Blue jeans and rock ‘n’ roll aren’t the only American products being shipped abroad. But the latest U.S. export, the “culture of compensation,” is not so benign.
The urge to sue at the slightest wrong in the hopes of winning big awards is putting European and Asian firms in a tizzy and leading to a global liability crisis.
To dodge that crisis, boards of directors must spend more time proactively managing risk, warned Peter Levene, chairman of Lloyds of London.
“They’ve got to face up to it. They’ve got to realize it’s there,” Levene told Bloomberg.
“More important than insurance is avoiding it by running their business in such a way that they’re not attacked.”
Although most companies are taking steps to manage risks, 43 percent have not yet adopted formal risk-management policies and procedures, according to a new Lloyds report.
Formal, proactive strategies to tracking and managing emerging risks will be key to avoiding litigation.
“The risks are enormously challenging. The amounts that can be claimed against companies are really quite frightening,” the Lloyds chairman said.
“Boards are recognizing now that when things go wrong, they will have their feet held to the fire.”
European and Asian companies are facing more lawsuits and higher litigation costs, according to the Lloyds report “Directors in the Dock — is business facing a liability crisis?”
Levene’s answer to that question is an unequivocal “yes.”
Product recalls rose 50 percent in Europe last year. Shareholder activism is becoming commonplace, and new legislation is adding to risks.
And because business is now global, risk is worldwide.
Over half of business leaders believe that U.S.-style litigation is spreading in Europe and Asia, according to the Lloyds survey.
That culture is costing European companies more money, although not as much as in the U.S., Levene said, adding that the U.K. is considering legislation but has yet to announce a plan.
“It’s something which is insidious,” he said. “We all have to do as much as we possibly can to avoid that. We think it’s something that should be dealt with at an early stage.”
Boards spend an average of 13 percent of their time discussing litigation and expect that amount to increase over the next three years. Their biggest fears are liability issues from technology advances, environmental damage, and corporate governance.
Close to 60 percent use lawyers more often, and nearly half spend more on directors’ and officers’ insurance. One-third are already passing costs on to customers, and a third say they have become more risk adverse due to litigation concerns.
Two out of three business leaders believe liability claims from the credit crunch will exceed those from the dot-com crash.
The U.S.-centered subprime crisis, Levene said, has so far had a relatively small impact on the U.K. “That could lull people into a false sense of security,” says Levene.
“Litigation is a leveler of modern businesses,” Levene stated in a press release. “No matter what their size, location or industry, all businesses are facing increasing liability risks.”
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