1.1.2 Recognising the dimensions of directors’ liability legislation

Directors have a distinct position of authority involving power that occurs in institutionalised form.1 Directors exercise of power rests in legal arrangements− collectively binding arrangements − which constrain opportunistic behaviour.2 Directors’ liability functions as a keystone within the institutionalised arrangement. Perhaps the most conventional concept of directors’ liability is its potential to constrain and regularise behaviour. Sociologists have characterised this type of control as involving regulative control of behaviour.3 In the attempt to influence directors’ behaviour, directors’ liability would involve specific rules which can monitor whether they were complied with, and can be enforced with sanctions. In a regulative understanding of directors’ liability in which conformity to rules is emphasised, enforcing sanctions against deviant behaviour is pivotal.4

Director duties are typically open-ended, however. Timmerman has argued that director duties involve discretionary decision-making and cannot be ‘regularised’ or seized in specific rules.5 Furthermore, Assink has argued that directors may be seen as role performers.6 Their conduct is ipso facto susceptible to enforcement. Directors may face legal sanction by reason of failure to perform their role in its specific context, not merely because the director concerned had not complied with specific rules.7 Accordingly, directors’ liability legislation may not be accurately viewed as solely regulative and coercive, but may also be considered as involving normative and cognitive attributes.

The assumption described above may find empirical support. In a Cambridge study, over sixty firms in the mining machinery and kitchen furniture industries operating in Germany, Britain and Italy were randomly selected. Lengthy interviews were conducted to understand the institutional characteristics of the different business systems. The researchers found that norms and sanctions may have important normative and cognitive value in the sense that they may afford individuals reliable frameworks of appropriate behaviour on which to base their interactions with one another without having to overly resort to selfprotection. The research revealed the informative source of legal norms and their ability to create shared knowledge about expected behaviour and their effectiveness to foster trust.8

I have regarded the Cambridge research as providing important insights for understanding the potential of directors’ liability to control directors’ behaviour. First, it is important to recognise the various dimensions of directors’ liability in providing stable patterns of generally accepted behaviour. Directors’ liability may exert control by prescribing norms of what directors are ‘supposed to do’, or should ‘avoid doing’ given their designated role and authority (also termed normative control).9 In addition, directors’ liability may involve frames describing routines, scripts, or ‘ways in which things are or should be done’ that would make sense in a given situation. Such common frames are informative and allow directors to relate specific behaviours to specific situations (also termed cognitive control).10 Second, if normative and cognitive control are deemed important attributes of directors’ liability, judges play a significant role in contributing to and communicating stable patterns of behaviour which are either beneficial, wasteful, or damaging, and should be avoided. As directors’ liability is primarily shaped in case law, courts play an influential role in controlling directors by articulating acceptable and non-acceptable courses of action. Third, if courts are able to provide powerful structures explicating expectations of directors’ responsibilities and liabilities in their respective roles in given situations, there may be less need for undue self-protection; of those exerting decision-making power and of those who make themselves vulnerable to directorial discretion.11 In the end, the best protection a director may have, might be transparency and predictability in possible courses of action to stay aloof of liability risks.