2.6 Conclusion

In this research, I have argued that defensive behaviour may generate a corporate governance problem. It was found that company directors fear liability risks without subjecting them to accurate assessment, and as a result tend to overestimate (or underestimate) liability risks. Based on the findings in this research, it seems that senior directors of major companies are prone to act defensively in situations involving significant reputational risks and perceived certainty of litigation. Prior experience with directors’ liability was found to influence how company directors perceive and cope with liability threats.

I have argued that director liability protection may counteract some of the negative effects of (potential) defensive behaviour. Risk reduction and risk avoidance may, under certain circumstances, be prudent management practices. The findings in this research suggest that the corporate governance needs to balance the perceptions of directors’ liability risk with the perceptions of the assurance offered by director liability protection. The findings suggest that good corporate governance, from a company law perspective, should encompass instruments that reduce undesirable defensive practices while preserving a significant deterrence against breaches of director duty.

Contractual liability protection primarily reduces the legal and financial liabilities of directors, but cannot exclude the threat of litigation. Although not perfect solutions, these instruments do provide reassurance, as they seem to adequately satisfy directors’ demands regarding risk mitigation. Nevertheless, the best solutions would address the factors that trigger defensive behaviour. This study indicates that the Dutch legal framework of directors’ liability may be in need of refinement in order to provide greater legal certainty. At present, it is perceived that there are no clear parameters within which to identify acceptable and unacceptable behaviour, and company directors often feel that they are the subjects of arbitrary and public scrutiny.

Viewing directors’ liability legislation as a corporate governance instrument inherently encompasses the role of the court as an important guide in a company’s good corporate governance. There is considerable potential for courts to shape directors’ perceptions of legal threats by increasing the likelihood that undesirable behaviour will be punished and desirable behaviour will be protected. Clarity about the factors determining liability might not exclude threats of litigation or reputational damage, but could reduce them significantly by guiding company directors in their endeavours to avoid legal threats and ward off arbitrary claims.