Officers of companies and members of the board of directors potentially face unlimited personal liability for their acts and activities as directors or officers of their companies.  (Shareholders of companies, on the other hand, have only very limited liability for the company's actions. They can lose their investment, but nothing else.)

Everyone knows the business environment in the United States is litigious. The environment is especially litigious for public companies and fast growing private companies.  For example, shareholders can sue a company's officers and the board of directors for failure to uphold their fiduciary responsibilities. In addition, the officers and directors can be sued for violations of securities laws. The Securities and Exchange Commission can prosecute directors and officers. And the Securities and Exchange Commission can refer cases to the Department of Justice, which can prosecute officers and directors criminally.

While this type of litigation is far from an every day occurrence, it's a real risk. And you might ask yourself, even if this risk were remote, why would a potential member of a company board be willing to expose himself and his lifetime's accumulation of assets to this risk?

From your company's standpoint, you need to be able to find excellent, qualified business people who are willing to serve on your board of directors. To recruit and retain qualified directors, your company has to understand this environment and its risks, and act to protect your board of directors from this potential. In the most basic sense, your company has to include in board compensation the promise that if a board member is accused of wrongdoing, the company will cover legal defense fees and pay for settlements when warranted.

How you make this promise a reality is what the mitigation of officer and director liability is all about.