Risks of Being an Independent Director

Harvard Business School Professors Francois Brochet and Suraj Srinivasan recently published an interesting study regarding independent directors in public companies sued in securities actions.  The study, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2285776, should be read by independent directors of public companies or those considering taking on such a role.  The study addresses issues such as the likelihood of being named as a defendant if the company issued for securities fraud (relatively low), which independent directors are most often sued (audit committee members are much more likely to be named as defendants than other independent directors), and the risk of independent directors paying a judgment or settlement (very low, there are only a handful of instances).  Most cases are addressed by indemnification or D&O insurance; inadequate D&O insurance and insolvent issuers are unsurprisingly risk factors for independent directors having to personally make payments.  Of course, simply being named as a defendant, even with no personal liability, has negative effects for independent directors: loss of time, distraction, reputational impacts, among others. Interestingly, the study addresses other forms of accountability for independent directors, such as the likelihood that independent directors will be the subject of withheld or negative votes, and the relationship of those types of actions for directors whose issuer is sued or independent directors who are themselves sued.