Increasing Liability Risks Threaten Growth and Trouble Boards
July 29 2008 by Fayazuddin A Shirazi
A study conducted by Lloyds, a
The study done in conjunction with the Economist Intelligence Unit – a global research and advisory firm on business intelligence based in London – entitled “Directors in the dock – is business facing a liability crisis?” brings forth the dangers of inefficient handling of corporate litigation cases, which could eventually jeopardize the company prospects by wasting the scarce resources.
The report, based on interviews with 180 board level executives reveals that one in five companies have faced lawsuits targeted at individual directors or officers, including non-executive directors with employees and customers being the most likely source. However, Lloyds chose to keep mum when asked about any specific examples of such litigation cases.
Alongside employees, the regulatory authorities also are increasingly becoming the source of lawsuits, says the report. “About 15 percent of companies seeing lawsuits brought by regulatory authorities is indicative of a change in the laws of the
“No matter what their size, location or industry, all businesses are facing increasing liability risks. Product recalls are now a daily occurrence, rising 50 percent in
Industry experts believe that these regulatory changes have led to enormous burden on both the time and finances of the boards. About 39 percent of those surveyed expect the growing risk of litigation will increase the cost of their products and services and stifle risk taking over the next three years. “On average boards are spending 13 percent of their time discussing litigation issues which is a huge drain on the leadership of businesses,” Ward pointed out adding that this amount of time if saved could be utilized in attending to other business priorities.
As per the study, boards have also reported sizeable increase in their litigation budgets, which they believe is indirectly affecting the customers. “The consequence is rise in cost as companies increase their use of legal teams and often have to increase the prices of their goods and services to make-up for the increased cost,” explains Ward.
According to a 2006 global survey of corporate counsel professionals commissioned by law firm Fulbright & Jaworski, companies with annual sales of $1 billion or more spend an average of $31.5 million on legal affairs. The number of lawsuits in 2006 soared to 556 cases for billion-dollar companies, with almost half facing 50 new suits annually, the survey said.
Yet another survey from Fulbright & Jaworski revealed that about one-third of
Citing an anecdote from one of the survey respondents Ward says that the rising cost in pharmaceutical products is self-explanatory of the survey finding. “People wonder why drugs are so expensive and why the cost of healthcare spirals very often. It’s the result of a legal system that won’t place limits,” said Ward quoting the general counsel of a US-based biopharmaceutical company interviewed by Lloyds.
Industry veterans believe corporate boards could see a huge liability crisis on the horizon for businesses if they fail to recognize and prepare for risks in their industry, especially the ones in the financial sector. “Businesses need to put in place an effective infrastructure to take pressure off of the board as they are competing with a number of other business priorities,” says Ward.
Effective infrastructure, Ward says, will involve creating a strong in-house legal team with clear lines of responsibility and accountability and monitoring & assessing the risk environment in a more structured way. “Using the resources at hand more effectively – monitoring media in a more structured way, looking at legal activity elsewhere, seeking advice from government bodies and risk & management consultants are some of the steps that organizations could take to mitigate such risks,” suggests Ward.
Interestingly, corporate boards also are of the opinion that the
According to Lloyds survey report one way of assessing the potential impact of a more litigious culture is to examine its economic impact on the
Additionally an annual survey by Tillinghast, an insurance consultancy, on
Ward is of the opinion that the current
- The complete Lloyd’s Report
- The 2006 Fulbright & Jaworski survey report on litigation trends
- Corporate Litigation in U.S. Growing Sharply for Large Companies: Insurance Journal 2004 report
- The Center for Legal Policy at The Manhattan Institute