Liability concerns over product recalls and other risks have stifled company innovation and monopolized the focus of boards, leaving them more vulnerable to future liability risks, Lloyd’s warned in a new report. The report, “Directors in the Dock—is business facing a liability crisis?” released yesterday, said boards are spending about 13 percent of their time dealing with liability risk. It urged businesses to anticipate and prepare for future liability risks. Lloyd’s said research reveals a growing concern among business leaders about the rise of a U.S.-style compensation culture in Europe and Asia as well as liability fallout from the current instability in the financial markets. It also highlights the future liability issues that boards should be preparing for. Sean McGovern, director and general counsel at Lloyd’s, told National Underwriter that the report demonstrates the “complexity of the business environment around the world.” He said, “Global business and the increase of regulation are making it more difficult for businesses to manage their liability exposures.” One message that comes out “loud and clear,” he said, is that “liability issues are constraining businesses in their approach to innovation and risk taking, with a consequence and impact on the prices of their products and services, but also the willingness to engage in providing new products and services, particularly into new countries.” Mr. McGovern said that a fascinating aspect of the report is that “there seems to be a clear indication at the board level of what they should be doing.” He said boards are aware of their complex operating environment and how they should be managing their risks. “They need to take time to train their staff and imbed the right kind of risk management culture and use technology to better understand their risks,” he said. But while boards understand what they should be doing, “there is a yawning gap between what they should be doing and what they are doing in practice,” he explained. Lord Peter Levene, the chairman of Lloyd’s, commented on the findings in a statement: “Litigation is a leveler of modern businesses. 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 Europe alone in the last year. Shareholder activism is on the rise, and a complex operating environment and new legislation serves to increase risks further,” he said. Lord Levene noted that an increase in litigation and fear of potential liability “is impacting customers through a rise in the cost of products and services and also stifling risk-taking amongst boards who are missing out on new opportunities.” At Lloyd’s, he said, “we know that taking risks is part and parcel of doing business, but our research shows that there are clear benefits to thinking differently about the liabilities they face and developing the right culture and structure to manage them more effectively.” Among the report’s key findings:
- Two - thirds of European business leaders expect to spend more time on litigation-related issues over the next three years.
- Thirty-nine percent expect the growing risk of litigation to increase the cost of their produc ts and services and stifle risk- taking over the next three years.
- Over half of all business leaders believe that a U . S . -style compensation culture is spreading in Europe and Asia .
- Two in three business le aders believe the scale of liability claims arising from the credit crunch will exceed those arising from the Dotcom crash.
- Boards most fear future liability issues arising from advances in technology, environmental damage and corporate governance.
The report launches the third series of Lloyd’s 360 Risk project, which aims to generate debate about today’s key risk issues and how best to manage them.
Lloyd’s said its report was written with the Economist Intelligence Unit and included a global survey of more than 180 board-level executives, supplemented by in-depth interviews, to provide a broad business perspective on the issue of liability risk management.
Mr. McGovern told NU that one-third of the survey respondents were in the U.S., a third were in Europe, and the rest were in Asia and other parts of the world.