Insuring the Agents: The Role of Directors' and Officers' Insurance in Corporate Governance

Holderness (1990) suggests that directors' and officers' (D&O) insurance has an important governance role in publicly owned companies. This article empirically tests Holderness's monitoring hypothesis by examining the association between board composition, managerial ownership, external shareholder control, and the purchase of D&O insurance for a sample of 366 companies in the United Kingdom. The results generally support the monitoring hypothesis. In large companies, where monitoring through external ownership is costly, D&O insurance and outside directors are utilized to monitor managers. In smaller companies, monitoring is more likely to be undertaken through internal and external ownership with less reliance on D&O insurance.