Product recall notices now seem like a weekly occurrence, with their total number in Europe alone growing by 50% last year, doubtless driven in part by fears of consumers keen to exercise their rights. At the same time, groups of angry investors calling for management heads are becoming commonplace and shareholder activism is forecast to rise again this year, fuelled by continuing stock market uncertainty. Add to this our ever more complex operating environment: high-profile losses of customer data are being reported at the same time as we learn that bank details are changing hands on the internet for £5, while directors are trying to get to grips with new legislation such as the UK’s Corporate Manslaughter Act.
These are just a few of the reasons why boards everywhere feel increasingly challenged by a liability environment which is taking up more of their time. Eight years after the start of the dotcom crash, what’s happening in the world’s financial markets is reminding boards everywhere of the interconnected nature of our business environment. Simultaneously, there is concern about the economic impact of a compensation culture which may now be spreading far beyond the traditional confines of the United States.
In our latest annual survey of Lloyd’s underwriters, the majority said they believe that compensation culture is out of control. While they acknowledge that insurance buyers are giving liability risk greater consideration now than previously, most agree that boards still need to do more to prepare for its impact on their business.
As this report highlights, dealing with liability risk consumes some 13% of board time and a level of company resources which many business leaders now find problematic. It is also increasingly clear that the accompanying costs must ultimately be passed on to the consumer. In this context, it is important for boards to understand whether they have in place the right culture and structure to manage liability risk as effectively and efficiently as possible.
Our research shows that the perception of an increased chance of liability is stifling risk taking and innovation, as it impacts on company strategy. In particular, many businesses are adopting a more cautious and bureaucratic approach and – rightly or wrongly – may be avoiding opportunities in new products and markets which they would have embraced otherwise. Looking to the future, it is critical that boards give greater attention to anticipating and responding to liability risks which may emerge later down the line. Advancing technology, environmental issues and corporate governance are the three areas boards are most concerned about in our study. As our findings indicate, however, there is too often a tendency to give most attention to risks that have already been the subject of a great deal of regulatory activity. Yet, with the right culture and processes in place, companies will be much more likely to identify and address issues before they become the subject of litigation.
At Lloyd’s, we know that taking risks is part and parcel of doing business. But this report suggests that there may be wide-ranging benefits for boards in thinking differently about the liabilities their companies face. We do not pretend to have all the answers, but we hope that this report will encourage this process of innovative thinking and we are most grateful for the Economist Intelligence Unit’s work in raising some of the key issues for further discussion. For our part, Lloyd’s remains equipped and ready to help companies to take on and manage the changing risks they face.
Lord Levene
Chairman of Lloyd's
May 2008
