Risk Insider: Nir Kossovsky

Speaking Volumes When D&O Defenses are Muted

By: | May 22, 2017 • 4 min read
Nir Kossovsky is the Chief Executive Officer of Steel City Re. He has been developing solutions for measuring, managing, monetizing, and transferring risks to intangible assets since 1997. He is also a published author, and can be reached at [email protected]

The Wall Street Journal headline was arresting: “Activist Investors Have a New Bloodlust: CEOs.”

The next day in the Financial Times, activist investor Jeff Ubben criticized the methods of activist firm, Elliott Management, noting that when companies are under attack, “ … you don’t ever hear the management or board side because they’re the defense, and the defense doesn’t talk.”

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To defend, a CEO could talk about his value-protecting governance, risk and compliance (GRC) investment leadership and hopefully mitigate an activist-initiated reputation crisis.

A prudent CEO would engage a credible third party to speak to the court of public opinion proactively on his and the board’s behalf, because as Ubben further noted, “ … when you [the CEO] do strike back, you’re fired.”

There is a range of alternative defensive strategies — none of which are particularly promising. The status quo, silence, is a path to disaster today.

In an age of weaponized social media, generalized anger and boards increasingly intimidated by activists, CEOs are in the crosshairs like never before.

“CEOs face an ‘unforgiving’ business environment, fraught with social, political and technological upheavals,” Marco Amitrano, head of consulting at PwC UK, recently told the Financial Times.

Silence aside, a CEO’s other historical defenses — chairing the board, board-accorded courtesies, the old-boys network, and D&O liability insurance — are no better than the Maginot line in arresting an activist blitzkrieg.

Fewer CEOs are chairing boards. Equilar, a data analytics company, reports that an increasing number of firms are appointing an independent director to run their boards. Among S&P 500 companies, 35.1 percent now have a non-executive chairman, up from 27.7 percent in 2012.

The boards are also less courteous to the CEOs. Late last year, State Street Global Advisors railed against boards that, in the Advisors’ opinion, were buckling too quickly to activist demands materially adverse to the interest of the CEO. “Say on Pay,” threats of clawbacks, shorter tenures and long-term incentives are one-way messages adding up to “don’t screw up — deal with it.”

There is a range of alternative defensive strategies — none of which are particularly promising. The status quo, silence, is a path to disaster today.

Consider the cognitive dissonance when the head of BP’s remuneration committee, Ann Dowling, said in a letter to investors “As a result — in a year of good performance and progress – (CEO) Bob Dudley’s total single figure for 2016 has been reduced by some 40 percent compared to last year.”

For male CEOs, even the protections afforded by the aptly disparaged old boys network are slipping. Being “male, pale, and stale” is today a liability in the eyes of proxy advisory groups.

According to the consultancy firm Challenger, Gray & Christmas, of 1,043 CEOs who were replaced in 2016, 18.5 percent were replaced by women. In 2010, just 12.3 percent of 943 replacements were women.

Moreover, in 2013, nearly two males replaced a female CEO for every female that replaced a male CEO. The ratio flipped in 2014, and by 2016 1.3 females had replaced a male CEO for every male that replaced a female CEO.

Not that being a woman afforded any intrinsic protections, either. The New York Times in 2015 left unanswered the question of whether activist investors — all of them men — see women as softer targets.

Prompting the question was the observation that while only 23 women lead companies in the Standard & Poor’s 500-stock index, at least a quarter of them had fallen into the crosshairs of activist investors.

And while D&O liability insurance was once upon a time a badge of good governance, issued only to highly qualified companies and their management, it is today commoditized and holds no standing in the court of public opinion.

And thus, both great and the average CEOs are turning over in greater numbers. In 2016, according to the executive services firm SpencerStuart, 58 of the S&P 500’s CEOs transitioned. That the highest number since 2006, a 13 percent increase over 2015, and a 57 percent increase over the nadir in 2012. The average age in 2016 was 60, which is 2 years younger than the average age in 2015.

There are two ways to give great CEOs a voice and a means to defend themselves against activists. The first is by brilliantly navigating a firm through a great reputational crisis, such as Johnson & Johnson’s Tylenol II reprise or Rolls-Royce’s Trent 9000 engine failure. Upon appreciation by the market of their excellence in leadership, both firms went on to greatly outperform their peers.

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The other strategy is an endorsement from a credible third party, such as the life-saving blessing Warren Buffet gave the CEO and select board members at Wells Fargo.

For CEOs who are not friends-of-Warren, it is better to use a growing number of creative post-PR signaling strategies — like D&O insurance once was — to communicate loudly in unambiguous financial terms that “good governance is practiced here.”

These third-party warranties and endorsements, which do include reputation insurance products, act like security alarm signs on the front lawn — they deter and blunt attacks and protect companies and individuals in leadership if those attacks do occur.

That third party signal is something that really great CEOs need to broadcast on their behalf … when all others fall silent.

More from Risk & Insurance

More from Risk & Insurance

2018 Most Dangerous Emerging Risks

Emerging Multipliers

It’s not that these risks are new; it’s that they’re coming at you at a volume and rate you never imagined before.
By: | April 9, 2018 • 3 min read

Underwriters have plenty to worry about, but there is one word that perhaps rattles them more than any other word. That word is aggregation.

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Aggregation, in the transferred or covered risk usage, represents the multiplying potential of a risk. For examples, we can look back to the asbestos claims that did so much damage to Lloyds’ of London names and syndicates in the mid-1990s.

More recently, underwriters expressed fears about the aggregation of risk from lawsuits by football players at various levels of the sport. Players, from Pee Wee on up to the NFL, claim to have suffered irreversible brain damage from hits to the head.

That risk scenario has yet to fully play out — it will be decades in doing so — but it is already producing claims in the billions.

This year’s edition of our national-award winning coverage of the Most Dangerous Emerging Risks focuses on risks that have always existed. The emergent — and more dangerous — piece to the puzzle is that these risks are now super-charged with risk multipliers.

Take reputational risk, for example. Businesses and individuals that were sharply managed have always protected their reputations fiercely. In days past, a lapse in ethics or morals could be extremely damaging to one’s reputation, but it might take days, weeks, even years of work by newspaper reporters, idle gossips or political enemies to dig it out and make it public.

Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

These days, the speed at which Internet connectedness and social media can spread information makes reputational risk an existential threat. Information that can stop a glittering career dead in its tracks can be shared by millions with a casual, thoughtless tap or swipe on their smartphones.

Aggregation of uninsured risk is another area of focus of our Most Dangerous Emerging Risks (MDER) coverage.

The beauty of the insurance model is that the business expands to cover personal and commercial risks as the world expands. The more cars on the planet, the more car insurance to sell.

The more people, the more life insurance. Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

As Risk & Insurance® associate editor Michelle Kerr and her sources point out, growing populations and rising property values, combined with an increase in high-severity catastrophes, threaten to push the insurance coverage gap to critical levels.

This aggregation of uninsured value got a recent proof in CAT-filled 2017. The global tally for natural disaster losses in 2017 was $330 billion; 60 percent of it was uninsured.

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This uninsured gap threatens to place unsustainable pressure on public resources and hamstring society’s ability to respond to natural disasters, which show no sign of slowing down or tempering.

A related threat, the combination of a failing infrastructure and increasing storm severity, marks our third MDER. This MDER looks at the largely uninsurable risk of business interruption that results not from damage to your property or your suppliers’ property, but to publicly maintained infrastructure that provides ingress and egress to your property. It’s a danger coming into shape more and more frequently.

As always, our goal in writing about these threats is not to engage in fear mongering. It’s to initiate and expand a dialogue that can hopefully result in better planning and mitigation, saving the lives and limbs of businesses here and around the world.

2018 Most Dangerous Emerging Risks

Critical Coverage Gap

Growing populations and rising property values, combined with an increase in high-severity catastrophes, are pushing the insurance protection gap to a critical level.

Climate Change as a Business Interruption Multiplier

Crumbling roads and bridges isolate companies and trigger business interruption losses.

 

Reputation’s Existential Threat

Social media — the very tool used to connect people in an instant — can threaten a business’s reputation just as quickly.

 

AI as a Risk Multiplier

AI has potential, but it comes with risks. Mitigating these risks helps insurers and insureds alike, enabling advances in almost every field.

 

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]