Liabilities of Board Members

A Board of Directors (or Board of Trustees) has responsibilities to others, known as stakeholders, who are affected by its actions.  Therefore, depending on insurance and other factors, individuals may put personal assets at risk when they join a Board.

For example, if a small, local non-profit sponsors an event and a visitor trips over a power cord and severely injures himself in the fall, the well-meaning, volunteer board members may be held personally liable for medical bills.

Alternatively, if a large public company offers to acquire a smaller company and one of the public company’s Board members is also on the smaller company’s Board, and this shared Board member advocates and votes in favor of the acquisition, there is a clear conflict of interest. ¬†If the publicly held company arguably under pays significantly for the purchase, the smaller company’s shareholders may sue the entire Board.

Below is a very brief list of some of the potential points of liability and their consequences for Board members.

  • For Poor Decision Making – Hard to prove, hardly ever goes to court, results in small settlements at worst, usually covered by D&O insurance.
  • For Negligence – Usually hard to prove or quantify, sometimes goes to court and results in substantial settlements, usually covered by D&O insurance.
  • For Conflict of Interest – Relatively easy to prove and carries potentially severe costs, court judgements and substantial settlements are not unknown, usually not covered by D&O insurance.

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