Canadian directors worried about lawsuit risks

June 29, 2006, volume 36, no. 5
By Diane Luckow

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Canadian directors and officers are worried about litigation, particularly from shareholders and institutional investors, says Daniel Shapiro, an SFU business professor who is director of the new CIBC centre for corporate governance and risk management at the Segal Graduate School of Business.

The centre recently surveyed directors' attitudes toward risk, the nature of the risks they face and their practices regarding risk management. They say they expect changes in Canada's business environment will result in more litigation and mounting legal costs, with the greatest potential claims arising from inadequate or inaccurate disclosure.

Respondents also say their greatest claimant risk is large institutional investors, which runs counter to the situation in other countries, where the risk from institutional investors is lower.

The survey, the first in 10 years to examine directors' and officers' insurance, also revealed that 14 percent of respondents had actual or threatened claims, with one-third of those claims denied or challenged by their own insurance companies. Although the absolute numbers were small, Paul Reynolds, a director of Bishop Phillips Consulting Canada, a leading risk management consulting firm which commissioned the survey, finds the results extraordinary.

“The equivalent claim dispute rate in the U.S. is just seven percent,” says Reynolds. He says claims denial is a serious problem for companies recruiting directors. “Do you tell a prospective director that if there is a claim, there's a 33 percent chance the insurance company may not step up to cover it?” he asks.

That's why survey respondents tend to agree quite strongly that directors' and officers' insurance is important for the recruitment and retention of qualified directors. In fact, prospective directors take the risk seriously enough that 25 percent of them engage an independent consultant to advise them on insurance.

Shapiro says 80 percent of respondents reported taking measures to strengthen the role of independent directors, to improve transparency in reporting and to strengthen audit and risk management committees. Less than half currently train directors but many indicate they plan to do so in the future.

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