Managerial bias in corporate governance and the effect of D&O insurance: A literature review and synthesis

This paper provides an argument that corporate managers co-opt the allegiance of their board members. Though owners elect board members, if the board is controlled by management the nominating process tends to guarantee a continuation of that control. Though board members operating with a managerial bias might violate a duty to shareholders, directors and officers (D&O) insurance assists managers in co-opting board support by eliminating the financial consequences of violating that duty. Corporate social responsibility and stakeholder movements, by increasing the number of stakeholders whose interests are likely to be violated by a continued managerial bias, are likely to increase the price of D&O coverage. This price effect and other recently proposed governance-linked coverage changes alter, but do not eliminate, the benefit of a continuing managerial bias.