Stephen Markscheid holds one of the riskiest jobs in the world, or so say insurers. The Mandarin-speaking American sits on the boards of JinkoSolar Holding (JKS) and four other Chinese companies that trade on U.S. exchanges. Over the past two years a rash of accounting scandals has hammered the stocks of the roughly 500 Chinese companies listed in the U.S. and sparked shareholder lawsuits. The Securities and Exchange Commission has revoked the registrations of more than 50 Chinese companies since early 2011. “The work that I’m doing now, it’s not for the faint of heart,” says Markscheid, who travels to China for board meetings from his home in Wilmette, Ill., eight to 10 times a year. “I’ve been sued quite a few times.”
As a result, the cost of insurance covering directors and officers of Chinese companies against lawsuits has skyrocketed, with annual premiums reaching as high as $100,000 per $1 million of coverage in some cases, up from a range of $10,000 to $15,000 a few years ago. Buyers of the coverage are “really getting socked,” says Brendan Dolan, a senior vice president at Willis Group Holdings’ (WSH) North America unit, who has brokered policies for Chinese companies since 2005. Insurers are “being opportunistic, because they know they can,” he says.
Markscheid says the rising cost of policies for directors and officers (D&O) has led one of his companies, which he declines to identify, to scale back coverage. He says that after speaking with a broker, he’s comfortable with the lower limit. Doing without coverage is not an option. “I don’t know of any directors who would go naked and serve on a Chinese company board without the benefit of D&O insurance,” he says. “I certainly would not.” He says he’s been paid $10,000 to $100,000 a year to serve on boards, and sometimes gets stock options.
Chinese companies are again lining up to seek U.S. listings as the Standard & Poor’s 500-stock index hit a record high in May. The first Chinese company to go public in the U.S. this year, Beijing-based online retailer LightInTheBox Holding (LITB), raised $78.9 million in a June 6 initial public offering and soared 81 percent through June 17. GDC Technology, a maker of digital cinema equipment backed by Carlyle Group (CG), has filed for an IPO in the U.S., and analysts also anticipate an IPO by Alibaba Group, another online retailer. Spokesmen for LightInTheBox and Alibaba declined to comment.
The prices Chinese companies pay for D&O coverage are about two to three times more than what a comparable U.S.-based business would face, according to Dolan. Chinese companies also have to spend more out of pocket before their policies cover a claim. XL Group (XL) has raised rates and deductibles. Bernard Horovitz, global head of professional operations at Dublin-based XL, says the premiums his company charges are justified. “There is a heck of a lot of risk in writing these accounts,” he says. “Plaintiffs’ attorneys are looking at these companies to make the slightest mistake and jump in.”
In 2010 short sellers including Carson Block, who runs research firm Muddy Waters, began targeting Chinese companies listed in the U.S. and Canada, such as Rino International (RINO) and Sino-Forest, saying they had manipulated financial information, embezzled money, and lied about factories and customers. That sent shares of many U.S.-listed Chinese companies tumbling. Rino, which lost most of its market value, agreed to settle an SEC lawsuit that claimed two executives diverted $3.5 million in company funds to buy a home, luxury cars, and clothing. The executives, who didn’t admit or deny the allegations, will pay investors at least that sum, according to court filings in an investor lawsuit filed in Washington, D.C. Sino-Forest, which denied the charges, filed for bankruptcy protection last year.
After Cole Capener resigned as a director of China Medical Technologies in 2007, investors sued the company, Capener, and other directors in federal court in New York. The suit claimed China Medical, which filed for bankruptcy last year, made false statements about its cash balances and that revenue was inflated through “fictitious sales.” The suit was dismissed last year. Capener says the claims against him were groundless and that he resigned over disagreements about the role of the board and to focus on his charity. “What’s happened is a number of companies that haven’t been playing by the rules have been caught,” says Capener. “Unfortunately, it has tarnished the image of the other companies that are better at compliance.”
Capener says that to join the board of another publicly listed Chinese company, he’d have to be convinced it had enough coverage and good governance. Markscheid says that while the lawsuits have made the work more dangerous, insurance and his own conduct give him confidence. “If I’m not incompetent, negligent, or dishonest,” he says, “I think my exposure is limited.”