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Management article
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Reference no. 90312
Published by: Harvard Business Publishing
Published in: "Harvard Business Review", 1990

Abstract

The economics of serving on the board of a publicly held corporation are fundamentally off balance. The risk to a director''s time, money, and reputation is far greater than the rewards. No matter how conscientious directors are, shareholders can easily file frivolous lawsuits against them. Resolving a lawsuit saps a director''s time and money; settling one appears to be an admission of guilt and is a black mark on his or her reputation. The boards of public companies should be more like those in LBOs or venture capital situations, where directors have a big financial stake in the company and thus the incentive to make it successful.

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Abstract

The economics of serving on the board of a publicly held corporation are fundamentally off balance. The risk to a director''s time, money, and reputation is far greater than the rewards. No matter how conscientious directors are, shareholders can easily file frivolous lawsuits against them. Resolving a lawsuit saps a director''s time and money; settling one appears to be an admission of guilt and is a black mark on his or her reputation. The boards of public companies should be more like those in LBOs or venture capital situations, where directors have a big financial stake in the company and thus the incentive to make it successful.

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