2.3.1 Research questions

The view that individuals tend to overestimate liability risks has gained ground among legal scholars. It is argued that it is undesirable that company directors avoid risky but potentially profitable decisions because they have become an increasingly attractive target for legal claims. It is likewise undesirable that company directors are preoccupied with calculating the risks of a claim because they assume that they can expect its assertion even if they act prudently and in good faith.1 In both cases, company interests are in danger of not being served in the best possible manner because directors fear exposure to liability risks. For the purposes of this research, I understand the defensive behaviour of directors as:

I designate the first behavioural pattern as assurance behaviour. This may include implementing elaborate internal controls, keeping more extensive records of board meetings and board decisions, ordering more information and administrating extensive risk analyses prior to business decisions in order to appear to meet the legal responsibilities placed on directors. The second behavioural pattern may be referred to as avoidance behaviour.Adirector then isolates him- or herself from possible sources of directors’ liability by, for example, not attending board meetings or taking part in board discussions, avoiding emergency and crisis situations, adhering only to low-risk activities, refusing to take high-risk decisions, or even refusing board service in high-risk industries.

My understanding of defensive behaviour thus implies that concerns for personal liability may induce company directors to neglect their duty of care because of their desire for assurance and/or avoidance. Moreover, this desire may, in fact, be based on perceived rather than actual risks, as it is rather the perception that leads directors to overestimate directors’ liability risks. Insights from cognitive psychology reveal that individuals persistently make decision errors which prevent information being accurately assessed when calculating the risks associated with appropriate due care behaviour. Even when individuals believe that they are making considered decisions, these decisions may be based on general tendencies rather than on calculation of the risks of legal sanction.3 These tendencies may include judgments based on similar situations or based on previous knowledge or experience.4 As such, individuals are likely to underestimate liability risks and behave in an unsafe, offensive, or harmful manner, or they may overestimate liability risks and avoid desirable activity due to their perceptions of liability risks that may differ significantly from the reality.

Both the courts and the business community have developed director liability protection in order to limit the assumed negative effects of defensive behaviour caused by directors being overly preoccupied with personal liability. No empirical research has yet been carried out on the question of whether and under what conditions directors display an irrational fear of liability risk and consequently engage in undesirable defensive behaviour, or the extent to which liability protection may mitigate such a tendency to adopt defensive behaviour. In this research, I will attempt to explore such issues. The research questions are formulated as follows: