Directors and Officers Need Your Backing

This article first appeared in Smart Business Magazine's September 2015 edition.

Corporate directors and officers are required to make decisions every day that help shape the future of the companies they lead.

When circumstances force these leaders to make choices that are painful, the emotions of the people affected can run high.

Decisions get made that people dont like and in this country, we allow free access to the courts. This exposes diligent, honest and hard-working officers and directors to the threat of being sued merely because somebody disagrees with their decisions.

Directors and officers of both public and private companies potentially face unlimited liability for the actions they take within the scope of their duties as leaders.

Where do private companies begin in protecting their directors and officers?
The three pillars of protection are corporate governance, indemnification and director and officer (D&O) liability insurance.

Corporate governance refers to the controls and procedures that exist in the management environment to help run a company well. You need a clear set of rules and training protocols so that everyone understands the rules and agrees to adhere to them.

Rules such as anti-corruption policies govern behavior and provide confidence for those who follow the rules that they will be protected. Structure also helps shape the actions that are taken to resolve problems when they occur, in addition to making it easier to stay connected with whats happening in your organization.

Indemnification agreements are an important protection for directors and officers accused of wrongdoing. When tough calls need to be made that involve layoffs, closing offices or other actions that negatively impact others, your leaders need to be confident that the company will back them up, even if the case goes to court.

The last pillar is insurance. If the company is insolvent, the indemnification agreement wont help because there is no money. There are other instances in which a company cannot indemnify as well. D&O insurance can respond on behalf of directors and officers in many of these situations.

It can also reimburse the company for its indemnification obligations, serving as balance sheet protection for the company.

Why do some companies forego personal indemnification agreements?
People often think indemnification agreements are more appropriate for public companies. But private company directors and officers benefit from these agreements as well. Consider the case of a private company that is acquired by another company.

Your directors and officers will want an indemnification agreement that will force the acquiring company to defend them if a suit arises after the close of a sale.

What is the biggest mistake companies make in D&O protection?
D&O insurance can and should be heavily negotiated by an independent broker, but companies often treat it like a commodity.

It is true that a very small percentage of all private companies in a given year will see a suit against one of their directors or officers. When a suit does occur, however, it can easily become a multimillion-dollar problem, potentially bankrupting the individual being sued.

If youre taking on significant debt or have plans to expand your business in the near future, you would be well-served to have a broker who specializes in D&O insurance to craft your policy.

How do you determine the right amount of coverage?
First, talk to an expert so you can calibrate the right amount of coverage for your company. Does your policy provide the broadest amount of coverage possible? Ask questions that are less about the policy and more about exposure.

Ask for instances in which your policy will not respond. You need to know if one bad act by a director or an officer could jeopardize coverage for the whole company. You want a broker who understands your exposures, can address your concerns and can help you negotiate endorsements to improve your coverage.