August 07, 2007
Outside Director Liability
Posted by Lisa Fairfax

          Last month DOJ’s Corporate Fraud Task Force issued a report revealing that in the five years since the Task Force was established (on the heels of the fall of Enron and WorldCom) there have been 1236 corporate criminal fraud convictions.  This includes high-profile convictions such as Martha Stewart and Bernie Ebbers as well as convictions of corporate officers whose names you may not know, even though you’d recognize the name of the corporation caught up in corporate malfeasance.  The report revealed that many different corporate officials have been the subject of prosecutions and convictions.  Apparently DOJ has convicted more CEOs and presidents than any other group of corporate officers.  This is surprising given than in the past it has been especially difficult to hold such top executives liable for criminal wrongdoing because such executives where less likely to be intimately involved with specific transactions.  Less surprising is that the group with the second largest number of convictions was vice presidents, followed by CFOs, and then corporate counsel and attorneys.  Interestingly, the one group of corporate actors who did not appear to be on the list was outside directors.  Hence, while there appear to have been plenty of inside directors, including board chairs, who have been convicted of various white collar offenses within the last five years, there do not appear to be many, if any, instances in which directors who were not employed by a corporation were convicted of corporate fraud.

            On the one hand, their apparent escape from criminal conviction is surprising.  Indeed, it seems as if a variety of current and former corporate officers were caught in the wave of increased criminal prosecutions, including those many believed did not have the kind of culpability necessary for criminal liability.  So why not outside directors as well?  On the other hand, however, the exclusion of outside directors makes sense.  Indeed, it seems unlikely that outside directors, who have more of an oversight role in the corporation, would have the kind of knowledge or intent necessary to be subjected to criminal liability.  Then too, the most recent study by Bernie Black and his co-authors reveals that out-of-pocket liability for outside directors is a rare phenomenon in the civil context.  It is certainly consistent with their study that the chances of an outside director being subject to criminal liability would be even more remote.  Moreover, their study suggests that the rarity of civil liability for outside directors will continue notwithstanding the fact that outsider directors had to pay out-of-pocket damages in connection with the WorldCom and Enron settlements.  In their view, civil damages will continue to represent the exception to a general rule of non-liability for outside directors.  Taken together, however, the study and the DOJ report reveal that while there may be repercussions for outside directors who are involved in corporations accused of wrongdoing, liability—either criminal or civil—is not likely to be one of them.

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