Recent instances in the Middle East serve as poignant reminders of the importance of corporate governance and D&O insurance in the face of executive malpractice

By Yolla El-Khoury, CEO of ACE Gallagher Holding W.L.L.

The Middle East stands at the crossroads of geopolitical tensions, economic uncertainties, and technological progress. The convergence of these factors, alongside regulatory changes and societal shifts, creates a multifaceted risk landscape that poses challenges for companies and their leadership. Therefore, understanding the emerging risks and how they affect the Directors & Officers (D&O) liability insurance landscape in the region has never been more pertinent.

As leaders within their organizations, D&Os must consistently act within the scope of their duties, prioritizing the best interests of their companies. By doing so, they can mitigate the risk of regulatory scrutiny or legal actions from external entities, safeguarding the integrity and stability of the business.

Despite all precautions, there are instances where unforeseen challenges arise. In recent developments, notable cases in the Middle East have underscored the gravity of corporate wrongdoing. Most recently, a final verdict has been issued against former executives of a telecom giant, mandating them to pay a substantial sum in compensation. As a result, regulatory bodies have taken decisive action, ordering former executives of the company to provide significant compensations for their alleged misdeeds. Similarly in another instance, the founder of a prominent company has attributed suspected fraudulent activities to executives within the organization.

These instances serve as poignant reminders of the importance of corporate governance and D&O insurance in the face of executive malpractice. But what factors contribute to such potential allegations of wrongdoing? In the year 2024, specific critical risks loom large, especially in the context of the Middle East:

• Cybersecurity breaches: With the increasing digitization of businesses, cyber threats continue to be a top concern. The financial impact of data breaches on companies in the Middle East surged to a record USD 8 million in 2023. This marks a 15% rise over the previous three years and a 155.9% increase over the past decade, as stated in the Cost of a Data Breach Report by IBM Security. Apart from financial loss, cyberattacks can result in reputational damage and legal liabilities, jeopardizing an organization’s future viability. Safeguarding against these threats falls squarely within the purview of D&Os, who bear the responsibility of upholding the integrity and resilience of the organization.

• Supply chain disruptions: The interconnected global economy makes supply chains vulnerable to disruptions. Political unrest, trade conflicts, and logistical challenges can disrupt the flow of goods and services, posing significant challenges for businesses and their management personnel. During the first two months of 2024, trade via the Suez Canal plummeted by half compared to the same period the previous year, according to the UN Global Platform – IMF PortWatch.

• Regulatory changes: Evolving regulatory frameworks in the Middle East add complexity to compliance efforts for organizations. D&Os must stay abreast of regulatory developments and ensure that their companies adhere to relevant laws and regulations.

In light of such emerging risks, the significance of D&O insurance cannot be overstated. According to Statista, the size of the global D&O market is set to reach USD 54 billion by 2023. In adopting a proactive approach to risk management, companies can better anticipate, assess, and mitigate potential threats.

Studies have shown that companies that collaborate with insurance brokers experience a 5 to 15% lower average cost of risk compared to those that don’t. The role of insurance brokers involves several key strategies to reduce the risk of accusations against D&Os:

Documentation

Documentation plays a pivotal role in D&O risk management strategies, providing a foundation for transparency and accountability within organizations. Comprehensive documentation of corporate governance policies, decision-making processes, and board resolutions helps clarify roles and responsibilities of D&Os. It also serves as evidence of adherence to regulatory requirements and best practices, mitigating potential legal risks. Moreover, thorough documentation facilitates effective communication among stakeholders and aids in the identification and resolution of governance issues.

Risk assessment

It is imperative that organizations engage in risk assessments to safeguard against potential threats and vulnerabilities, thereby fulfilling the responsibility of D&Os to protect the company. Utilizing methodologies such as scenario analysis, risk mapping, and historical data analysis allows for the identification of risks impacting the business. Moreover, involving key stakeholders, including D&Os, risk management professionals, and subject matter experts, ensures comprehensive coverage and diverse perspectives in risk evaluation.

Acting with a reasonable degree of caution

Acting with a reasonable degree of caution is essential for D&Os to fulfill their fiduciary duties and minimize potential liabilities. This involves exercising prudence, diligence, and sound judgment in decision-making. D&Os must conduct thorough due diligence on corporate matters, assess risks, and consider the long-term implications of their actions. By staying informed about industry trends, regulatory requirements, and emerging risks, they can proactively identify and mitigate potential threats to the organization. Additionally, maintaining open communication channels with stakeholders and seeking legal counsel when necessary helps ensure informed decision-making and reduces the likelihood of regulatory scrutiny or legal challenges.

Risk mitigation

It is necessary to develop risk mitigation plans that address key risks prioritized based on their severity and potential impact on the company’s objectives. Risk mitigation measures should also be integrated into daily operations and strategic decision-making processes, ensuring proactive risk management becomes ingrained in the company culture.

Insurance review

Conducting regular reviews of D&O Insurance policies is indispensable to ensure the provision of adequate coverage and alignment with the company’s risk profile and evolving needs. To do so, companies and their leadership should collaborate with insurance brokers to understand policy terms, coverage limits, exclusions, and endorsements.

To enhance the resilience of their operations and secure a prosperous future in the current landscape of the Middle East, it is imperative for companies and their leadership to proactively address emerging risks and fortify their D&O risk management strategies.