COVID-19: NAVIGATING THE ‘CEO MOMENT’
In the wake of the Covid-19 shockwaves, companies are still having to plan and implement return-to-office measures. Given that, and a looming global recession, the pressure – and risks – couldn’t be higher for executives, as highlighted in a recent Clyde & Co. and Allianz Global Corporate & Specialty (AGCS) joint-webinar, ‘Covid-19: D&O Impact and Opportunities’.
“Never let a good crisis go to waste,” is the often brandished call-to-arms being brought out by a number of trade media outlets and financial publications, as they call for corporate leaders to be brave in the face of the Covid-19 uncertainty.
Indeed, McKinsey has termed it as the “CEO moment”, namely, the “once-in-a-generation opportunity” business leaders have to use the current crisis as a springboard to shape how they and their companies work in the future.
The pandemic has hit a reset button, changing customer behavior, disrupting supply chains, and dislocating employees from their traditional places of work. Crucially, it has also contributed to a global recession expected to surpass the spiral of the global financial crash in 2008. As a result, the stakes could not be higher for executives.
RUN FOR COVER
“This is something of a moment of truth for directors and, as insurers, the Covid-19 crisis arrives as a complex obstacle impacting a challenging financial lines insurance market,” says Shanil Williams, Global Head of Financial Lines at AGCS.
With such a widespread reach, the threat that Covid-19 carries for directors and officers (D&O) is diverse in terms of what it means to each business, with the scope of risks ranging from class action lawsuits and shareholder derivative litigation to bankruptcy and an increase in cyber risk as more and more employees work from home.
“We’ve also seen a number of consumer class actions as a result of a failure to reimburse customers,” adds James Ilardi, Head of Financial Lines Claims North America, at AGCS. “This ranges from gym memberships to cancelled sporting events. These are some of the things that could lead to future D&O claims going forward.”
Williams adds that of the class actions already been brought forward during the early stages of the pandemic, most have been generally characterized with shorter class periods (meaning less damages exposure), given that the spread of the economic downturn is so wide, and cannot be attributed to failures from the companies in question.
This is a protection, however, that may no longer be valid as the pandemic continues, with those companies slower to recover leaving themselves open for litigation from shareholders and consumers alike if they underperform compared to industry competitors.
As is the case with the virus itself, there is no miracle one-size-fits-all cure for the effects of the pandemic. What companies and executives can do to protect themselves – especially against class actions – is to be diligent and proactive in informing themselves and stakeholders about what the Covid-19 crisis means for them.
“It is really important to document the work you are doing,” says Paul Schiavone, Regional Head of Long-Tails and Alterative Risk Transfer, North America at AGCS, “If there is a class action, you need to show through proof that you haven’t ignored your oversight duties and did what you could to assess the risks and made informed business judgements. Document what you’re doing and have thorough board minutes and other documentation to show your actions.”
Getting into the specifics of how Covid-19 affects individual aspects of a company – such as its impact on supply chains, distributions channels and key markets – is vitally important, while ignoring any potential red flag dangers only serves to heighten risk exposure.
“Don’t make over-qualified statements about your operations, don’t mask the problem; and make sure to give an accurate portrayal of the Covid-19 dangers to shareholders,” adds Kim West, Senior Equity Partner, Clyde & Co. “For mitigation against shareholder derivative actions, the board must show evidence of a true understanding of the Covid-19 risk before making decisions, which can often mean reaching out to third-parties.”
RETURN TO WORK
While the field for D&O related litigation has been somewhat calm so far, perhaps the biggest threat looming on the horizon comes from the return to work steps taken by businesses, which are expected to be ramped up in the new future. The return to office is fraught with peril, with particular regard to shareholder derivative actions, but also in relation to other forms of litigation.
Employers are in a tough spot when asking employees to return, and in particular, on deciding which employees to choose. While it has been established that a number of factors increase the risk of contracting Covid-19 (such as age and the presence of pre-existing medical conditions), employers are restricted by regulations regarding what they can ask and how they can act.
In the US, for example, companies know that they cannot exclude a 65+ year-old or a disabled employee from the workplace – even to protect them from infection – as it violates pre-existing regulations, such as the American Disability Act.
“While you can’t ask about specific employee medical issues, surveys about employee willingness to return to work are extremely helpful in showing due care and demonstrating that you have considered those in at-risk groups,” says West.
Although there are benefits of home-working – many industries and companies are able to cope with having the majority of their workforce at home – nevertheless it brings its own perils.
“While they have now reduced, it was reported that at the height of the pandemic in mid-March cyber-attacks peaked at around a million a day,” says Williams. In particular, ransomware attacks, which targeted workers using private devices and networks as a potential entry point into companies’ systems, soared.
While the Covid-19 crisis has been viewed as a once in a lifetime, “black swan event” there is still some precedent for which companies and insurers alike can look back to help them navigate through current difficulties.
Imagine this scenario: Company A has a return-to-office after an outbreak and a number of employees die from contracting the virus in the workplace. The facility shuts down and there is a liquidity crisis leading to litigation. “It sounds far-fetched, but this is an actual shareholder action,” says Williams, adding that while the actual case is not Covid-19 related it is still an apt comparison. The 2015 lawsuit involved US food manufacturer Blue Bell Creameries, where five employees contracted listeriosis in the workplace – and three consumers died.
“The allegation was made that managers and the board failed to implement an adequate reporting system and that there were food safety compliance issues that were not addressed,” says Williams. “It is a lesson to all now, more than ever, that US Food and Drug Administration compliance alone is not sufficient. You have to do a lot more than that and supply proof of a good faith effort to protect the safety of the workplace.”
In ongoing litigation against US-based cruise liner Carnival, some similarities to the Bluebell Creameries case have been noted. Plaintiffs claim that, despite following government guidelines at the time, the company put them at risk by starting voyages in March after known outbreaks already occurred in February.
With the widespread economic decline following global lockdown measures, many point to the 2008 global financial crisis as a touchpoint for the road ahead, something which Williams is keen to avoid: “The global financial crisis was an inside-out event, where there were wrongful actions taken by some bad actors; this pandemic, however, is outside-in, where the taps have just been turned off.”
Inevitably, like any economic downturn, the number of bankruptcies are expected to rise.
According to Euler Hermes, Covid-19 is creating an “insolvency time bomb”. It says that the bulk of insolvencies is still to come “largely between the end of 2020 and H1 2021, as a result of uneven initial conditions, as well as differing reopening strategies and emergency policy measures, particularly regarding when insolvencies are filed”. It says its global insolvency index is likely to hit a record high of +35% by 2021, culminating over a two-year period, with half of the countries recording a new high since the financial crisis3. Standard & Poor’s (S&P), has already warned that 2020 will set a 10-year US bankruptcy record, with the trend likely to continue into 2021.
Edward Altman, founder of one of the best-known formulas for predicting corporate insolvency, the Z score, further defined the nature of these bankruptcies, forecasting ‘mega bankruptcies’ to become more commonplace than ever5. “This year will easily set a record for mega bankruptcies of companies worth over $1bn,” agrees Ilardi, “while the number of normal bankruptcies over $100mn will rival levels during the 2007 financial crisis.”
For insurers, the best way to combat such an outlook is to get more thorough and granular in their analyses. “We are bringing back Underwriting 101,” says Williams. “If you see an insolvency issue with an industry, then think about an insolvency exclusion, but right now, when it comes to exclusions, we can’t take a broad-brush approach.”
RISK BY RISK
A more detailed underwriting analysis is the order of the day for insurers, featuring general questions about changes in board meeting frequency, continuity planning, changes to travel policy, downsizing plans or changes to dividends or cash flow in order to get a better understanding of the risk exposure.
“Given the uncertainty in markets and long term impact, market volatility has not diminished from those directly impacted, so industries like airlines, hospitality, travel and retail will continue to be negatively impacted,” says Williams. “Underwriters need to address these new exposures in their analyses to have a better understanding of what companies will look like coming out of the pandemic.”
Regarding the impact and future of the pandemic, only a cautious and detailed approach from both D&Os and insurers will safeguard a safe passage through the crisis.
“We are going to continue these conversations, look at the risk return and see how it plays out, particularly as we get to the second or third Covid-19 wave,” adds Williams. “The biggest mistake would be to assume we have seen the worst of the crisis. This is an ongoing, fast-changing issue and we have to be prepared for things to get worse before they get better.”
Listen to the AGCS and Clyde & Co. webinar, ‘Covid-19: D&O Impact and Opportunities’
Allianz Global Corporate & Specialty (AGCS) Africa
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