3. Board of Directors: Duties and Liability

In this chapter, we examine the duties and liabilities that come with directorship. We start with an overview of the role of the board and the requirement for independence. We then review the basic operations of the board. This includes evaluating the process by which topics are selected, deliberated, and decided. Next, we review the process by which directors are elected and removed. Finally, we examine the legal responsibilities that come with directorship and consider the potential liability directors face when they fail to uphold their duties. While we focus on boards of U.S. corporations, the broad principles apply to boards in all countries.

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.¹

That is, the board is expected to provide both advisory and oversight functions. Although these responsibilities are linked in many ways, they have fundamentally different focuses. In an advisory capacity, the board consults with management regarding the strategic and operational direction of the company. Attention is paid to decisions that balance risk and reward. Board members are selected based on the skill and expertise they offer for this purpose, including previous experience in a relevant industry or function.

In its oversight capacity, the board is expected to monitor management and ensure that it is acting diligently in the interests of shareholders. The board hires and fires the chief executive officer, measures corporate performance, evaluates management contribution to performance, and awards compensation. It also oversees legal and regulatory compliance, including the audit process, reporting requirements for publicly traded companies, and industry-specific regulations. In fulfilling these responsibilities, the board often relies on the advice of legal counsel and other paid professionals, such as external auditors, executive recruiters, compensation consultants, investment bankers, and tax advisors. Effective board members are individuals that can capably complete both advisory and oversight responsibilities.

The responsibilities of directors are separate and distinct from those of management. Directors are expected to advise on corporate strategy but do not develop the strategy. They are expected to ensure the integrity of the financial statements but do not prepare the statements themselves. The board is not an extension of management. The board is a governing body elected to represent the interests of shareholders.

Survey data suggests that board members understand the role they are expected to serve. When asked to describe what areas directors should pay most attention to, directors list strategic planning, merger opportunities, and CEO succession as their top three priorities. Other areas of focus include international expansion, information technology, and the development of human capital.² Still, some evidence indicates that directors prefer the advisory function to the monitoring function. When asked what issues they would like to spend more time discussing, directors list strategic planning, competition, and succession planning among their top responses. By contrast, most want to spend the same or less time on executive compensation, monitoring performance, and compliance and regulatory issues.³

However, regulatory standards are not necessarily the same as true independence. Board members who have worked with management over a long period of time may well form ties that will challenge a truly independent perspective. Independence may also be compromised by individual factors, such as a board member’s background, education, experience, values, and personal relation to management. There are many examples of boards comprised of highly capable directors who went along with management decisions that later proved disastrous. For example, the board of Enron failed to rein in management actions that were later held to be criminal. Similarly, the board of the Walt Disney Company acquiesced to management in the hiring and firing of Michael Ovitz as president, which later drew harsh criticism from shareholders.

Anecdotal evidence suggests that board members do not necessarily believe that formal independence standards are correlated with true independence. An informal study conducted by professors at Harvard Business School found that relevant experience is a more important indicator of director quality than regulatory requirements. According to one respondent, “I don’t think independence is anywhere near as important as people thought it was. . . . It was a red herring.”⁴ Nevertheless, most directors believe that they are capable of maintaining independence. In a survey by Corporate Board Member magazine, 90 percent of directors responded that they and their fellow board members effectively challenged management when necessary.⁵ (We discuss independence in more detail in Chapter 5, “Board of Directors: Structure and Consequences.”)

Traditionally, the CEO has served as the chairman of the board in most U.S. corporations. In recent years, however, it has become more common for a nonexecutive director to serve as chair. Given the advising and oversight responsibilities of the board, several obvious conflicts could arise from a dual chairman/CEO. Chief among them are the commingling of responsibilities that are afforded separately to management and the board, and the potential for weakened oversight in the areas of performance evaluation, compensation, succession planning, and recruitment of independent directors. At the same time, a dual chairman/CEO offers potential benefits regarding singular leadership within the organization and clear, efficient decision making. (We examine the evidence on independent chairmen in Chapter 5.)

In the debate over the Sarbanes–Oxley Act of 2002 (SOX), Congress considered but ultimately rejected calls to require an independent director to serve as chairman. Instead, SOX required that companies designate an independent director as “lead director” for each board meeting. The lead director may be named to serve on a meeting-by-meeting basis or may be appointed to serve continuously until replaced. The role of the lead director is to represent the independent directors in conversations with the CEO. This structure is intended to fortify an independent review of management among companies with a dual chairman/CEO. (We discuss the role of the lead director in more detail in Chapter 5.)

Board actions take place either at board meetings or by written consent. At a board meeting, resolutions are presented to the board and voted upon. An action is complete when it receives a majority of votes in support. When the board acts by written consent, a written resolution is circulated among board members for their signatures. The action is complete when a majority of the directors have signed the document. Because board actions by written consent do not require advance notice, they can occur more quickly than actions taken at board meetings.

In addition to attending meetings of the full board, independent directors meet at least once a year in executive session, in which executive directors are not present. This practice was mandated by SOX. Although no formal actions are taken at these meetings, executive sessions give outside directors an opportunity to discuss candidly the performance of management, operating results, internal controls, and succession planning. The lead independent director presides over these meetings.

Directors report spending approximately 20 hours per month on board matters. According to the National Association of Corporate Directors (NACD), the full board of directors convenes eight times per year either in person or over the phone, and a typical meeting lasts 7 hours.⁶ Increased regulatory requirements in recent years have done much to lengthen board meetings. Still, most directors believe that the agenda is structured to make efficient use of their time and that 20 hours per month is sufficient to satisfy their duties.⁷

To inform its decisions, the board relies on materials provided by management. Survey data indicates that the quality of this information might not be adequate. For example, a study by the NACD reported that 17 percent of directors are not satisfied with the quality of information they receive from management about the company’s strategy, 18 percent about nonfinancial risk, and 27 percent about information technology.⁸ Nonexecutive directors can address these deficiencies by requesting that management improve reporting on nonfinancial as well as financial strategic performance measures. Directors may also benefit through direct contact with management. According to one director, “There is no substitute for time spent meeting with management of the different divisions or sectors that are the next level down the corporate ladder, having them present directly to the board, [and] visiting operations.”⁹ (We examine these issues in greater detail in Chapter 6, “Strategy, Performance Measurement, and Risk Management.”)

Historically, the creation of committees was left largely to the discretion of the board. The only committee that the Securities and Exchange Commission (SEC) required was an audit committee, which was mandated for all publicly listed companies in 1977. In 2002, the Sarbanes–Oxley Act required additional committees, including a compensation committee, a governance committee, and a nominating committee. The act stipulated that these committees and the audit committee consist entirely of independent directors.

The audit committee is responsible for overseeing the company’s external audit and is the primary contact between the auditor and the company. This reporting relationship is intended to prevent management manipulation of the audit. Under SOX, the audit committee must have at least three members, all of whom are financially literate; the chair also must be a financial expert. The audit committee maintains a written charter that outlines its duties to the full board, including these obligations:

1. Overseeing the financial reporting and disclosure process

2. Monitoring the choice of accounting policies and principles

3. Overseeing the hiring, performance, and independence of the external auditor

4. Overseeing regulatory compliance, ethics, and whistleblower hotlines

5. Monitoring internal control processes

6. Overseeing the performance of the internal audit function

7. Discussing risk-management policies and practices with management¹⁰

According to the NACD, audit committees meet an average of eight times per year either in person or over the phone, and a typical meeting lasts 2.7 hours.¹¹ Ninety-seven percent of directors believe that the audit committee is effective in its oversight of the financial reporting process.¹² (We explore the duties of the audit committee in greater detail in Chapter 10, “Financial Reporting and External Audit.”)

The compensation committee is responsible for setting the compensation of the CEO and for advising the CEO on the compensation of other senior executives. Sarbanes–Oxley established no minimum committee size. The obligations of the compensation committee include the following:

1. Setting the compensation of the CEO

2. Setting and reviewing performance-related goals for the CEO

3. Determining an appropriate compensation structure for the CEO, given these performance expectations

4. Monitoring CEO performance relative to targets

5. Setting or advising the CEO on other officers’ compensation

6. Advising the CEO on and overseeing compensation of nonexecutive employees

7. Setting board compensation

8. Hiring consultants to assist in the compensation process, as appropriate¹³

Compensation committees meet an average of six times per year for 2.7 hours.¹⁴ Eighty-nine percent of directors believe the compensation committee can properly manage CEO compensation.¹⁵ (We explore compensation in greater detail in Chapters 8, “Executive Compensation and Incentives,” and 9, “Executive Equity Ownership.”)

The governance committee is responsible for evaluating the company’s governance structure and processes and recommending improvements, when appropriate. The nominating committee is responsible for identifying, evaluating, and nominating new directors when board seats need to be filled. The nominating committee is also typically in charge of leading the CEO succession-planning process. In most companies, the nominating and governance committees are combined into a single committee with these responsibilities:

1. Identifying qualified individuals to serve on the board

2. Selecting nominees to be put before a shareholder vote at the annual meeting

3. Hiring consultants to assist in the director recruitment process, as appropriate

4. Determining governance standards for the corporation

5. Managing the board evaluation process

6. Managing the CEO evaluation process¹⁶

The nominating and governance committee meets an average of eight times per year for 1.8 hours.¹⁷ Despite the independence of this committee, the CEO often has significant input into the choice of directors nominated to the board. This is true whether or not the CEO holds the dual role of chairman. (We explore director recruitment in Chapter 4, “Board of Directors: Selection, Compensation, and Removal,” and CEO succession in Chapter 7, “Labor Market for Executives and CEO Succession Planning.”)

Boards are free to establish additional committees beyond those required by listing exchanges. These committees generally monitor functional areas that the board believes to hold strategic importance for the firm, thus meriting additional oversight (specialized committees). According to Spencer Stuart, 31 percent of companies have a committee dedicated to finance, 11 percent to public policy or social and corporate responsibility, 8 percent to science and technology, 8 percent to the environment or health and safety, 8 percent to risk, and 6 percent to legal matters or compliance.¹⁸ These committees oversee and advise these functions; they do not directly manage them, which is the purview of management (see the following sidebar).

Largely in response to the increased incidence of hostile takeovers in the 1980s, firms began adopting staggered boards. For example, from 1994 to 1999, the percentage of firms that adopted staggered boards at the time they went public increased from 43 percent to 82 percent in the United States.²³ In recent years, however, the trend has reversed. Companies have come under fire from shareholder activists and proxy advisory firms who believe that staggered board elections insulate directors from shareholder influence. Institutional investors, particularly public pension plans, often have policies of opposing staggered boards. Some public companies have responded to shareholder pressure by destaggering their boards. In 2014, about 53 percent of publicly traded companies had staggered boards, down from 63 percent in 2002.²⁴

Three main alternatives to this system of voting exist: dual-class stock, majority voting, and cumulative voting. A company with dual-class shares has more than one class of common stock. In general, each class has equal economic interest in the company but unequal voting rights. For example, Class A shares might be afforded one vote per share, whereas Class B shares might have ten votes per share. Typically, an insider, a founding family member, or another shareholder friendly to management holds the class of shares with preferential voting rights, which gives that person significant (if not outright) influence over board elections. Dual-class stock thus tends to weaken the influence of public shareholders. Approximately 10 percent of publicly traded corporations in the United States have some form of dual-class structure.²⁵ Berkshire Hathaway, Facebook, Google, the New York Times Co., and Hershey all have dual-class shares.

The second variation in voting procedures is majority voting. Majority voting differs from plurality voting in that a director is required to receive a majority of votes to be elected. This means that even in an uncontested election, a director can fail to win a board seat if over half of all outstanding votes are withheld from him or her. The specific procedures of majority voting systems vary. In some companies, candidates who receive more withhold votes than votes in favor are strictly refused a seat on the board. More commonly, the director is required to submit a letter of resignation, and the rest of the board has discretion over whether to accept it. Other companies require resignation, but only after a replacement director is appointed. Majority voting gives shareholders more power to control the composition of the board, even in the absence of an alternative slate of directors. In 2014, more than 85 percent of companies in the S&P 500 had adopted majority voting for director elections—a percentage that has been increasing in recent years. However, majority voting remains less common among small and midsized companies, with only 23 percent of companies in the Russell 2000 Index using this standard of voting.²⁶

The third variation is cumulative voting. Cumulative voting allows a shareholder to concentrate votes on a single board candidate instead of requiring one vote for each candidate. A shareholder is given a number of votes equal to the product of the number of shares owned times the number of seats the company has on its board. For example, a shareholder with 100 shares in a company with a board of nine directors has 900 votes. The shareholder can allocate those votes among board candidates as he or she chooses. To increase the chances of electing a specific director, the shareholder might concentrate more votes toward a single candidate or a subset of candidates. Cumulative voting is relatively rare. Fewer than 5 percent of companies in the S&P 500 have adopted cumulative voting.²⁷

In the ordinary course, board elections are uncontested. The company puts up a slate of directors for election, and the shareholders are expected to elect the slate. Contested elections occur in two circumstances. First, in the case of a hostile takeover battle, the bidding firm puts up a full slate of directors that is sympathetic to the acquisition. If the target shareholders elect the bidder’s slate, those directors will remove impediments to the takeover (such as a poison pill) and vote in favor of the deal. The second context in which contested elections take place involves an activist investor who is dissatisfied with management and wants to gain influence over the company. In this situation, the shareholder might put up a “short slate” of directors—a limited number of directors who, if elected, would constitute a minority of the board. These directors would then serve as a vehicle through which the activist investor could participate in board-level decisions. Historically, the cost of nominating a dissident slate was borne entirely by the hostile bidder or activist. For this reason, proxy contests unrelated to takeovers have been quite rare. According to Institutional Shareholder Services, only 24 proxy contests occurred in 2013.²⁸

The Dodd–Frank Wall Street Reform Act, as originally enacted, allowed investor groups that own at least 3 percent of a company’s shares continuously for three years to nominate up to 25 percent of the board. However, this right—known as proxy access—was struck down by a federal court in 2011. Subsequently, the SEC issued a private ordering that allows companies to adopt proxy access on a voluntary basis. According to Sullivan & Cromwell, nine shareholder-sponsored proposals for proxy access were voted on in 2013; of these, only two received majority support, at CenturyLink and Verizon, both of which adopted bylaw changes to this effect the following year.²⁹

Under state corporate law, the primary duties of the board are embodied in the broad principle of fiduciary duty. Under federal securities law, the directors’ duties stem from the corporation’s obligation to disclose material information to the public.

The fiduciary duty of the board includes three components:

• A duty of care

• A duty of loyalty

• A duty of candor

The duty of care requires that a director make decisions with due deliberation. In the United States, courts enforce the duty of care through the rubric of the “business judgment rule.” This rule provides that the judgment of a board will not be overridden by a court unless a plaintiff can show that the board failed to inform itself regarding the decision at issue or that the board was infected with a conflict of interest, in which case there may have been a violation of the duty of loyalty. Courts have rarely ruled against a board for a violation of the duty of care. Even if a board decision was clearly wrong, if the board can show that it engaged in some consideration of information related to the decision, the courts will adopt a hands-off posture. The business judgment rule is most protective of outside directors. In the absence of “red flags” regarding what management is telling them, outside directors are permitted to rely on what they hear from management to inform their decision. Moreover, companies are permitted to include exculpatory provisions in the charters that protect an outside director from suits for monetary damages for breach of the duty of care, so long as the director has not acted intentionally or in bad faith.

The duty of loyalty addresses conflicts of interest. For example, if management is considering a transaction with a company in which a director has a significant financial interest, the duty of loyalty requires that the terms of the transaction promote the interests of the shareholders over those of the director. As another example, if a director discovers a business opportunity in the course of his or her service to the company, the duty of loyalty requires that the director refrain from taking the opportunity before first determining whether the company will take it. The law lays out procedures for a board to follow in situations when a potential conflict of interest may exist.

The duty of candor requires that management and the board inform shareholders of all information that is important to their evaluation of the company and its management. The company’s management is required in the first instance to provide accurate and timely information to shareholders, and the board is expected to oversee this process. In the absence of direct knowledge of wrongdoing, the board is permitted to rely on management assurances that the information is complete and accurate.

As a practical matter for publicly held companies, disclosure requirements mandated by federal securities law are more relevant than the duty of candor (discussed in the next section, “Disclosure Obligations under Securities Laws”). Like the duty of candor, federal securities laws require a company and its management to disclose material information to shareholders and that they do so in great detail. Consequently, public company shareholders are more likely to assert disclosure violations under securities laws than under the duty of candor. The duty of candor is important, however, for nonpublic companies.

Because the courts have interpreted the board’s obligation to serve “in the interest of the corporation” to mean “in the interest of shareholders,” corporate governance in the United States is said to be shareholder-centric. Survey data indicates that directors accept a shareholder-centric view of their responsibilities. When asked to identify in order of importance the constituents they serve, directors ranked “all shareholders” first, followed by institutional investors, customers, and creditors. They ranked other constituents such as employees and the community lower (see Table 3.1).³¹

In the 1990s, the legislatures of many states enacted statutes that allow the board to consider nonshareholder interests. These statutes are referred to as “nonshareholder constituency” or “expanded constituency” provisions. They allow the board to consider the impact of their actions on stakeholders such as workers, customers, suppliers, and the surrounding community. The primary application of these statutes is in the evaluation of a takeover bid. These statutes purportedly allow management and the board to reject a takeover offer that is in the interest of shareholders if the takeover would harm other constituents. Still, courts generally have not allowed these statutes to be used to the disadvantage of shareholders.

Ohio and Pennsylvania have gone further and require that the board consider nonshareholder interests. In 2010, Maryland became the first state to allow entrepreneurs to incorporate as a “benefit corporation” (or B Corp). A benefit corporation is formed for a “general public benefit”—such as the environment or community involvement—which is identified in its charter. The annual report to owners includes an assessment of its performance against this objective. Some states require periodic third-party verification of the company’s activities. The enactment of benefit corporation legislation is intended to provide indemnity to corporate directors who take nonshareholder concerns into account in making decisions. Currently, more than 40 states have passed or proposed legislation recognizing benefit corporations (see the following sidebar).³²

Statutes that provide for nonshareholder considerations have been litigated only to a limited extent. As a result, their meaning is still uncertain. To date, courts have interpreted them to mean that boards should take into account nonshareholder interests only to the extent that shareholder interests are not compromised. Thus, even the board of a corporation that is governed by one of these statutes has a duty to promote the interests of shareholders.

A failure to comply with these rules—by misstating material information or by omitting information and thereby making the information provided materially incorrect—exposes the company, its managers, and its directors to liability. Directors are expected to question management regarding the rationale for its disclosure decisions but, absent any red flags, they are not expected to verify information on their own.

When shareholders file suits alleging that directors have taken an action that violated their fiduciary duties, courts use different standards to review the action, depending on the nature of the alleged violation. As explained earlier, when a violation of the duty of care is involved, the courts apply the business judgment rule, which is most deferential to the board’s decision. Under the business judgment rule, a court will not second guess a board’s decision—even if, in retrospect, it was proved to be seriously deficient—if the board followed a reasonable process by which it informed itself of key, relevant facts and then made the decision in good faith. (Good faith requires that the board act without conflicting interests and that it not turn a blind eye to issues within its responsibility.) If the board can demonstrate that it satisfied these criteria, the courts will not intervene.

The Disney case is a recent high-water (or perhaps low-water) mark for nonintervention by the Delaware courts. In 2005, shareholders filed a derivative lawsuit against the Walt Disney Company in which they claimed that the directors did not sufficiently review the appointment of Michael Ovitz as president of the company in 1995 or his no-fault termination 14 months later. They sought to void his original employment agreement or, alternatively, to change his termination to “with cause,” which under the agreement would mean the return of nearly $140 million in severance payments. Although the court agreed with the plaintiffs that the board’s handling of the matter was seriously deficient, it nonetheless ruled that the business judgment rule protected the board’s conduct and declined to intervene.

On the other hand, if a plaintiff successfully shows that a director has violated the duty of loyalty by virtue of a conflict of interest, the courts will not hesitate to intervene. The courts will apply a strict standard of review under which they make their own judgment whether the director has placed his or her own interest above the interests of shareholders. In such a case, the burden shifts to directors to demonstrate the fairness of their decision.

A board’s decision to sell a company also receives a higher level of scrutiny by the courts. Because management self-interest may taint its decision to sell the company and, if so, to whom, the courts spend more time ensuring that the sale and process by which it was conducted were in the best interest of shareholders.

Securities laws are enforced through both private lawsuits and SEC enforcement actions. Private lawsuits take the form of class actions by investors who bought (or sold) a security during the period in which its price was artificially high (or low) as a result of a material misstatement. Because it is difficult for investors to coordinate their efforts, the law allows lawyers to sue in the name of a class of investors who have suffered from a common alleged violation. Although U.S. Congress enacted reforms to the securities class action system in 1996 to facilitate a degree of oversight by institutional investors and lessen the influence of plaintiffs’ lawyers, plaintiffs’ lawyers remain largely in control of these lawsuits.

In a securities class action lawsuit, the plaintiff’s lawyers typically name the company and its CEO as defendants. In cases involving financial misstatements, the CFO is typically named as well. Outside board members are named much less frequently. Brochet and Srinivasan (2014) found that, among a sample of securities class action lawsuits filed between 1996 and 2010, independent directors were named 11 percent of the time. The likelihood of being named is greater for audit committee members and directors who sell stock during the class period.³⁶

In an SEC enforcement action, the SEC targets members of management who were responsible for a violation. Managers are subject to monetary penalties and can be barred from serving as officers or directors of a public company, either for a specified number of years or permanently. The SEC occasionally imposes monetary penalties on companies as well. It is very unusual, however, for the SEC to target outside directors.

A company may indemnify directors for costs associated with securities class actions and some fiduciary duty cases. Indemnification generally is available to an individual director for any expense incurred in connection with litigation, including legal fees, settlements, and judgments against the director. Indemnification is only permitted, however, if the director has acted in good faith. Indemnification agreements have been widely adopted by most public companies. According to one study, 98 percent of a sample of Fortune 500 companies have indemnification arrangements for the benefit of their directors.³⁷

Corporations also protect directors by purchasing director and officer liability insurance (or D&O insurance). These policies cover litigation expenses, settlement payments, and, in rare cases, amounts paid in damages (up to a limit specified in the policy). A D&O insurance policy has three parts, referred to as Side A, Side B, and Side C. Side A protects the directors when indemnification is not available—for example, if the company becomes insolvent. Side B reimburses a corporation for its indemnification obligations to its directors. Side C insurance reimburses a corporation for its own litigation expenses and amounts it pays in settlement. As the name implies, D&O insurance covers both a company’s directors and officers.

D&O insurance contracts are written broadly and are intended to apply when directors are sued in private action for violating securities fraud. However, as with all other insurance policies, D&O insurance has limits. First, these contracts contain dollar limits on the coverage they provide. Amounts owed in excess of coverage limits must be paid by the company. Second, they contain exclusions. The most important of these arises when the director has committed “deliberate fraud” or otherwise illegally enriched him- or herself. Third, although D&O insurance covers litigation expenses and some costs of responding to an SEC investigation that precedes litigation, it does not cover civil fines levied by the SEC (see the following sidebar).

Despite the protections afforded to directors through indemnifications and D&O insurance, most directors believe they are at legal risk by serving on the board. When polled, more than two-thirds believe that the liability risk of serving on boards has increased in recent years. Almost 15 percent have thought seriously about resigning due to concerns about personal liability.³⁸ Notwithstanding this perception, the actual risk of out-of-pocket payment is quite low. Black, Cheffens, and Klausner (2006) found that between 1980 and 2005, outside directors made out-of-pocket payments—meaning unindemnified and uninsured—in only 12 cases.³⁹ This figure includes cases where directors only incurred out-of-pocket litigation expenses and did not incur settlement costs (see Table 3.3).

Although indemnification and D&O insurance afford directors considerable financial protection, they do not reimburse directors for the emotional cost of the litigation process, the time involved, and the adverse impact the lawsuits might have on their reputations.⁴⁰

2. NYSE Corporate Governance Services, Corporate Board Member, and Spencer Stuart, “What Directors Think 2014: Annual Board of Directors Survey” (2014). Accessed July 16, 2014. See https://www.nyse.com/publicdocs/nyse/listing/What_Directors_Think_2014.pdf.

3. Corporate Board Member & PricewaterhouseCoopers LLP, “What Directors Think 2008: The Corporate Board Member/PricewaterhouseCoopers LLP Survey,” Corporate Board Member (2008). Accessed May 5, 2015. See https://www.pwc.com/en_US/us/corporate-governance/assets/what-directors-think-2008.pdf.

4. Jay W. Lorsch, Joseph L. Bower, Clayton S. Rose, and Suraj Srinivasan, “Perspectives from the Boardroom—2009,” Harvard Business School Working Knowledge (September 9, 2009): 1–20. Accessed January 21, 2010. See http://hbswk.hbs.edu/item/6281.html.

5. NYSE Corporate Governance Services, Corporate Board Member, and Spencer Stuart (2014).

6. National Association of Corporate Directors, “2013–2014 NACD Public Company Governance Survey” (Washington, D.C.: National Association of Corporate Directors, 2014).

7. Ibid.

8. Ibid.

9. Lorsch, Bower, Rose, and Srinivasan (2009).

10. AICPA, The AICPA Audit Committee Toolkit, 3rd edition (New York: American Institute of Certified Public Accountants, 2014).

11. National Association of Corporate Directors (2014).

12. NYSE Corporate Governance Services, Corporate Board Member, and Spencer Stuart (2014).

13. New York Stock Exchange, NYSE Listed Company Manual §303A.00, “Corporate Governance Standards.” Accessed April 25, 2015. See http://nysemanual.nyse.com/LCMTools/PlatformViewer.asp?selectednode=chp_1_4_3&manual=%2Flcm%2Fsections%2Flcm-sections%2F.

14. National Association of Corporate Directors (2014).

15. NYSE Corporate Governance Services, Corporate Board Member, and Spencer Stuart (2014).

16. New York Stock Exchange, “Corporate Governance Standards.”

17. National Association of Corporate Directors (2014).

18. Spencer Stuart, “Spencer Stuart U.S. Board Index 2013” (2013). Last accessed July 11, 2014. See https://www.spencerstuart.com/research-and-insight/spencer-stuart-us-board-index-2013.

19. Merck & Co., Inc., “Merck Research Committee Charter.” Accessed July 11, 2014. http://www.merck.com/about/leadership/board-of-directors/charter_research.pdf.

20. Fifth Third Bancorp, Form DEF 14A, filed with the Securities and Exchange Commission March 6, 2014.

21. Cisco Systems, Inc., Form DEF 14A, filed with the Securities and Exchange Commission September 30, 2013.

22. General Mills, Inc., Form DEF 14A, filed with the Securities and Exchange Commission August 12, 2013.

23. Robert M. Daines and Michael Klausner “Do IPO Charters Maximize Firm Value? Antitakeover Protection in IPOs,” Journal of Law, Economics & Organization 17 (2001): 83–120. John C. Coates, “Explaining Variation in Takeover Defenses: Blame the Lawyers,” California Law Review 89 (2001): 1301.

24. These descriptive statistics were generated from data supplied by SharkRepellent, FactSet Research Systems, Inc. The sample used 1,871 firms in 2014 and 2,849 firms in 2002.

25. Ibid.

26. Ibid.

27. Ibid.

28. Institutional Shareholder Services, “2013 Proxy Season Review United States.” Accessed December 12, 2014. See http://www.issgovernance.com/library/united-states-2013-proxy-season-review/.

29. Sullivan & Cromwell, “2013 Proxy Season Review.” Accessed August 8, 2014. See http://www.sullcrom.com/siteFiles/Publications/SC_Publication_2013_Proxy_Season_Review.pdf.

30. See Joseph Hinsey IV, “Business Judgment and the American Law Institute’s Corporate Governance Project: The Rule, the Doctrine, and the Reality,” George Washington Law Review 52 (1984): 609–610.

31. Interestingly enough, directors apparently do not view “activist shareholders” as included in the group “all shareholders,” given their disparate rankings. This implies that directors do not see themselves as serving all shareholders equally. Corporate Board Member & PricewaterhouseCoopers LLP, “What Directors Think 2007: The Corporate Board Member/PricewaterhouseCoopers LLP Survey,” Corporate Board Member (2007). Accessed May 5, 2015. See http://www.pwc.com/en_US/us/corporate-governance/assets/what-directors-think-2007.pdf.

32. Smith Moore Leatherwood LLP, “Informed: FAQ about ‘B Corps.’” Accessed April 3, 2015. See http://www.smithmoorelaw.com/bcorpfaq.

33. U.K. Companies Act of 2006 (c. 46), Part 10—A Company’s Directors Chapter 2—General Duties of Directors Section 172 (1).

34. Institute of Directors Southern Africa, “King Report on Corporate Governance in SA.” Accessed March 25, 2015. See http://www.iodsa.co.za/?kingiii.

35. Etsy Inc., Form S-1, filed with the Securities and Exchange Commission March 4, 2015.

36. Francois Brochet and Suraj Srinivasan, “Accountability of Independent Directors: Evidence from Firms Subject to Securities Litigation,” Journal of Financial Economics 111 (2014): 430–449.

37. Lawrence A. Hamermesh, “Why I Do Not Teach Van Gorkom,” Georgia Law Review 34 (2000): 477–490.

38. Corporate Board Member and PricewaterhouseCoopers LLP, “What Directors Think 2009: Annual Board of Directors Survey. A Corporate Board Member/PricewaterhouseCoopers LLP Research Study. Special Supplement,” Corporate Board Member (2009): 1–16. Accessed January 21, 2010. See http://www.pwc.com/us/en/corporate-governance/publications/corporate-board-member-study-what-directors-think.jhtml.

39. Three of the cases are quite well known: Enron ($13 million for misleading statements and $1.5 million for violating ERISA), WorldCom ($24.75 million for misleading statements), and Tyco ($22.5 million from an SEC enforcement action). The fact that these high-profile cases resulted in out-of-pocket payments no doubt contributes to the perception that a director’s risk of liability has increased. See Bernard S. Black, Brian R. Cheffens, and Michael Klausner, “Outside Director Liability,” Stanford Law Review 58 (2006): 1055–1159.

40. Helland (2006) finds that board member reputation generally does not suffer following allegations of fraud and that the majority of directors named in such lawsuits do not experience a decrease in board seats. An exception arises for directors named in SEC-initiated cases and those named in class actions that end in large settlements. In these cases, director reputation does suffer. Fich and Shivdasani (2007) also found that outside directors named in class-action lawsuits experience a decrease in board seats. See Eric A. Helland, “Reputational Penalties and the Merits of Class Action Securities Litigation,” Journal of Law and Economics 49 (October 2006): 365–395. Eliezer M. Fich and Anil Shivdasani, “Financial Fraud, Director Reputation, and Shareholder Wealth,” Journal of Financial Economics 86 (2007): 306–336.