We often hear that hardly anyone wants to sit on corporate boards anymore and that public companies struggle to attract outside directors. Their reluctance to serve has several causes, including the increased workload imposed by new corporate-governance rules and the risk of a damaged reputation if problems arise. The primary concern, however, is that a lawsuit could oblige outside directors to dig into their own wallets—even if they do their jobs well.

Nevertheless, both experience and an analysis of the relevant legal rules suggest that this concern over personal liability isn't justified. As long as outside directors of a public company refrain from enriching themselves at its expense, they face only a minute risk of having to pay damages or legal fees out of their own pockets—in the United States as well as in less lawsuit-happy countries.¹

Not that outside directors of public companies can take it easy and let executives do as they please. Even without the threat of out-of-pocket liability, directors have significant incentives—financial and otherwise—to do a good job. The incentives are imperfect, but increasing the risk of out-of-pocket liability would not necessarily do much to improve the vigor of board oversight. On the contrary, making...