The directors and officers of a company provide the leadership and guidance it needs to succeed. As they navigate a business to its desired goals, it is important that their personal assets aren’t at risk.
Responsibilities of management
Directors and officers are appointed to a position of great privilege and responsibility. They provide an organisation with strategic direction and manage its daily operations, to ensure it meets its business and financial objectives. Management have a duty to act in the best interest of an organisation at all times.
They are required to perform their role in an honest, careful and competent manner, whilst ensuring that interests of stakeholders are appropriately represented. Directors and officer must perform their duties within complex legislative environments, which have been developed to ensure organisations are run in an effective manner.
The regulatory authorities that enforce these rules demand that executives maintain adequate corporate governance and reporting procedures.
If an organisation or its management fail to meet the requirements of governing authorities, the board of directors can be held personally accountable. Official investigations and inquiries into alleged breaches can be a lengthy process, and offenders face severe penalties.
Management constantly walks a fine line, making tough and complex decisions, often using limited information. They are ultimately responsible for an organisation’s performance in addition to their own. Directors and officers do their best to make correct decisions, but the reality is, from time to time, they make mistakes.
Their decisions can affect a range of stakeholders, from investors and employees, to trade partners and market competitors. If the actions of executives cause financial loss to an organisation or an affected third party, an allegation of wrongful conduct may be made against them personally, resulting in costly litigation.
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Insuring the actions of directors and officers
To protect the personal liability of its management, a company can purchase directors and officers liability insurance, commonly referred to as D&O. D&O is an insurance policy designed to protect the directors and officers of an organisation, from claims which may arise as a result of the decisions undertaken during the course of their corporate duties.
D&O offers protection from the legal expenses incurred in defending the actions of executives, including the costs of settling claims. A policy will generally also reimburse an organisation for any expenses it has paid on behalf of its managers, in the course of defending them. Publicly listed companies may also have the option of obtaining coverage for securities claims made directly against the organisation itself.
D&O insurance is an integral part of many insurance programmes. Without it, executives are not protected against allegations of wrongful conduct, potentially leaving their personal assets exposed. Additionally, it can also protect an organisation’s balance sheet from the expensive task of indemnifying management from claims.