Global Directors’ and Officers’ Survey Report 2024 – Australasia overview

The results from the survey for Australasia demonstrate a notable rise of environmental social governance (ESG) risk.

• the S (in health and safety) was the number one risk in Australasia (84%) and all global regions except GB where it came a very close second with 85%;
• the G (systems and controls) being the third risk in Australasia (66%) – with that risk being in the top seven of four other regions; and
• the E (climate change) ranked seventh in Australasia (46%) – although surprisingly this risk was only in the survey’s top seven risks in two other regions.

The rise of ESG

Concerns about ESG risks have replaced cyber risks which had dominated the top three global slots in the previous two years. Notably health and safety is nearly double the risk that it was last year and is consistently the biggest risk across nearly all industries and across all sizes of companies. This is surprising, as in Australasia there have been no significant legislative changes regarding health and safety of employees, and health and safety is the leading risk in four of the six industries, scoring figures in excess of 80% for all industries (with services at 77%). Ordinarily, health and safety would be considered a bigger risk to the Industrial sector at 89% (with heavy machinery) than the finance and insurance sector at 86%, however that is not the case.

Health and safety ranks number one in Australasia

Australasia’s concern about health and safety risk (84%) is similar to all other jurisdictions but, unexpectedly, all the other social risk criteria are of much less concern in Australasia than in other regions. For example, only 33% consider the threat of employment claims to be very or extremely important and only 39% thought this about the breach of human rights. However, psychosocial risk, rather than traditional safety risk, appears to be the most relevant factor. In that regard, we note the comments of a couple of industrial insureds in Australia to the effect that it is the risk of hiring and retaining employees which keeps them up at night, as without employees (in what can be a very tight labour market, particularly in some sectors), an organisation cannot operate its business. A company’s work health and safety policy, including in relation to mental health and well-being, could differentiate itself from its competitors. The current debate following the Australian Government’s proposal to introduce the “right to disconnect” highlights the prevalence of psychosocial risks and its likely ongoing presence on the agenda for 2024.

The risk of inadequate staffing has been highlighted in many recent company financial results, particularly in the mining and resource sectors, with the inability to obtain and retain employees leading to production shortages, which in turn has resulted in production and profit downgrades and failures to meet forecasts, which then exposes the company to further risks of class action litigation and regulator scrutiny.

Cyber risk is still a concern

After health and safety, cyber-attacks (69%) and data loss (64%), ranking second and fourth respectively, highlight that cyber and data risks remain a substantial and significant risk for D&Os – as they have been global number one and number two risks respectively for the prior two years. This does not necessarily mean that cyber risks (which consistently are around the 80% mark in other regions (other than Africa) are diminishing, as they are still clearly a major risk across all industries irrespective of size. Indeed, Australasian regulators have included technology and operational resilience including cyber resilience as part of their key enforcement priorities for 2024. For this year at least , cyber attacks and data loss have been overtaken by health and safety issues.

Which risk takes third place for Australasia?

Australasia places systems and controls as number three at 66% which is the highest that risk is placed globally, although the Australasia region records the lowest assessment (at 66%) than any other region (71%+), and it is the first time that systems and controls have been in the top seven risks globally. Traditionally systems and controls describe corporate policies and controls, which is a governance issue. Its ranking suggests that respondents may associate this question with cyber or technology-related operational risks and controls. Australian regulators have expressed their expectations that board members will be across the companies’ cyber risks and cyber resilience.

Breaking down the E, S and G

Notwithstanding that S and G are ranked one and three risks respectively, the E is rather unexpectedly a distant seventh with 46%, which would not register on any other region. Of further note, it is only Asia and the Middle East which has climate change in their top seven risks, which is surprising given the amount of climate change legislation and litigation in the US, European and Australasian jurisdictions, including mandatory climate financial reporting that is being implemented across those regions.

Insolvencies in the top seven risks for Australasia

Finally, Australasia is one of only two regions to have Insolvencies\bankruptcy in the top seven risks at 54%. That still means financial distress is a risk to over half the D&Os which, as it is a specific risk to the particular company rather than a risk that can generally apply to all companies, it is still a high figure of one in two. All regions suppressed the number of bankruptcies during the COVID-19 period, with the number of insolvencies approximately half or what they were previously.

Recent Australian Securities and Investments Commission (ASIC) insolvency numbers show a large increase of insolvencies in the first half of FY24 with numbers at an approximate 35% increase above pre-COVID-19 number insolvencies. The Australian Tax Office (ATO), which is responsible for 50% of all insolvencies in Australia, says that businesses currently owe $50 billion of taxes and have warned that the ATO will not be used as a credit facility going forward, such that the risks of insolvencies must be on the rise from even 1HFY24 numbers. That insolvency risk is actually reported higher in all other regions (other than Europe), is not remarkable given the rise in insolvencies in most regions, so the risk of financial distress is not higher or more prevalent in Australasia, it is just that the overall risk landscape is less, such that Insolvency\bankruptcy appears in Australasia’s top seven, but not other regions’.

Regulatory risk

The final risk in Australasia’s top seven is regulatory breach, which at number five and 56% is much less than other regions such as Europe (72%), GB (82%) and North America (75%), notwithstanding what are thought to be very active regulators in Australia.

Insurance coverage and terms

Control and settlement of claims (71%) has ranked number one in key insurance coverage concerns, which on the one hand is not surprising given the personal liabilities that can attach to individuals. Many standalone D&O policies afford individuals the right to control the defence of a claim, so on the other hand, the fact that it has registered as a key coverage concern is unexpected. Some packaged policies provide the insurer with the right to conduct and control the defence of a claim and under these policies, individuals would understandably be concerned with ensuring that they can control the defence and settlement of a claim.

More than half (51%) of respondents observed an increase to the premium of their D&O insurance. This is surprising given the market outlook for standalone D&O insurance in Australia was positive in 2023, with a stabilised market and reductions in premium for risks with no claim. 21% of respondents also increased the limit of the D&O insurance which would ordinarily correspond with an increase in the total cost of the insurance program. Packaged policies also saw an increase in overall premium, driven primarily by employment practices liability and statutory liability claims. New Zealand has traditionally lagged behind global insurance trends, with the effects of the positive global D&O outlook only being felt in recent months.