75. Liability (definition)

NOTE: if you’re new to Ground-Up Governance, or are finding anything a bit strange or confusing, you might want to START HERE.

If you’re the type of person who thinks a lot about corporate governance, especially if you think a lot about boards, then you’re probably a little surprised that Ground-Up Governance hasn’t talked about liability yet. A lot of really smart corporate governance people kinda put liability in big bold letters with flashing lights at the top of everything they say about boards. When we describe what liability is, you’ll probably understand why. You might also understand why, when it comes to Ground-Up Governance, it’s definition number…what, like, 75 or something?

When it comes to boards, “liability” is the potential for a director to be punished for doing something wrong. And it’s true, in a lot of parts of the world, directors can be individually punished for bad things that the board does, like making negligent mistakes or doing crimes. Kinda weird that the board only has authority collectively, but individual directors can be punished, huh? Anyway, it’s true.

Making matters worse, if the board makes a negligent mistake that harms people - and it really was a mistake - they can’t just say “oops…sorry, we really messed up!”

Like, for example, imagine the Reallie Steilish board approves a huge investment into developing super funky and desirable hats made of peanut butter, but fails to make sure that the company warns people who might have peanut allergies. And then some stylish Eyelashes end up getting severe allergic reactions from their new hats. Really bad, right?  

The board can’t just say, “Oh no! We promise we know that some people have peanut allergies. We just forgot about them for a sec. Our bad!” In fact, the affected Eyelashes might choose to sue the company, and if things get really bad the directors’ personal wealth may be on the line.

It’s a big deal! Nobody wants to lose their house, car, or Magic: The Gathering card collection just because of a mistake, right?

Here’s the thing, though: no director is going to do a great job if they’re obsessing over liability. In fact, if you have the right people in the room, and constructive conflict, and good onboarding, and healthy management of conflicts of interest, and a good board chair, and a good CEO and lots of other things we’ve already talked about in Ground-Up Governance, the chance of you being held liable for a bad result is super low. And if you really feel kinda icky about a decision your board is making, you can always dissent. Or leave. There’s no rule that says you have to go along with everything.