Harris Poll Reveals Likelihood Of Outside-Director Lawsuits

More than one in three outside directors of companies have been sued in connection with their board service, according to a recent Louis Harris & Associates poll. The study, "Outside Directors and The Risks They Face—III," commissioned by Executive Risk, a professional liability insurer located in Simsbury, CT, follows up on similar studies conducted in 1992 and 1995.

The 1998 Harris study, covering responses taken from June to September 1997, includes 501 independent (i.e. non-officer) directors and divides them into three distinct groups, based on their corporation size and ownership:

• Large Fortune 1000 service and industrial firms (300 respondents)
• Smaller non-Fortune 1,000 publicly held corporations (101)
• Small (non-Fortune) non-public organizations (100)

The 1998 Harris study found that 37 percent of outside directors of large Fortune 1000 firms had been sued at least once in their capacity as directors. This constitutes a fairly significant decline from 1992, when it was found that 50 percent of outside directors of these firms had been sued. The 1998 study showed that for smaller publicly held firms and private firms, the percentage of directors that have been sued was 38 percent and 46 percent, respectively.

Fortune 1000 firm directors are still less concerned over future suits than they were in 1992, although that concern has risen slightly since 1995. The proportion of Fortune 1000 directors who believe that the probability of being sued in the near future will increase was 43 percent in the 1992 study, dropped to 28 percent in the 1995 study, and rose to 33 percent in the 1998 study.

For smaller, publicly owned firms, 30 percent of directors said they thought the probability of being sued in the near future is higher than it is today, while 62 percent said the probability is the same. At small, private companies, 38 percent of directors said they believe the probability of being sued in the near future will be higher, and 58 percent said it would be the same.

In other words, directors at the smaller public and private firms are at least as apprehensive about the future as those at large companies. Timothy J. Curry, counsel for Executive Risk, believes he knows why this is the case. He says it's because D&O insurance coverage is, "so commonly available, homogenizing directors' risk perceptions and anxiety levels across the spectrum of corporate sizes and ownership structures."

Are directors more concerned about liability from employment-related claims than they were four or five years ago? The 1998 Harris study asked that question and found that about half of directors are more concerned. For Fortune 1000 companies, 44 percent of directors said they are more concerned; at smaller public companies, 48 percent said they are more concerned; and at small private firms, 60 percent said they are more concerned. Given the general rise in employment-related litigation in recent years, the high level of concern makes sense.

As in past years, directors and officers said that a major barrier to joining a board of directors of a for-profit company is "inadequate or no directors and officers liability insurance." For Fortune 1000 company directors, 87 percent said the lack of proper D&O insurance would be a barrier, compared to 91 percent in 1995 and 89 percent in 1992. Among public non-Fortune company directors, 89 percent said this would be a barrier to joining a board, while 78 percent of private non-Fortune companies said it would be a barrier. "Once again, this survey clearly demonstrates that for companies to continue to recruit top directors, providing adequate D&O coverage is an absolute must," says Robert Leitman, president and chief executive officer, Louis Harris & Associates.

An area of stability found by the 1998 Harris study is director familiarity with certain legal issues. A substantial majority (approximately 85 percent) of respondents in all groups feel "very/somewhat informed" about the liability laws that affect directors and officers. "Such consistency itself is newsworthy," says Curry. "Consider the Private Securities Litigation Reform Act, an important 1995 federal law that attempts to shield corporate management from abusive shareholder class action lawsuits. Although a majority of public company board members seem to have heard about the new law, only a very small minority report that it has had any effect on the way they feel about their board service or the possibility of shareholder claims."

Additional topics where the 1998 Harris study sheds light include the size of boards, views on "Golden Parachutes," barriers to joining a board, effect of a significant market correction on liability, personal involvement in attempts to reform the system, confidence in exoneration of prudent and responsible directors.

Free copies of the full Harris report and a brief article highlighting the study's results are available by contacting Executive Risk's Communications/Marketing Team by phone at 800-432-8168, fax 860-408-2288, or email info@execrisk.com.