When Others Pass Judgment. The Real Liability Risk for Directors

The personal liability of executive and non-executive directors receives perhaps surprisingly little attention in the international literature and research into the functioning of corporate governance. Although liability is a recognised enforcement mechanism for dealing with misconduct, no systematic research has as yet been conducted into the effects of personal liability (or the threat of it) on the conduct of executive and non-executive directors. The central point of this paper is that the core risk of liability for directors is that they are being judged by others (the court and public opinion) and will find that it becomes harder to maintain self-serving rationalisations for their behaviour that help them deal with their cognitive dissonance. This threat does not depend on actual out-of-pocket payments of damages. In fact, the ongoing formalisation and juridification of corporate and board conduct constantly increases the risk of making mistakes that trigger this threat. This may lead to boards being distracted from taking the best possible decision in order to take a decision that can be best justified in light of the rules and procedures that need to be complied with.