Indemnification of a corporate board consists of a contract where a corporation promises to protect its directors from personal financial loss. If a board member is sued or faces regulatory investigations for their decisions, the company covers their legal fees, settlements, and judgments. Serving on a corporate board involves inherent risks, as directors can be targeted by lawsuits from shareholders, creditors, or government regulators. Indemnification acts as a vital risk- management and recruitment tool. Without it, qualified individuals would likely be unwilling to accept board positions due to the threat of litigation and even personal bankruptcy.

Corporate law allows two primary forms of board indemnification:

(1) Mandatory where the corporation is legally required to indemnify a director, but usually only if the director entirely prevails in a lawsuit (Le., wins the case), and

(2) Permissive: where the corporation is allowed but not strictly required to pay for the director's defense even if they lose, provided the board member acted in good faith and believed their actions were in the best interest of the company. Board indemnification includes two main financial assurances which are often outlined in a company's corporate bylaws or others agreements:

These include: The actual reimbursement of fines, judgments, and settlements, and The advancement of expenses where the company pays legal bills and defense costs in real-time as the lawsuit unfolds, rather than waiting for the case to conclude.

Indemnification is not a blank check. Companies are typically prohibited from indemnifying board members for:

(1) Bad Faith Actions which is conduct that is intentionally fraudulent, criminal, or reckless, and

(2) Self-Dealing which are actions where the director acted for personal, undisclosed profit or violated their duty of loyalty.

 

 

Selecting Corporate Directors

National Association of Corporate Directors

Advisory Board

Audit Committee