FIFA officials if a Swiss HQ protected them from US action. If your company has international interests or even works in US dollars, the risk you personally face is increasing.

Whilst lawyers will be rubbing their hands at all the money they are going to make, insurers will be worried about the size of claims and how long they are going to last.

The extent of D&O cover

Chief amongst the ways senior executives can protect themselves is Directors & Officers (D&O) insurance coverage, put in place to pick up the costs of defending legal action brought against the directors and senior managers of a company.

A D&O policy is designed specifically to protect individual directors and officers because the company may not be in a position to indemnify them—either because of its constitution or the local law (e.g. Companies Act). In such situations, the D&O policy directly indemnifies directors and officers against damages claimed against them. It also pays for their defense costs. The individual directors and officers do not have to bear any sum (i.e. deductible also referred to as excess) on their own.

Where the company indemnifies them, as allowed by its constitution and the law, the company can claim the indemnity from the policy. In such instances, generally, the company has to bear some amount of the claim/costs as a deductible, whichever is due for payment first.

D&O policies provide for defense costs even in the case of criminal proceedings. Such costs are advanced until there is a verdict guilt. Further, the conduct of one insured director, for instance, is not imputed to other innocent directors.

As Singaporean businesses look to expand internationally, both the opportunities and risks grow. Even as supply chains become more complicated, director-level oversight and responsibility is being increased. If you are not protected, or you are not sure just how well protected you are, it is worth taking a very good look at your D&O policy fine print.