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Hundreds
of directors sitting on the boards of public or
private companies are liable to be sued by
investors, shareholders and employees for a wide
range of reasons, which is why an increasing
number are resorting to insurance as a basic
protection against suits by third parties,
according to Miltiades Miltiadou, Senior Manager
at American Home Assurance Co.
Miltiadou was the guest speaker at a luncheon
hosted by the Institute of Directors on the role
of directors and the level of exposure they have
with respect to the corporate governance
environment, which in recent years has become
more rigorous and formal.
"Poor corporate governance has ruined
companies, sent directors to jail, destroyed a
global accounting firms and threatened economies
and governments," said Miltiadou, adding
that Cyprus is no exception to the rule.
Under recent changes in the Cyprus legislation,
employees will have more potential rights of
action against their employers and, therefore,
easier access to the Industrial Disputes Court,
while failure by directors to adopt the Code of
Corporate governance guidelines could evidence a
breach of directors duty and increase the
likelihood of suits against directors and
officers.
THEY ARE WATCHING YOU
Quoting extracts from an Insurance and Planning
Resource Centre paper, Miltiadou said as a
director or officer of "their"
corporation, shareholders watch every move
directors make.
"Some are convinced that they (investors)
could run the company better than you. Others
don't see you as a person, they see you as a
target for lawsuit. It does not matter how many
shares they own, or how much they know about the
company. Investors know their rights and they
take those rights very seriously. So seriously
in fact that, each year, more and more directors
and officers face shareholders suits."
According to Miltiadou, 35% of the worldwide
cases against directors is for breach of
fiduciary duties, 26% for fraud, 19% for
misrepresentation and 10% for mergers and
acquisitions gone sour.
CYPRUS LAW
Under recent changes to the Cyprus legislation,
directors are under increased scrutiny as
regards their compliance with the amendments to
the CSE Laws, the return of cash to investors
law and abuse of private criminal prosecution.
The establishment of a Legal Aid Fund, and class
action to be brought by the Securities &
Exchange Commission on behalf of investors, when
combined with current measures to reform the
Evidence law and extensions of the limitation of
actions, provide ample ground for directors to
feel insecure and exposed to multiple cases
running into several million of pounds.
MASS RESIGNATIONS
Quoting a D&O Insurance paper, Miltiadou
said so great are the personal risks today, that
many capable people are turning down invitations
to join boards, and many directors and officers
are behaving more timidly than they might
otherwise or simply resigning from their posts
to protect against lawsuits.
The risk/reward balance for non-executive
directors is now a serious concern, which when
viewed from the rising trend of increased
litigation will create problems in attracting
and retaining the best directors.
PROTECT YOURSELF
In response to growing demand for directors
liability insurance cover, American Home
Assurance, a 100% subsidiary of the triple A
rated AIG, offers tailor made products to
protect directors against lawsuits.
In fact, Miltiadou goes a step forward
suggesting that new board members should follow
the pre-appointment due diligence checklist
adopted by the UK Corporate Governance code
before accepting such positions, with the
availability of insurance cover to indemnify
directors one of top concerns.
The financial strength of the insurance company
providing the cover is also very important,
according to Miltiadou, considering that such
cases, when they occur, take 3-4 years to
resolve.
"Because of this, those seeking insurance
should consider whether the insurance company
will be around when it comes time to pay a
claim. In today's Cyprus, this is not anymore a
theoretical risk, but an everyday happening in
view of the recent closures," said
Miltiadou, adding that a well capitalised global
company like AIG is perhaps one of the few that
can answer to such concerns.
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