Liability Risk for Outside Directors: A Cross-Border Analysis

20 Pages Posted: 11 Mar 2005

See all articles by Brian R. Cheffins

Brian R. Cheffins

University of Cambridge - Faculty of Law; European Corporate Governance Institute (ECGI)

Bernard S. Black

Northwestern University - Pritzker School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)

Michael Klausner

Stanford Law School

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Much has been said recently about the risky legal environment in which outside directors of public companies operate, especially in theUSA, but increasingly elsewhere as well. Our research on outside director liability suggests, however, that directors' fears are largely unjustified. We examine the law and lawsuit outcomes in four common law countries (Australia, Canada, Britain, and the USA) and three civil law countries (France, Germany, and Japan). The legal terrain and the risk of 'nominal liability' (a court finds liability or the defendants agree to a settlement) differ greatly depending on the jurisdiction. But nominal liability rarely turns into 'out-of-pocket liability,' in which the directors pay personally damages or legal fees. Instead, damages and legal fees are paid by the company, directors' and officers' (D&O) insurance, or both. The bottom line: outside directors of public companies face a very low risk of out-of-pocket liability. We sketch the political and market forces that produce functional convergence in outcomes across countries, despite large differences in law, and suggest reasons to think that this outcome might reflect sensible policy.

This article is a condensed version, for a finance audience, of Bernard Black, Brian Cheffins and Michael Klausner, Outside Director Liability,, and Black & Cheffins, Outside Director Liability Across Countries, For a condensed, practitioner-oriented version of this article, see Black, Cheffins & Klausner, Outside Directors and Lawsuits: What are the Real Risks?, McKinsey Quarterly 70-78 (2004, No. 4),

Keywords: corporate governance, outside directors, legal liability, corporate law, securities law

JEL Classification: G30, G34, G38, G39

Suggested Citation

Cheffins, Brian R. and Black, Bernard S. and Klausner, Michael D., Liability Risk for Outside Directors: A Cross-Border Analysis. European Financial Management Journal, Vol. 11, pp. 153-171, 2005. Available at SSRN:

Brian R. Cheffins (Contact Author)

University of Cambridge - Faculty of Law ( email )

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Cambridge, CB3 9DZ
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European Corporate Governance Institute (ECGI)

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Bernard S. Black

Northwestern University - Pritzker School of Law ( email )

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Northwestern University - Kellogg School of Management

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Evanston, IL 60208
United States
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European Corporate Governance Institute (ECGI)


Michael D. Klausner

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-6433 (Phone)
650-725-0253 (Fax)

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