The macroeconomic environment
At the end of 2021, many were expecting the UK economy to be on course for a period of recovery during 2022, following the economic shocks stemming from pandemic lock downs. These expectations turned out to be wrong.
On 24th February 2022, Russia invaded Ukraine. Energy prices went up. Add the effects of Brexit to some loose domestic monetary policymaking, and this led to rampant inflation, increasing the cost of goods and materials. Then came the inevitable increases in interest rates which increased the cost of borrowing for all. Disposable incomes went down, along with consumer confidence.
What were is the impact of this? A challenging economic environment puts pressure on companies and their boards of directors.
In the case of financial pressures, they can have a number of consequences, the starkest is being insolvency. The time running up to any insolvency event is a precarious period of time when directors are having to balance the interests of the company versus its creditors, and other stakeholders.
Financial pressures on a company can also trigger events such as restructuring, refinancing, mergers and acquisitions, redundancies, or change of board personnel. These events give rise to uncertainty, and almost always involve competing interests and duties. Directors have to make difficult decisions about the future of the company whilst balancing these competing interests, and also ensuring that they comply with applicable laws and regulations. These events can all give rise to disputes, investigations, litigation, and ultimately, D&O loss.
Many directors are facing the abovementioned challenges whilst at the same time navigating a D&O risk landscape that is increasingly complex and multifaceted (cyber risk, regulatory investigation/enforcement risk, shareholder activism, employee relations and remote working to name a few).
Add in the macroeconomic environmental challenges, and arguably you have the perfect storm. A storm of course which can be ridden out, but one which can also increase the chances of missteps, disputes, and therefore follow-on D&O claims and losses.
For more on how the changing macroeconomic landscape may impact securities litigation, check out Episode 11 of The Rising Edge D&O Podcast where we discuss these issues with Kevin LaCroix of the D&O Diary.