IDEAS home Printed from https://ideas.repec.org/a/wri/journl/v35y2012i2p159-179.html
   My bibliography  Save this article

Directors, Directors and Officers Insurance, and Corporate Governance

Author

Listed:
  • Richard MacMinn
  • Yayuan Ren
  • LiMing Han

Abstract

This article models a board of directors consisting of either pure directors or shareholder directors. Pure directors only receive a fee for their service to the board, while shareholder directors receive corporate equity in addition to the fee. The analysis shows that: (1) compensation-maximizing pure directors and shareholder directors are unlikely to act in the best interests of shareholders; (2) if the appointment of directors is controlled by the CEO, directors choose to concur with the CEO’s decisions unless they can form a majority to control the vote; (3) when a board is dominated by shareholder directors who only have equity stakes in the firm, the board will advise the CEO to maximize shareholder value. We also show that it is optimal for directors to be fully insured against the liability risk for endorsing CEO’s suboptimal decisions. If a firm does not offer D&O coverage, directors will pay for the insurance themselves or decline the directorship. The corporate purchase of D&O insurance, therefore, does not change directors’ monitoring actions but does influence their decisions to accept the position. These results have important implications for board composition, director appointment, and the design of director compensation.

Suggested Citation

  • Richard MacMinn & Yayuan Ren & LiMing Han, 2012. "Directors, Directors and Officers Insurance, and Corporate Governance," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 35(2), pages 159-179.
  • Handle: RePEc:wri:journl:v:35:y:2012:i:2:p:159-179
    as

    Download full text from publisher

    File URL: http://www.insuranceissues.org/PDFs/352MRH.pdf
    Download Restriction: no

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wri:journl:v:35:y:2012:i:2:p:159-179. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (James Barrese). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.