Directors' liability (IVOR nr. 101) 2017/2.1:2.1 Introduction

Directors' liability (IVOR nr. 101) 2017/2.1

2.1 Introduction

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This Chapter focuses on the defensive behaviour of company directors. Its primary object is to explore the relationship between the perceived threat of directors’ liability and defensive behaviour. The study is largely based on 54 interviews with senior directors of major Dutch group companies, supplemented by 10 interviews with legal professionals, insurers and risk managers.1

The assumption is that fear of directors’ liability curtails risk taking. If true, apprehension about directors’ liability may give rise to corporate governance problems, as risk aversion may become one of the overriding factors motivating directors, compelling them to perform their tasks in ways that reduce the chance of incurring personal liability. This study focuses on four main issues: (1) the ways in which directors perceive liability risks, (2) the aversion that directors have to such risks and the defensive behaviour that may result, (3) the point at which such defensive behaviour may become problematic, and (4) the values that directors attribute to director liability protection.

In response to these research issues, an exploration of the conditions that may fuel the apprehensions of directors about their liability and trigger their defensive behaviour. This will be followed by an assessment of the function that director liability protection serves or may serve in reducing the concerns that directors have with regard to their liability. Finally, it will be suggested that the fear of public proceedings is not the root problem underlying defensive behaviour but the fact that directors are rather uncomfortable with uncertainty. Directors are not only uncertain about actual liability risks, but they are also unfamiliar with standards of liability. This realisation suggests that courts may have an important role to play in aligning perceived and actual liability risks and may enhance good corporate governance by clearly articulating when and why a company director is relieved of liability or may be held liable.2

This research was conducted in the period 2012-2013.

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