Does Personal Liability Deter Individuals from Serving as Independent Directors? Evidence from a Corporate Governance Reform in India

This study examines whether personal liability for corporate malpractice deters individuals from serving as independent directors. We exploit a quasi-natural experiment in the form of a recent corporate governance reform in India, which introduced personal liability for independent directors. We find that personal liability deters individuals from serving on corporate boards and find stronger deterrence among firms that have a) greater litigation and regulatory risk, b) higher monitoring costs, and c) weak monetary incentive to serve as an independent director. We document changes in board composition, resulting in fewer expert directors after the reform. The decline in board expertise results in 1.6% lower firm value for the average firm. Overall, our study documents that personal liability deters individuals with high reputational costs and weak monetary incentives from serving on corporate boards.