Law Commons^™

The Missing Monitor In Corporate Governance: The Directors' & Officers' Liability Insurer, Tom Baker, Sean J. Griffith

Faculty Scholarship

This article reports the results of empirical research on the monitoring role of directors' and officers' liability insurance (D&O insurance) companies in American corporate governance. Economic theory provides three reasons to expect D&O insurers to serve as corporate governance monitors: first, monitoring provides insurers with a way to manage moral hazard; second, monitoring provides benefits to shareholders who might not otherwise need the risk distribution that D&O insurance provides; and third, the "bonding" provided by risk distribution gives insurers a comparative advantage in monitoring. Nevertheless, we find that D&O insurers neither monitor corporate governance during the life of the insurance …