2.2.2 Defensive behaviour

In the context of company law, the literature on directors’ defensive behaviour is often affected by hindsight bias. Judgments about a director’s course of action may become unfairly biased once courts are informed about the negative outcome of a business decision. The key emphasis in the literature falls on the fact that company directors prefer to minimise risks when confronted by the fear of being held personally liable because courts are likely to judge business decisions ex-post on the basis of their negative effects.1 The obvious conclusion is that legal judgments in hindsight thus cause company directors to take excessive precautions in foresight.

Moreover, there is a greater tendency for the courts to be subject to hindsight bias when cases are determined on the basis of an objective standard of reasonableness.2 When deciding on the liability of a company director, Dutch courts apply a substantive, marginal judicial assessment of the director’s course of action and require the director to make decisions, on balance, within the range of reasonableness that would be expected from an ordinarily prudent businessman or woman.3 In each of the individual cases brought under the court’s review, assessment involves a ‘multi-factor’ analysis of the circumstances against the background of the open-textured formulation of ‘serious reproach’ (also knownas the Staleman v. Van deVen ‘all circumstances’ doctrine).4 The case-bycase method of reviewing a director’s conduct strongly emphasises individualised context-specific factors and, it can be argued, is important for reaching fair results. Nevertheless, the literature suggests that, as the Dutch courts are bound to a marginal substantive assessment, they are more likely to be susceptible to hindsight bias and more vulnerable to judicial errors.5

Given this risk of bias, Dutch law typically ensures that businessmen and women are protected against the potential negative effects of this bias.6 In other words, the Dutch legal system deals with such bias by tolerating it while requiring that the threshold of ‘serious reproach’ be met before directors’ liability may be assumed.7 Although hindsight bias has a very high profile in the legal literature on company law, it should be recognised that studies on hindsight bias and legal culpability are primarily concerned with understanding and reducing erroneous judicial decisions. Little attention is paid, however, to the ways in which company directors perceive risks and respond to them. Whether company directors fear liability and respond to it with defensive practices is an empirical question that has generally been overlooked in the literature. At the same time, director fears about incurring personal liability serve an important function in Dutch company law, compelling the legal and business community to implement measures to protect directors from personal liability. In the present study, I take directors’ perceptions and attitudes about the risks of liability as the point of departure and demonstrate that the defensive behaviour argument is used by courts and the business community to motivate efforts to equip directors with director liability protection. Within the focus of this study, I understand director liability protection to include the liability standard of ‘serious reproach’ developed in Dutch case law, statutory liability defences (exculpation) and contractual clauses, including Directors’ and Officers’ Liability insurance (D&O insurance), indemnification and exoneration.