Audit, Compliance and Risk Blog

Business Roundtable (Re)states Position for Broad Corporate “Purpose”

Posted by Jon Elliott on Tue, Oct 08, 2019

The Business Roundtable has just offered its answer to the question “what’s the purpose for a corporation”? There are various ways to ask that question – existentially, legally, and/or operationally. Because the Roundtable is an association of chief executive officers of (CEOs) of many of America’s leading companies, its formal statements reflect the views of forward-looking Big Business. The Roundtable is most focused on the operational version, although press reports are pushing in all directions. The remainder of this note looks at what the Roundtable actually said, and provides some context to the multi-faceted question.

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Tags: Corporate Governance, Business & Legal, directors, directors & officers

Reevaluating Your D&O Coverage

Posted by Joy A Schwartzman on Thu, Apr 11, 2019

Especially at public companies, many corporate boards are facing increased risk and liability exposure from a volatile past few years. Case in point: After Marriott announced its data breach on Nov. 30, it took plaintiff’s attorneys only one day to file a securities class action lawsuit against the corporation. In fact, cyber exposure and the subsequent reputation damage are the top concerns cited by corporate boards in a recent study by Akin Gump Strauss Hauer & Feld LLP.

But there are many other potential risks that could result in lawsuits against corporate directors and officers (D&O). These include an ensuing drop in stock price after an incident, mishandling of personal information, effects of the opioid crisis, sexual harassment allegations, and pollution risk created by the use and disposal of dangerous chemicals used in manufacturing. Even liability suits for mass shootings in the workplace can find their way to directors and officers.

Insurance designed to protect corporate directors and officers has been on the market for almost a century, but it was not until the scandals of Enron and WorldCom in the early 2000s that many executives became more aware of the need for liability protection. While we all remember those two bankruptcies, many may not recall that directors of WorldCom had to contribute their personal assets to settle the D&O claims that ensued.

Today, the risk factors motivating the purchase of additional D&O insurance are compelling, but the type of coverage purchased has a material impact on the limits available to protect directors from liability. As corporate officers reevaluate their current D&O coverage, it is important to thoroughly understand the type of coverage purchased and to quantify a board’s potential risk or “claim severity.”

Understanding and Quantifying D&O Risk

In 2017, 9% of public companies in the United States faced securities class actions—an all-time high. These are highly correlated with ensuing D&O claims, and the risks facing every company continue to grow. A U.S. Supreme Court ruling late last year, for example, now enables litigants to pursue class action suits regarding initial public offerings in state courts, which are commonly perceived to be more sympathetic to plaintiffs. These suits are also generally more expensive to defend because they cannot be consolidated and must be negotiated or litigated case by case.

Despite this increase in risk and liability exposure, the market for D&O insurance continues to be soft, with low premiums relative to the potential exposure. There continues to be ample competition for this business, preventing any meaningful increase in pricing. As such, this is a good time for companies to purchase additional coverage as pricing may be at a low point, especially in the excess layers. That said, not all D&O coverages are alike. An understanding of the coverages and their differences is essential for decision-makers looking to evaluate risk mitigation options.

Differences In D&O Coverage

With the introduction of the Private Securities Litigation Reform Act (PSLRA) in 1995, there followed a change in D&O coverage available in the marketplace. PSLRA is a federal law enacted in response to the perceived increase in frivolous class action suits alleging securities fraud under the Securities Act of 1933 and the Securities Exchange Act of 1934. The key features of PSLRA are:

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Tags: Business & Legal, Workplace violence, corporate social responsibility, directors, directors & officers

If You Want Everyone To Know You’re A Transparent and Sustainable Company, Delaware Can Help

Posted by Jon Elliott on Tue, Feb 19, 2019

When companies claim they’re reducing their environmental impacts, how does anyone distinguish actual improvements from greenwashing? A growing number of national and international nonprofits and industry trade associations offer benchmarks and standards that companies can subscribe to, and third parties offer their services to evaluate and validate claims. Effective October 1, 2018 the state of Delaware has added a governmental layer, which Delaware companies can use to submit information and claims under penalty of perjury in order to gain formal state acknowledgement. The state claims this is the first such law.

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Tags: Business & Legal, Environmental, sustainability, corporate social responsibility, directors, directors & officers

Directors' Liability for Workplace Sexual Harassment in Canada Can Depend on Which Laws are Applied

Posted by Jon Elliott on Tue, Jan 22, 2019

Sexual harassment in Canadian workplaces can trigger a variety of laws and regulations:

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Tags: Business & Legal, Employer Best Practices, Employee Rights, Workplace violence, Canadian, directors, directors & officers

Employment Contracts and Employee Termination Rights

Posted by Jon Elliott on Tue, Nov 27, 2018

The Canada Labour Code and provincial employment standards acts generally specify a minimum notice period before such terminations (the “statutory notice period”), and generally allow the employer to pay compensation to the employee instead of giving the employee notice. (e.g., CLC ss. 54-67) This compensation is usually called “severance pay”; it replaces advance notice of termination. In general, the severance pay must equal the salary and benefits that the employee would have earned if permitted to work until the end of the notice period. Courts interpret and defend these prohibitions against “contracting out” termination benefits.

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Tags: Business & Legal, Employer Best Practices, Employee Rights, Canadian, directors, directors & officers

Tackling the Gender Pay Gap: Ontario’s Pay Transparency Act, 2018

Posted by Maria Gergin on Tue, Oct 30, 2018

On April 26, 2018, the Ontario government passed the Pay Transparency Act, 2018 (the Act), which created a number of requirements for employers with respect to compensation reporting and disclosure to employees and potential employees, as well as compliance compensation reporting to the government, which the government will then make public.

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Tags: Business & Legal, Employer Best Practices, Employee Rights, Canadian, directors, directors & officers

Are Your Climate Risks “Material”, and If So, Do You Disclose Them?

Posted by Jon Elliott on Thu, May 17, 2018

The Securities and Exchange Commission (SEC) administers reporting requirements for companies listed on national securities exchanges (“listed companies” or “public companies”), under the federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These requirements include detailed specifications for some reporting, such as financial reporting consistent with Generally Accepted Accounting Practices (GAAP). But SEC also administers vaguer reporting standards – including requirements to report any information that might be “material” to investors’ evaluation of a public company. Registered entities must disclose material information, including details or caveats necessary to ensure that the disclosures are not misleading. Materiality is open to wide differences in interpretation, at any given time across companies with different activities and resources, and over time based on developments in markets and the wider world. The Government Accountability Office (GAO) recently issued an evaluation of SEC’s “Commission Guidance Regarding Disclosure Related to Climate Change” (referred to below as the “2010 Guidance”), and subsequent general and company-specific guidance related to this topic. Read More

Tags: Corporate Governance, Business & Legal, SEC, directors, directors & officers

Does Sex Discrimination Include Sexual Orientation – The Second Circuit Changes Sides

Posted by Jon Elliott on Tue, Apr 24, 2018

Because federal anti-discrimination statutes include “sex” discrimination but do not define the term, its interpretation evolves with social and political changes, with policy changes by the Equal Employment Opportunity Commission (EEOC), which administers and enforces Title VII of the Civil Rights Act of 1964 and a variety of subsequent laws, and with court decisions. A major present debate is whether “sex” encompasses “sexual orientation” – which would protect non-heterosexual employees against employment action based on their sexual orientation. On February 26, 2018 the Second Circuit Court of Appeals reversed its own precedent, and decided that homosexual employees are protected.

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Tags: Employer Best Practices, Employee Rights, Workplace violence, EEOC, directors, directors & officers

Ninth Circuit: Salary History Doesn’t Justify Male-Female Pay Disparities

Posted by Jon Elliott on Tue, Apr 17, 2018

On April 9, a majority of the Ninth Circuit Court of Appeals ruled that an employer cannot rely on newly-hired employees’ salary histories to justify paying men more than women for the same work. Although the federal Equal Pay Act of 1963 allows disparities based on factors “other than sex,” the court found that salary histories are sufficiently tainted with sex discrimination to bar such reliance. Since it’s taken over 50 years for an appeals court to reach this conclusion, it’s worth exploring the court’s reasoning.

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Tags: Employer Best Practices, Employee Rights, directors, directors & officers

SEC Expands Public Company Cybersecurity Disclosure Expectations

Posted by Jon Elliott on Tue, Apr 10, 2018

The Securities and Exchange Commission (SEC) has just published Interpretive Guidance to “assist” public companies with evaluation and reporting of their cybersecurity risks. This Guidance expands similar SEC guidance issued in 2011, reflecting the growing importance of the issue and highly-publicized cybersecurity breaches during the intervening years. The following discussion summarizes the new Guidance, and provides context.

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Tags: Corporate Governance, Business & Legal, SEC, Internet, directors, directors & officers