Corporate Liability, Director/Officer Actions and the Agency Issue

This paper presents the results of a survey of the Business Week 1000 firms concerning their perception of and reaction to liability exposure. Actions taken by the respondent firms to reduce liability exposure have resulted in an increased operating focus, which should result in more effective monitoring by directors and officers. Also, the paper presents an application of the MM Capital Structure Model to demonstrate the potential impact of liability exposure arising from failure to minimize operating risks. The model illustrates the process by which non-project related liability exposure subjects the firm to financial leverage through lawsuits which may result in a dramatic reduction in shareholder wealth.