Board Composition, Stock Ownership and the Exemption of Directors from Liability

This research examined the relationships between board composition, stock ownership, and the existence of director liability protection in a sample of industrial manufacturing firms. Results indicate that the impact of board leadership on liability protection depends on the proportion of independent directors on the board. Findings suggest that high levels of independent directors compromise the governing effectiveness of independent board leadership. Results demonstrate that stock ownership patterns affect liability protection as well. High levels of institutional ownership are associated with liability protection. While the theoretical paradigm of organizational economics predicts that the decision to provide protection is based on economic advantage, this study shows that liability protection for directors involves social dimensions as well as economic ones.