Personal risks facing board members of Russian companies



FW moderates a discussion looking at the risks faced by D&Os of Russian companies between Boris Korchemkin at Aon Risk Solutions, Vladimir Kremer at Chartis Russia, and Leonid Zubarev at CMS, Russia.

FW: What risks do directors and officers (D&Os) of Russian companies face? What does it take to be a D&O of a Russian company, given these risks? 

Zubarev: Directors in Russian companies face liability risks in the course of the day-to-day activities of the company, during the process of squeezing out minority shareholders, in the course of an IPO, and in the event of insolvency. They bear the risks of entering into transactions that may be detrimental to the company, and may be held liable if minority shareholders disagree with the share value approved by directors for the purposes of the squeeze out process. They face subordinate liability for non-disclosure and misrepresentation during IPOs, and are also obliged to compensate the losses of the creditors if they lead the company to insolvency. However, so far lawsuits against directors have not become routine. The reason for this seems to be the lack of a proper corporate governance culture and shareholder protection.

Kremer: Generally speaking D&O risks in Russia are not so much different from other countries and jurisdictions. Like anywhere else, directors of Russian companies are going to be liable for the losses caused by their wrongful acts, provided there is a provable causal connection between the two. At the moment Russian legislation is reasonably well equipped to address this and will be further strengthened as draft legislation currently in the State Duma will provide greater clarity on management liabilities in Russia. And on top of this there are Russian-specific risks connected to a number of regulations and the way they impact business, for example, anti-monopoly, tax, and so on. These risks involve administrative fines and criminal liability applicable to individuals, and the criminal charges might be very severe. For example, anti-monopoly convictions may carry up to six years of imprisonment. In view of this it goes without saying that prior to becoming a director of a Russian company you must make sure that all these risks are properly mitigated by insurance, legal consultancy, indemnification agreements with the company, and so on.

Korchemkin: Generally Russian companies and their directors face similar risks to their peers in other parts of the world, as the concept of fiduciary duties of directors is very similar. A Russian director needs to know the peculiarities of Russian law – for example tax, compliance, and procurement – to develop and maintain their company’s corporate governance and internal control structure, and to regularly assess and update the system. Directors and companies need to monitor changes in legislation, as the laws and statutes are regularly revised and amended, and the changes could be critical.

FW: To what extent have you seen an increase in the personal liability risk facing directors and officers (D&Os) in Russia?

Kremer: Over the last three years we have seen amendments to various pieces of law strengthening the liabilities of management, which were applicable to civil liabilities and to administrative/criminal liabilities as well. These changes are clearly going to lead to an increase in management liability risks. We have already witnessed the increasing interest of regulators in D&O liability issues. For example, in 2009, for violations of employment law, Russian courts disqualified about 200 managers. In 2011, for the same type of violations, the number of disqualified managers was close to 1300.

Korchemkin: Russian companies are growing and their operations are expanding well beyond Russian borders and jurisdiction. Directors’ risks are no longer limited by domestic Russian laws and issues. In fact, many foreign laws and acts, such as the UK Bribery Act, apply to Russian directors as well. As business becomes more global, directors’ personal risks are certainly increasing. The Russian government is also taking steps to bring more clarity to directors’ duties and to hold them liable for damages caused to their companies and shareholders, including access to directors’ personal assets in Russia and abroad.

Zubarev: As Russian companies have gained access to international capital markets, their directors have started to face personal liability risks. The number of Russian IPOs outside Russia has shrunk recently, so that currently the Russian D&O liability insurance market is limited to those Russian corporates which have already placed their shares or other securities on the capital markets outside Russia, or are planning to do so in the near future. There have also been few examples of big Russian companies, such as Sberbank, buying D&O insurance policies for their directors to cover mostly domestic risks.

FW: What kinds of prosecutions, settlements and penalties have you seen imposed upon D&Os in Russia? Are there any particular cases worth highlighting?

Korchemkin: Despite the common view that the concept of a directorship is underdeveloped in Russia, Russian directors are facing very similar goals, challenges and risks to their Western peers. Russian directors have been found liable for causing financial losses to the company and its shareholders. Some have been criminally prosecuted and others have been ordered by the courts to pay back damages. Litigation between directors and companies is fairly high in Russia already and it will increase.

Zubarev: The first examples of such cases were seen after the banking crisis in Russia in 2004. For example, directors of Dialog-Optim Bank were found guilty of stripping the assets of the bank and were required to pay over RUR 1bn – over €25m. The claim against Mechel steel plant, a Russian mining and metals company and its directors, was brought in the US in 2009 by shareholders who accused the company of not keeping investors up to date on a damaging 2008 antitrust probe, and of making false financial statements. Recently, a Russian subsidiary of the supermarket chain Billa has filed a claim against its former general director claiming damages of over €9.5m, accusing him of entering into an unfavourable lease agreement.

Kremer: In Russia, prosecutions involve administrative and criminal charges – fines, disqualification, imprisonment, and so on. However, it would be wrong to say that civil liability charges are not important in Russia. According to the Central Bank of Russia, between 2005 and 2011 there were 22 court decisions in force against 35 individual directors of 21 banks, for a total amount of RUR 5.5bn (US$180m) for various breaches which led to loss of assets or bankruptcies of those banks. As far as we know, none of these cases were insured. Obviously there were cases with our insureds as well. The largest we paid in Russia was $2m in defence costs in the US securities class action which was pending for 2.5 years then dismissed. The claimants have, however, filed an appeal. We have also seen several smaller cases against our insureds, brought in the Russian courts, which shows this is increasingly becoming an option.

FW: To what extent can risks be mitigated by D&O insurance? What are the main issues to consider when buying D&O insurance in Russia?

Zubarev: D&O insurance can be a very useful tool to finance a defence. In Russia, defence costs may be significant while they are not refundable from a losing party – the courts allow only a small percentage of real legal fees to be recovered by the winner. Also, D&O insurers would usually recommend defence lawyers for a director who may be at a loss when he faces a claim for millions of euros. Certainly, a D&O policy would pay the awarded damages too, should the director be found liable. Unfortunately, Russian insurance legislation is not designed to embrace such a line of insurance. There have been debates around classification of this type of insurance which is important in the Russian legal environment. Pure liability policies do not allow compensation of legal costs of directors and cannot provide Side B cover either. So, insurance companies have to sell combined civil liability and financial risks policies, and such policies are not easy documents to read and understand.

Kremer: The policy covers all D&Os expenses arising from claims against them alleging wrongful acts. This includes defence costs and indemnity. Virtually all activities that a director or officer undertakes while performing their duties is going to be covered by the policy – the only big exemption is criminal liability, but the insurance normally would provide defence costs up until there is a final decision of the court that criminal conduct has taken place. The standard D&O policy is an all risks type of policy, which means that everything is covered except exclusions. It is very important to see what is mentioned in the exclusions section of the policy you are going to buy. At present the number of exclusions of a standard D&O policy is relatively small – not more than five or six exclusions – so it should not be very difficult to understand and address these.

Korchemkin: The purpose of the D&O policy is to protect the company and its directors against unintentional mistakes which they may make in their day-to-day operations. The policy is not a carte blanche for irresponsible management and hectic decision-making. Directors and their companies need to remember that they need to maintain strong internal system of controls, including effective risk management systems. The policy will only work well in the long run if it is purchased and used to protect against unlikely catastrophic events, and not from basic operational errors and omissions, which must be managed internally.

FW: What advice would give to D&Os on selecting a policy that is appropriate for both the individual and the company? How important is it to properly assess the terms, coverage and pricing of available policies?

Kremer: It should be mentioned that Russian companies, by law, have to buy insurance from Russian insurance carriers. The Russian D&O insurance market is already pretty well developed and offers a good level of coverage. Still, it is desirable to pick the experienced and reputable insurers with good financial security. The risk of making the right selection here, as well as the right terms and conditions, should not be underestimated; therefore it is advisable to engage a professional adviser such as an insurance broker. All major international insurance brokers are represented on the Russian market and they should be in a position to advise on the terms, coverage, and pricing of the policies available. I would advise D&Os of Russian companies to ask that their company put in place the indemnification agreement. This should make sure that the company will have to indemnify the director in case of any claims against them, where it is permitted or not prohibited by law. In Russia, a company is not automatically required to indemnify directors; therefore, such an agreement is very important.

Korchemkin: A policy is only as good as its terms and conditions, and the security of the insurer who has issued the policy. Companies should invest in due diligence and policy wording analysis when the policy is first purchased, and at periodic renewals. Investment in legal advisers’ and brokers’ fees is worth the security of the protection that the directors and company get as a result. If bad times come and the policy is triggered, even a minor item could make the difference between having the claim declined or covered. Companies should also choose to work with professionals with a track record of policy design, placement, and claims handling. Lastly, there is an old saying that you can never buy too much liability insurance, so the limit of liability decision should be taken personally depending on the business environment, benchmarking and capital restraints.

Zubarev: It is important to ensure that the proposed policy wording includes material terms and conditions, and types of insurance that comply with Russian law. One would need to assess how broad the proposed cover is; for instance, whether it has an insured v insured exclusion, covers PR costs, provides cover for VAT on defence costs and for claims in relation to transactions that are not at arm’s length, and so on. One of the main questions to ask is whether the policy is a claims made or an occurrence based policy, and what would the insurer need to get as evidence of liability: a lawsuit filed with the court, an indictment statement in a criminal case, or a court judgement? The notification provisions are of utmost importance too. Some policies require the company to enter into an indemnification agreement with its directors. Unless the proposed changes to the legislation go through, such agreements are questionable under Russian law.

FW: Do you expect any changes to the corporate governance regulations in Russia in the foreseeable future?

Korchemkin: The Russian government is taking steps to improve corporate governance regulations. Certain issues, such as bribery and systems of control, have been under the spotlight lately and we expect to see changes in their legal treatment. There was an initiative to introduce compulsory D&O insurance for state-owned companies, but we will have to wait and see what the future holds.

Zubarev: The government has introduced to the State Duma a draft law that would mean a major change in the regulation of the duties of D&Os and their liability, making them hugely exposed. The draft provides that a director or officer has been at fault and, therefore, liable for damages if he has acted unreasonably or in bad faith. The draft provides for certain criteria that should help establish when a director or officer acts unreasonably or in bad faith. For example, a director or officer acts unreasonably where he has taken a decision without regard to all information available to him, or has not taken steps that are usually taken to obtain such information. A director or officer acts in bad faith if he was aware of a conflict of interests; or realised, or should have realised, that he was acting to the detriment of the company’s interest. Also, a director or officer acts in bad faith if he does not perform his duties without a cause or if his actions, or a decision he supported, contradicts the legislation or the charter of the company. The draft law shifts the burden of proof on the director requiring him to demonstrate that there has been no evidence of unreasonable or bad faith behaviour. The draft law provides that members of the board that voted for the approval of the prospectus may also be held liable for losses caused by any wrong or incomplete disclosure of information in the prospectus.

Kremer: I have already mentioned the changes regarding D&O liability which are passing the State Duma. In the summer of 2011 we also learned about President Medvedev’s initiative to make D&O insurance a standard instrument for state-owned companies after the replacement of state representatives in their boards with independent directors. This has resulted in the creation of a committee to address the necessary changes to legislation. I am sure that it is just a beginning – we will see more changes and this is going to happen soon.

FW: Looking ahead, do you expect to see more Russian companies taking a proactive approach to risk management tailored specifically to protecting board members?

Zubarev: It is conceivable that if and when the proposed changes come into force and the scope and extent of directors’ liability increases, Russian companies – or rather, their directors –  will pay more attention to risk management and would consider D&O insurance as a condition precedent to them taking positions in the board. At present, shareholders are not that active in suing directors. One of the reasons is the high level of concentration of corporate control. On average, it is over 40 percent and majority shareholders do not have incentives to sue directors appointed by them. It is expected that this situation will change, that more truly public companies will appear in Russia, and their boards will be occupied by independent directors enjoying the benefits of D&O insurance. 

Kremer: Assuming the continued integration of Russia into the global economy, inevitably more Russian companies will have to consider protecting the risks board members face. Fifteen years ago our clients were only US listed companies; now we see a significant number of submissions from locally listed and even private companies, and their number grows every year. Thus, the percentage of growth between January and November 2011 was 13 percent, more than during the same period in 2010.

Korchemkin: As the business environment matures we see more companies take a proactive and centralised approach to risk management, which also has a positive effect on the risk management of board members. The purchase of a D&O policy is an important step to protect board members and allow them to make efficient decisions. It does not, however, grant either the company or its directors indemnity from all risks. Companies should take further steps such as developing strong corporate governance structures, and run risk audits to assess the company’s structure and identify key exposures.


Boris Korchemkin is a managing director at Aon Risk Solutions. He has worked in the insurance industry for nearly 20 years in Russia and the US. Mr Korchemkin has been involved in the advising of, design, implementation, and claims handling of financial lines insurance products for domestic and global clients at pre-IPO, project finance, and operational stages. He may be contacted on +7 495 660 8687 or by email:

Vladimir Kremer is the financial lines manager at Chartis Russia. He has 16 years experience in the insurance industry: first as a broker in the Russian branch of Willis; from 1997 as an AIG Russia underwriter; and to date in his position at Chartis. Mr Kremer specialises in D&O, professional indemnity (PI), and crime insurance. He graduated from the Moscow Institute of Transport Engineering in 1993. Mr Kremer can be contacted on +7495 935 8950 or by email:

Leonid Zubarev is a lead partner at CMS, Russia, and heads the Insurance and Funds industry group. He is based in Moscow and has been involved in advising on insurance related matters since 1997. Mr Zubarev and his team has advised many foreign insurers and re-insurers on various aspects of their business in Russia, including entry strategies and new insurance products launch to regulatory issues, M&A, competition, claims handling and insurance litigation. He advises a number of insurance companies and their clients on directors’ and officers’ liability insurance issues. Mr Zubarev can be contacted on +7 495 786 4000 or by email:

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Boris Korchemkin

Aon Risk Solutions


Vladimir Kremer

Chartis Russia


Leonid Zubarev

CMS, Russia

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