Litigation Risk and the Independent Director Labor Market

48 Pages Posted: 12 Nov 2019 Last revised: 23 Jun 2020

See all articles by Dain C. Donelson

Dain C. Donelson

University of Iowa

Elizabeth Tori

Texas A&M University - Department of Accounting

Christopher G. Yust

Texas A&M University

Date Written: October 1, 2019

Abstract

After decades of declining litigation risk, independent directors of public companies are viewed as effectively immune to personal litigation costs. However, the unexpected In re Investors Bancorp decision by the Delaware Supreme Court in 2017 lowered the liability threshold only for directors in derivative litigation over their own equity grants. Investors and firms both reacted to this rare increase in director-only litigation risk. First, Delaware firms experienced significant negative short-window returns, concentrated in firms where equity compensation is most important, consistent with investor concerns about attracting and/or retaining qualified directors. Second, Delaware firms added more qualified directors to the compensation committee. Third, Delaware firms with higher abnormal compensation decreased director compensation. Finally, Delaware firms decreased discussion of director pay in 8-K filings and their use of compensation consultants. Overall, results are consistent with firms acting to mitigate litigation concerns.

Keywords: Director Labor Market; Derivative Litigation; Board Composition; Director Compensation; Litigation Risk; Entire Fairness Standard

JEL Classification: G30, G32, J3, K22, K41, M12, M52

Suggested Citation

Donelson, Dain C. and Tori, Elizabeth and Yust, Christopher G., Litigation Risk and the Independent Director Labor Market (October 1, 2019). Available at SSRN: https://ssrn.com/abstract=3479341 or http://dx.doi.org/10.2139/ssrn.3479341

Dain C. Donelson

University of Iowa ( email )

108 Pappajohn Business Building
Iowa City, 52242-1000
United States

Elizabeth Tori

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Christopher G. Yust (Contact Author)

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States
979.845.3439 (Phone)

HOME PAGE: http://www.christopheryust.com

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