D&O liability in the post-Enron era

In today's post-Enron environment, directors and officers face unprecedented scrutiny and liability exposure. For a variety of reasons, the size of settlements in securities class actions against directors and officers has exploded in recent years, with no end in sight. Plus, now more than ever directors and officers are being routinely named as defendants not only in securities class action lawsuits, but also in a host of other types of claims, including shareholder derivative suits, single-plaintiff opt-out suits, ERISA (Employee Retirement Income Security Act of 1974) tagalong actions, and regulatory, criminal and bankruptcy proceedings. The existence of these parallel proceedings further complicates the defence of the claims and escalates even higher the defendants' liability exposure. Finally, to make a bad situation worse, some defendant directors and officers are now being required by institutional investor plaintiffs and regulators to make large payments from their personal assets to resolve these claims, without insurance or indemnification reimbursement from their directors' and officers' insurer or their company. Each of these sobering dynamics is discussed in this paper. Although directors and officers should redouble their commitment to sound corporate governance practices and should confirm the existence of state-of-the-art insurance and indemnification protection in response to this environment, ultimately one must ask if the benefits of serving as an outside director of a US public company still outweigh the risks. Unfortunately, the answer to that question is not entirely clear today.