2.4.1 Do senior directors fear directors’ liability risks?

It has long been assumed that emotions have a significant impact on how individuals perceive risks and act on them.2 Several empirical studies on risk and feelings show that feelings of fear influence an individuals’ perception and tolerance of risk. Feelings such as dread, stress and anxiety have proven to have an impact on an individual’s risk assessment and decision-making, which is also known as the ‘affect heuristic’ in literature.3

I found that the affect heuristic was also important in terms of how the directors under study perceived directors’ liability risks. Directors’ liability was strongly associated with a feeling of dread. It was described as unpredictable and uncontrollable and one of the most stressful and traumatic experiences.4 One important finding in my study is that a director’s perception of his or her liability risks is not just rational but also involves an affective element. This may cause divergence between perceived and actual liability risks. The majority of the directors tended to overestimate directors’ liability risks.5 Because the consequences of directors’ liability were exaggerated, the probability of their occurrence received little consideration.6 The interviews revealed the extent to which directors’ liability risks carry affective meaning and are strongly associated with negative outcomes, while disregarding risk level and the statistical probability of incurring actual liability. Directors of major companies may fear directors’ liability risks despite such risks being not well-founded, because their consequence may nevertheless be devastating.