2.5 Discussion

In this study, I argued that the fear of directors’ liability may be reduced and undesirable defensive behaviour may be mitigated without causing negative effects on risk taking, providing there is a strong alignment between threats of liability and availability of director liability protection. It seems that threats of personal liability do, in fact, form part of directors’ pattern of risk concern, but under very specific circumstances: when company directors perceive the risk as certain and directly personally threatening, i.e. when there is fraud or bankruptcy involved. Under these circumstances, the chance of loss, the magnitude of loss, and the exposure to loss are perceived as real and certain and therefore extremely risky.1

In March & Shapira’s survey,2 it was found that managers are inclined to take riskier actions when their own positions are threatened. The findings in this research, in fact, suggest that, when company directors are confronted with threats of personal liability, they will act defensively, in particular if they had been subject to previous liability claims. This can be explained as follows. The participants in this research were directors of large companies and were exposed to a wider spectrum of risks than the managers at lower levels of authority. Consequently, these individuals were very aware of the fact that any liability risks in the company might implicate them. They were, furthermore, mindful of not jeopardizing their reputation, as any error could have adverse consequences for other current and future board positions. Moreover, mass media, internet and globalisation may induce directors to engage in defensive behaviour as any error, regardless of magnitude, can be reported throughout the world. Some of the directors with whom I spoke informed me that a number of capable directors had fled to other parts of the world in an attempt to (re)establish their professional status and reputation.

Based on the research into investment games, it can further be argued that company directors are generally more risk averse when dealing with personal threats than with opportunities. As a result the greater the personal threat, the more risk adverse the response, regardless of possible gains.3 In the present study I found that company directors cope with these extremely risky situations by adjusting the risks, reducing their probability and magnitude or limiting their exposure to losses as a consequence of litigation. The results of this study suggest that contractual liability protection is valuable in enabling company directors to control and adjust the magnitude of and their exposure to losses due to the uncertainty of litigation. This observation does not seem to be trivial. For instance, the possibility of risk adjustment may enable a company director to accept a board appointment in complex organisations or risky industries.4

Modifying the probability of liability is a more complicated issue. Regardless of the fairness or reasonableness of court judgments, the threat of liability and the likelihood of court proceedings may often be perceived as arbitrary and beyond the director’s control. I have noted however that the origin of defensive behaviour may not lie in the fear of public proceedings. Directors are rather uncomfortable with facing uncertainty. Not only do they not know what the actual liability risks are, they are also unfamiliar with the standards of liability. I have suggested that, as a first step, an attempt should be made to provide directors with an understanding of the prevalent standards with regard to liability.