How the crackdown on corporate governance will affect all sizes of businesses

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This article was originally published on LinkedIn by David Walters, Director of Warranty and Indemnity for PIB Insurance Brokers. Click here for the original article.

When Carillion collapsed on the 15th of January 2018, it led to increased calls for improved corporate governance and a more robust approach from ‘chronically passive’ regulatory authorities. The scope of the new governance regime extends beyond publicly traded companies and private entities now need to understand and implement potential new directives.

Formalised consideration of corporate governance has been recommended by government and required since December 1992 when the Cadbury Code was published. This was itself a response to another spectacular corporate implosion, the Maxwell Group. It is however quite clear from recent business collapses that corporate governance needs to be reinforced at the highest level and indeed, Theresa May asserted in 2016 that she would ‘change the way big business is governed’.

To that end, the Financial Reporting Council (FRC) has published a revised edition of the UK Corporate Governance Code. The new version tackles three fundamental areas of concern: executive pay, employee/stakeholder input at board level and a focus on corporate governance for larger private companies.

It is this last aspect that should be highlighted as the drive towards greater governance and regulation will continue to permeate downwards. Whilst the current focus is on larger private companies, it is inevitable that in due course, the scope of review will expand to include other non-traded companies of all sizes. In June 2018, the FRC published in draft form ‘The Wates Corporate Governance Principles for Large Private Companies’. The principles encompass board composition and effectiveness, focus on risk, remuneration and stakeholder engagement. The directors of such companies will need to report on their application of corporate governance and if there are any departures from recommended best practice.

This new appetite for a wider application of governance accurately reflects the claims patterns in the Directors & Officers (D&O) insurance market that PIB Insurance Brokers (part of the PIB Group) have witnessed in recent years.

It was once (erroneously) assumed that UK publicly traded entities would experience a high degree of D&O claims – largely derived from their shareholders. Whilst some shareholder claims do occur, by far the largest category of D&O claims emanate from regulatory authorities who largely, are responding to failures of governance and adherence to statutory provisions.

By volume, the largest source of D&O claims are notified by private companies and the insurance market has responded by restricting the breadth of cover in areas such as employment practices.

A well-constructed D&O policy will provide cover for the costs involved in defending and preparing for such an eventuality and as such, a forensic review of any D&O policy language is essential. The increased scrutiny of the private sector only makes this process more relevant and timely.

PIB Insurance Brokers understand the close nature of the interplay between D&O insurance and corporate governance, how to best present a company to the insurance market and to negotiate optimum coverage.

To discuss how PIB Insurance Brokers could find the right D&O insurance solution for your company, please email david.walters@pib-insurance.com.