IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Directors, Directors and Officers Insurance, and Corporate Governance

  • Richard MacMinn
  • Yayuan Ren
  • LiMing Han
Registered author(s):

    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.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

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

    Article provided by Western Risk and Insurance Association in its journal Journal of Insurance Issues.

    Volume (Year): 35 (2012)
    Issue (Month): 2 ()
    Pages: 159-179

    as
    in new window

    Handle: RePEc:wri:journl:v:35:y:2012:i:2:p:159-179
    Contact details of provider:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    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)

    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.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.