A leading broker has said the year ahead is set to be defined by a new wave of Director & Officer’s claims around ESG with litigation around the diversity on a company’s board exceeding the market’s worst fears.
Leo Tootell, Management Liability and Financial Institutions broker, at New Dawn Risk Group said the D&O market has suffered a wave of SPAC-related litigation, which followed a fourfold increase of SPAC IPOs from 2019 to 2020.
However, he added no emerging D&O risk has more potential for litigation than Environmental, Social and Governance (ESG) risks – especially with respect to the social pillar.
“The Black Lives Matter movement has focused attention on the diversity of company boards, particularly in relation to Nasdaq’s SEC-approved diversity targets for listed companies, and California’s new law mandating minimum requirements for board-level inclusion of women and under-represented groups,” he said. “We have already seen claims arise where requirements have not been met. In a suit filed against Qualcomm (and dismissed last month), the company was accused of a ‘materially false and misleading’ statement in claims made about the diversity of its board.
“Similar lawsuits were also filed against NortonLifeLock and OPKO Health, which were also ultimately dismissed. While this is undoubtedly frustrating for those alleging a lack of diversity on company boards, in the near future we predict that the tide will turn in plaintiffs’ favour.”
Tootell said the market has been braced for some time for diversity to become a major liability issue.
“Since early 2021, it was expected that diversity could be the next big D&O risk, but recent developments suggest diversity-related suits could be a bigger exposure for companies than originally thought, since it will now be an expected standard for boards,” he explained. “In the UK, the FCA has launched a new consultation on proposals ‘to boost disclosure of diversity on listed company boards and executive committees’, which will in effect mandate disclosure and publication of the composition of company boards.
“Moving into 2022, if diversity isn’t placed at the top of the board agenda, alongside a commitment to consistency and transparency, then exposure to diversity-related suits could potentially be catastrophic.”