The D&O defence

As Chinese companies venture further afield, their senior leaders are more vulnerable to regulatory risks. Jason Kelly analyzes why they need protecting

Directors and Officers liability (D&O) insurance provides essential cover for a company’s senior leadership against claims that may arise against them. D&O insurance primarily covers defence and settlement costs related to regulatory investigations or an action brought against a company by a group of shareholders.

As the role of the board and corporate governance has evolved, D&O insurance has become an important and widely used risk management tool for company leaders. D&O cover gives boards the flexibility and confidence to pursue those strategies that deliver the best outcomes for shareholders.

D&O insurance is still in its infancy in Asia, but this is likely to change, especially in China. Risks and liabilities that didn’t exist in past years loom large for growing Chinese businesses as they become bigger and, more importantly, geographically broader and more complex enterprises that require sophisticated corporate governance standards. The risk of a shareholder action in Australia, a discrimination lawsuit in Europe, a cyber-attack in Malaysia or a securities investigation in Hong Kong are real issues that boards need to mitigate.

Without D&O insurance, the financial consequences of such an event could be catastrophic for a company, and devastating to the directors themselves at a personal level.

There are eight reasons why Chinese companies need to think seriously about D&O.

(1) Expanding Chinese companies face expanding liabilities. Chinese companies are fast becoming some of the largest multinational conglomerates in the world. In the first three quarters of 2016, Chinese companies spent more than US$141 billion on foreign acquisitions, predominately in western Europe and the US. But only about 10% of Chinese listed companies in the A-share stock exchange have D&O insurance. This is a major corporate governance concern as Chinese companies expand around the world.