The Fear Factor
from November/December 2006
Are you more concerned about shareholder lawsuits than in the past? About your personal liability?
No, not really. And yet...and yet...
Yes. In our country today, if the Securities and Exchange Commission or government in general decides to come after you, you really have no effective recourse. Prosecutors are ruthless, you are guilty until proven innocent, and by the time you’re proven innocent it’s too late. As a director charged with protecting the company first, you may be forced to do things that may expose you personally. You may have legitimate reasons, but that won’t really matter. Standing up to the government entails staggering risk.
Paul A. Zevnik, 55
Partner, Morgan Lewis & Bockius LLP, Philadelphia
Entravision Communications Corp.
Certainly. You feel the liability when a company gets in trouble. People start asking, “Who was watching the ship?” But you can’t expect directors who aren’t there every day to ask all the tough questions that they need to ask and not quit until they get an answer.
Anthony Hardwick, 61
Executive Vice President and CFO, Beasley Custom Plastics, Easley, South Carolina
Collins & Aikman Corp.
No. I think that the business rule has in fact been reinforced in recent times during a few lawsuits. I think if you truly exercise diligence as a director, you will not have a liability issue. There’s nothing to stop you from being sued, but there have been recent restrictions on class-action suits. I think that today I feel as good as I did five years ago about my liability exposures, as long as I continue to truly exercise diligence and not just skim the surface.
Charles Mathews, 68
Chairman, Avanir Pharmaceuticals, San Diego
Elpath Inc.
I am concerned about the plaintiffs’ bar and the motivation for what they do. I’m not sure why you call them shareholder suits, though, as most of them are really filed without the involvement of any true shareholders. I worry about the tremendous drain on corporate resources, both human and financial, that these matters consume.
Richard A. Reck, 56
President, Business Strategy Advisors LLC, Hinsdale, Illinois
Advanced Life Sciences Inc., Interactive Intelligence,
Merge Healthcare
It would be foolish and naïve for directors not to be concerned about their personal liability in these times. I know talented executives who would be terrific contributors on the right boards but who are unwilling to risk their personal assets and reputations in today’s litigious environment. Sure, boards carry D&O insurance, but who can say how much coverage is enough? There is clearly more personal risk to being a director today than there was even five or 10 years ago. Some recent court findings have underscored and even quantified the potential risk, albeit in circumstances that suggest seriously questionable board behavior. A fellow director recently asked me if I knew of any personal liability insurance he could purchase that would give him an added measure of protection against the possibility of a lawsuit out of left field, so I know it’s on other directors’ minds as well. While board members have certain legal protections in their governance roles, there is clearly the opportunity for legal mischief and the associated personal risk.
John B. Balousek, 61
Former CEO, True North Technologies, Chicago
Aptimus, Central Garden & Pet Co., Web.com Inc.
Yes, I’m more concerned about shareholder lawsuits. Although securities litigation is declining by volume, it is not declining in terms of dollars. Property and tort litigation is out of control. And because the courts take so long and are so uncertain, much is settled out of court. It’s a huge tax on business and I think is one of the great threats to free enterprise and therefore to America.
Personal liability for board membership doesn’t scare me, since I’m careful about the companies on whose boards I sit. I also sit on the audit committee of each to make sure the disclosures are good. But I’m in a minority. Most board members are very concerned about liability. This fear costs us a lot of money through the process we go through of checking off boxes and using time that would be better spent on other company issues.
James T. Hackett, 52
Chairman, President, and CEO, Anadarko Petroleum Corp., Houston
Fluor Corp., Temple-Inland Inc.
