73 Pages Posted: 12 Dec 2003
Date Written: November 2003
This is an EARLY version of our published article, Outside Director Liability, which is also on SSRN at http://ssrn.com/abstract=894921. A companion article, Brian Cheffins & Bernard Black, Outside Director Liability Across Countries, Texas Law Review (forthcoming 2006), http://ssrn.com/abstract=438321), studies six comparison common-law and civil-law countries (Australia, Britain, Canada, France, Germany, and Japan). These two articles are the most fully developed of our articles on outside director liability.
This early version was completed before the Enron and WorldCom settlements in 2005. We have left it on SSRN because Parts III and IV were not included in our published work.
ABSTRACT FOR THIS PAPER: Outside directors can do a bad job, sometimes spectacularly. Yet outside directors of U.S. public companies who fail to meet what we call their vigilance duties under corporate, securities, environmental, pension, and other laws almost never face actual out-of-pocket liability for good faith conduct. Their nominal liability is almost entirely eliminated by a combination of indemnification, insurance, procedural rules, and the settlement incentives of plaintiffs, defendants, and insurers. The principal risk of actual liability is under securities law, for an insolvent company (which can neither pay damages itself nor indemnify the director) and a seriously rich (hence worth chasing) director, where damages exceed the D&O insurance policy limits and the director does not represent an institution that can indemnify him. The principal sanction against outside directors is harm to reputation, not direct financial loss.
Other pieces of our overall research on Outside Director Liability are listed below.
http://ssrn.com/abstract=878135 (policy analysis)
http://ssrn.com/abstract=628223 (study of Korea)
http://ssrn.com/abstract=682507 (summary article for a finance audience)
http://ssrn.com/abstract=800604 (German language version of Germany-paper)
http://ssrn.com/abstract=590913 (summary for practitioner audience)
Keywords: directors, corporate goverance, liability, securities law, corporate law
JEL Classification: G30, G34, G39
Suggested Citation: Suggested Citation
Black, Bernard S. and Cheffins, Brian R. and Klausner, Michael, Outside Director Liability (Before Enron and WorldCom) (November 2003). Stanford Law and Economics Olin Working Paper No. 250. Available at SSRN: https://ssrn.com/abstract=382422 or http://dx.doi.org/10.2139/ssrn.382422