The Advisors' Blog

The “bottoms up” approach is indeed a useful starting point for assessing directors’ pay at small and large organizations. But the potential liability and exposure fall virtually all on the outside professional advisors, who always run some risk of being sued successfully for malpractice and who therefore build the costs of that risk into their hourly rates.

The potential liability and exposure of directors have been badly overexagerated. As long as directors do these four things – (i) make decisions on a rational basis, (ii) use a rational process for making these decisions, (iii)act in good faith, and (iv) have no conflicts of interest – the business judgment rule will insulate them from liability. Of course, anyone can sue anyone for anything – and that’s why directors need D&O insurance to cover the costs of litigation.

But I do not know of a court decision where the court found that the directors met this four-part test and still were found liable. The business judgment rule gives directors the right to be wrong. Outside professional advisors do not have this right.

– Peter Hursh, ECG Advisors