More Protection Can Only Be Good

Regardless of size, the companies that insure individual board members against legal damages vastly outnumber those that do not—87 percent to 13 percent, in fact. And a full 64 percent of respondents said their companies had increased D&O coverage recently.

Perhaps quite obviously, firms as well as individual board members are growing increasingly cognizant of the risks. Nevertheless, well over half (59 percent) of board members polled said they obtain coverage above and beyond what their companies supply, such as umbrella insurance, Side A insurance or errors and omissions coverage. The significant number who do not may feel that their corporate coverage is adequate, or they may be aware that many individual umbrella policies specifically exclude accusations of financial wrongdoing, such as inappropriate or misleading disclosure of information. "Untested and unknown," one respondent wrote. Thus, many directors may feel such insurance doesn't offer much of a shield.

At the same time, many feel the need to protect their personal assets from potential seizure as a result of litigation. Fully 34 percent of polled board members maintain some kind of trust, and a further 16 percent say they place personal assets in a spouse's or another person's name. And 10 percent say they have "other" plans or mechanisms that protect assets from garnishment or seizure, such as "entering into indemnification contracts with the company and in appropriate circumstances having the company create a rabbi trust or other bankruptcy remote mechanism and placing sufficient assets in them," one respondent wrote.

Thus, 60 percent of directors are worried enough about losing personal wealth as a direct result of board service that they try to shield at least some assets from lawsuits. Clearly, they have a reason, because 38.5 percent have either been named in a suit while serving on a board or think they are currently at legal risk.

Board members also have given thought to how companies can make their jobs less dangerous as individual directors. When asked to choose the best ways to lower risk, 64 percent said corporations should establish a central spokesperson and eliminate any and all director contact with the public, and 56 percent said companies should impose stricter controls over both external and internal communications. And half thought investor relations education for board members would help them avoid lawsuits.

All three responses suggest that public relations is a field much on directors' minds. A majority still seem to believe that careful image management is key to limiting risk. Yet increasingly, shareholders are sensitive to being locked out of dialogue with directors—witness the uproar after Home Depot's annual meeting. And many investors dislike being "spun." So, putting communications through too many filters could wind up causing more problems than it solves.

Currently, almost 53 percent of respondents—a fairly high percentage—said all external communications were vetted by the CEO. Fellow directors approved a third of communications. But another third said "nobody" cleared communications before dissemination to the public. Again, that's a big percentage, and a surprising one given the prevailing legal environment. Another 18 percent said an investment relations officer approved them; 5 percent said "other"; and in at least one case, a respondent interpreted that to mean that directors "don't speak to the press at all unless there is a divergence of defense."

Half of the polled directors weighed in with additional suggestions for reducing risk. They include outside legal and audit reviews of board and committee procedures to ensure fiduciary duty compliance, companywide risk management systems with board involvement and "better qualified directors."