Crisis in the boardroom: fact <i>and</i> fiction

Abstract

Executive Overview In recent years the popular press has been replete with articles suggesting that a “crisis” is taking place in America's boardrooms. The culprit—shareholder suits—is blamed not only for the difficulty directors are having in securing affordable liability insurance but also for the exodus of outsiders from corporate boards. Based on a study of 162 publicly held firms, Kesner and Johnson take a closer look at the rise in shareholder suits to distinguish fact from fiction. The authors address trends in shareholder lawsuits and judgments against corporate boards, escalating insurance premiums, the link between corporate size and shareholder suits, and commonly accepted boardroom reforms such as inside/outside composition, separation of the CEO and chairperson positions, stockholding requirements for directors, and decreasing board size. Kesner and Johnson reveal some surprising findings regarding the legal exposure of corporate directors and the related costs of liability insurance. Their results raise new questions concerning the protective impact of commonly cited boardroom reforms. Suggestions for how boards might reduce their future exposure to such suits are presented.