|
|
 |
|
| Best Practices: On the Board |
Bonfire of the Indemnities
Suzanne McGee
06/01/2005
|
WorldCom’s former CEO Bernie Ebbers may be the highest-profile chief
executive found guilty of fraud in the recent wave of accounting scandals, but
he is unlikely to be the last. Enron’s Kenneth Lay and Jeffrey Skilling, Tyco’s
Dennis Kozlowski and HealthSouth’s Richard Scrushy are all up on charges. With
C-level executives under intense scrutiny, board members—and those asked to
serve on boards—are pausing to consider the risks involved and how to mitigate
them.
“If there is one lesson that directors have taken away from the Enron
and WorldCom debacles, it is that you may think that you really know the guy
sitting next to you at that table, but you can never know beyond a shadow of a
doubt that he is incapable of fraud,” says Tony Galban, senior vice president
and manager of directors and officers (D&O) insurance underwriting for the
Chubb Group in Warren, N.J.
TOP VIEW
The wave of recent accounting scandals has made board directors and officers
especially vulnerable to lawsuits—even when they are not personally to blame for
corporate malfeasance. Today directors and officers are closely scrutinizing
corporate insurance to ensure they have enough protection. Some feel vulnerable
no matter how extensive the coverage, leading them to buy personal policies
tailored to their specific risks. |
Consider the settlement reached between 10
former WorldCom directors and a group of plaintiffs led by New York State
Comptroller Alan Hevesi after Ebbers allegedly inflated the company’s earnings
by $11 billion. Hevesi was intent on punishing the board publicly. Under the
deal (which later collapsed), he insisted that directors pay fines roughly equal
to 20 percent of their personal net worth, without tapping into insurance. The
settlement set off a wave of panic among directors from coast to coast.
“That
kind of event made us all think more deeply about whether we want to make a
commitment to a board, and what kind of board it is that we are joining,” says
Michael Downey, a San Jose, Calif., corporate director and former business
executive. Downey, who just joined his fourth board, says he has never rejected
a board seat because of an inadequate D&O policy. But he says that
identifying the risks associated with recent board scandals has climbed to near
the top of his list of priorities. “It is sobering to see the number of lawsuits, and it’s up to us as directors to make sure we are comfortable with
what it is that we are taking on.”
Muddled Indemnity
A first step is to determine the company’s ability to
indemnify its directors. Indemnification provisions spell out the company’s
policy on paying the expenses, fines, judgments and settlement amounts incurred
by board members and officers should they become defendants in a lawsuit. Those
provisions are usually contained in a company’s constitution and are first
established when it is incorporated.
“Indemnification is the first line of
defense,” says De’Andre Salter, president of Professional Risk Solutions, a
Somerset, N.J.-based specialty insurance brokerage. “It is only when a company
can’t indemnify you, as in a bankruptcy, that the insurance kicks
in.”
Evaluating D&O coverage has become a much trickier task in the last
five years, underwriters and lawyers agree. In the immediate aftermath of the
recent accounting scandals and consequent lawsuits, premiums on D&O
insurance skyrocketed, sometimes soaring as much as 500 percent over three years
for the largest companies with the most volatile businesses. Now that the dust
is beginning to settle, prices are stabilizing. The new challenge for directors
is deciding which of the myriad new insurance products is most
appropriate.
|
|
|
|
|
|
|
