Directors, Directors and Officers Insurance and Corporate Governance

Abstract:     
This article models a board of directors consisting of either pure directors or shareholder directors. Different from pure directors, shareholder directors own equity of the firm in addition to receiving directors’ fee. The model reaches a conclusion that if directors owe their appointments to the CEO, both pure and shareholder directors tend to endorse CEO’s decisions unless they can form a majority to counter‐balance the CEO. It shows that D&O insurance does not change directors’ decisions to follow the CEO but affects their decisions to accept the job. The analysis also shows that when the board is made up of only shareholder directors who have equal equity and liability stakes in the firm, the board will move the CEO’s decision toward one that maximizing shareholders’ value.

Number of Pages in PDF File: 18

Keywords: Directors, Directors and Officers Insurance, Corporate Governance

JEL Classification: G34, G22

working papers series