Changing Guards: Improving Corporate Governance with D&O Insurer Rotations

Abstract

Almost all public companies buy insurance for their directors and officers. D&O insurers should be active gatekeepers for the corporation, since they lose money if executives misbehave, but all available evidence suggests the opposite: insurers protect executives from liability for bad management and they encourage wasteful settlement of even meritless lawsuits. This Article diagnoses the failure of D&O insurance as a form of pernicious relational contracting. Insurers ignore even the worst corporate governance because they can recoup losses in the years to come. This recognition unlocks a potential solution: mandatory rotation. If insurers had only a few years to recoup any losses, they would seek to limit those losses by serving as an active gatekeeper.

Keywords: Insurance; Corporate; Governance: Directors; Officers; D&O; Auditor; Audit Partner; Rotation; Risk; Monitoring; Gatekeeper; Gatekeepers