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

Emerging Risks

Stadium Safety

Soft targets, such as sports stadiums, must increase measures to protect lives and their business.
By: | January 10, 2018 • 8 min read

Acts of violence and terror can break out in even the unlikeliest of places.

Look at the 2013 Boston Marathon, where two bombs went off, killing three and injuring dozens of others in a terrorist attack. Or consider the Orlando Pulse nightclub, where 49 people were killed and 58 wounded. Most recently in Las Vegas, a gunman killed 58 and injured hundreds of others.

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The world is not inherently evil, but these evil acts still find a way into places like churches, schools, concerts and stadiums.

“We didn’t see these kinds of attacks 20 years ago,” said Glenn Chavious, managing director, global sports & recreation practice leader, Industria Risk & Insurance Services.

As a society, we have advanced through technology, he said. Technology’s platform has enabled the message of terror to spread further faster.

“But it’s not just with technology. Our cultures, our personal grievances, have brought people out of their comfort zones.”

Chavious said that people still had these grievances 20 years ago but were less likely to act out. Tech has linked people around the globe to other like-minded individuals, allowing for others to join in on messages of terror.

“The progression of terrorist acts over the last 10 years has very much been central to the emergence of ‘lone wolf’ actors. As was the case in both Manchester and Las Vegas, the ‘lone wolf’ dynamic presents an altogether unique set of challenges for law enforcement and event service professionals,” said John

Glenn Chavious, managing director, global sports & recreation practice leader, Industria Risk & Insurance Services

Tomlinson, senior vice president, head of entertainment, Lockton.

As more violent outbreaks take place in public spaces, risk managers learn from and better understand what attackers want. Each new event enables risk managers to see what works and what can be improved upon to better protect people and places.

But the fact remains that the nature and pattern of attacks are changing.

“Many of these actions are devised in complete obscurity and on impulse, and are carried out by individuals with little to no prior visibility, in terms of behavioral patterns or threat recognition, thus making it virtually impossible to maintain any elements of anticipation by security officials,” said Tomlinson.

With vehicles driving into crowds, active shooters and the random nature of attacks, it’s hard to gauge what might come next, said Warren Harper, global sports & events practice leader, Marsh.

Public spaces like sporting arenas are particularly vulnerable because they are considered ‘soft targets.’ They are areas where people gather in large numbers for recreation. They are welcoming to their patrons and visitors, much like a hospital, and the crowds that attend come in droves.

NFL football stadiums, for example, can hold anywhere from 25,000 to 93,000 people at maximum capacity — and that number doesn’t include workers, players or other behind-the-scenes personnel.

“Attacks are a big risk management issue,” said Chavious. “Insurance is the last resort we want to rely upon. We’d rather be preventing it to avoid such events.”

Preparing for Danger

The second half of 2017 proved a trying few months for the insurance industry, facing hurricanes, earthquakes, wildfires and — unfortunately — multiple mass shootings.

The industry was estimated to take a more than $1 billion hit from the Las Vegas massacre in October 2017. A few years back, the Boston Marathon bombings cost businesses around $333 million each day the city was shut down following the attack. Officials were on a manhunt for the suspects in question, and Boston was on lockdown.

“Many of these actions are devised in complete obscurity and on impulse, and are carried out by individuals with little to no prior visibility.” — John Tomlinson, senior vice president, head of entertainment, Lockton

“Fortunately, we have not had a complete stadium go down,” said Harper. But a mass casualty event at a stadium can lead to the death or injury of athletes, spectators and guests; psychological trauma; potential workers’ comp claims from injured employees; lawsuits; significant reputational damage; property damage and prolonged business interruption losses.

The physical damage, said Harper, might be something risk managers can gauge beforehand, but loss of life is immeasurable.

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The best practice then, said Chavious, is awareness and education.

“A lot of preparedness comes from education. [Stadiums] need a risk management plan.”

First and foremost, Chavious said, stadiums need to perform a security risk assessment. Find out where vulnerable spots are, decide where education can be improved upon and develop other safety measures over time.

Areas outside the stadium are soft targets, said Harper. The parking lot, the ticketing and access areas and even the metro transit areas where guests mingle before and after a game are targeted more often than inside.

Last year, for example, a stadium in Manchester was the target of a bomb, which detonated outside the venue as concert-goers left. In 2015, the Stade de France in Paris was the target of suicide bombers and active shooters, who struck the outside of the stadium while a soccer match was held inside.

Security, therefore, needs to be ready to react both inside and outside the vicinity. Reviewing past events and seeing what works has helped risk mangers improve safety strategies.

“A lot of places are getting into table-top exercises” to make sure their people are really trained, added Harper.

In these exercises, employees from various departments come together to brainstorm and work through a hypothetical terrorist situation.

A facilitator will propose the scenario — an active shooter has been spotted right before the game begins, someone has called in a bomb threat, a driver has fled on foot after driving into a crowd — and the stadium’s staff is asked how they should respond.

“People tend to act on assumptions, which may be wrong, but this is a great setting for them to brainstorm and learn,” said Harper.

Technology and Safety

In addition to education, stadiums are ahead of the game, implementing high-tech security cameras and closed-circuit TV monitoring, requiring game-day audiences to use clear/see-through bags when entering the arena, upping employee training on safety protocols and utilizing vapor wake dogs.

Drones are also adding a protective layer.

John Tomlinson, senior vice president, head of entertainment, Lockton

“Drones are helpful in surveying an area and can alert security to any potential threat,” said Chavious.

“Many stadiums have an area between a city’s metro and the stadium itself. If there’s a disturbance there, and you don’t have a camera in that area, you could use the drone instead of moving physical assets.”

Chavious added that “the overhead view will pick up potential crowd concentration, see if there are too many people in one crowd, or drones can fly overhead and be used to assess situations like a vehicle that’s in a place it shouldn’t be.”

But like with all new technology, drones too have their downsides. There’s the expense of owning, maintaining and operating the drone. Weather conditions can affect how and when a drone is used, so it isn’t a reliable source. And what if that drone gets hacked?

“The evolution of venue security protocols most certainly includes the increased usage of unmanned aerial systems (UAS), including drones, as the scope and territorial vastness provided by UAS, from a monitoring perspective, is much more expansive than ground-based apparatus,” said Tomlinson.

“That said,” he continued, “there have been many documented instances in which the intrusion of unauthorized drones at live events have posed major security concerns and have actually heightened the risk of injury to participants and attendees.”

Still, many experts, including Tomlinson, see drones playing a significant role in safety at stadiums moving forward.

“I believe the utilization of drones will continue to be on the forefront of risk mitigation innovation in the live event space, albeit with some very tight operating controls,” he said.

The SAFETY Act

In response to the terrorist attacks on Sept. 11, 2001, U.S. Homeland Security enacted the Support Anti-Terrorism by Fostering Effective

Warren Harper, global sports & events practice leader, Marsh

Technologies Act (SAFETY Act).

The primary purpose of the SAFETY Act was to encourage potential manufacturers or sellers of anti-terrorism technologies to continue to develop and commercialize these technologies (like video monitoring or drones).

There was a worry that the threat of liability in such an event would deter and prevent sellers from pursing these technologies, which are aimed at saving lives. Instead, the SAFETY Act provides incentive by adding a system of risk and litigation management.

“[The SAFETY Act] is geared toward claims arising out of acts of terrorism,” said Harper.

Bottom line: It’s added financial protection. Businesses both large and small can apply for the SAFETY designation — in fact, many NFL teams push for the designation. So far, four have reached SAFETY certification: Lambeau Field, MetLife Stadium, University of Phoenix Stadium and Gillette Stadium.

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To become certified, reviewers with the SAFETY Act assess stadiums for their compliance with the most up-to-date terrorism products. They look at their built-in emergency response plans, cyber security measures, hiring and training of employees, among other criteria.

The process can take over a year, but once certified, stadiums benefit because liability for an event is lessened. One thing to remember, however, is that the added SAFETY Act protection only holds weight when a catastrophic event is classified as an act of terrorism.

“Generally speaking, I think the SAFETY Act has been instrumental in paving the way for an accelerated development of anti-terrorism products and services,” said Tomlinson.

“The benefit of gaining elements of impunity from third-party liability related matters has served as a catalyst for developers to continue to push the envelope, so to speak, in terms of ideas and innovation.”

So while attackers are changing their methods and trying to stay ahead of safety protocols at stadiums, the SAFETY Act, as well as risk managers and stadium owners, keep stadiums investing in newer, more secure safety measures. &

Autumn Heisler is a staff writer at Risk & Insurance. She can be reached at [email protected]