NEW YORK–Directors and officers insurers will see lower levelsof claims payouts if they get behind the idea of having boards ofdirectors talk directly to shareholders about questions beforethem, an expert suggested here.

Ira Millstein, senior associate dean for corporate governance atthe Yale School of Management and a senior partner for Weil,Gotshal & Manges, made his plea on Tuesday during a luncheonaddress at the 2007 Standard & Poor's Insurance Conference.

“If shareholders are given a chance to voice objections inearly, nonbinding communications, they're going to be less likelyto sue” the companies that D&O carriers insure, he said, notingthat while corporate boards could not possibly talk to all theirshareholders, they would call in the major institutional investorsfor these discussions on key issues.

Mr. Millstein gave an example of a positive outcome of such anapproach in the United Kingdom.

There, he said, a law that required a shareholder advisory voteon compensation practices consequently compelled discussion betweena company and its shareholders for the first time.

“It turned out that the shareholders were not as interested inamounts of compensation as they were in seeing to it thatcompensation had some relationship to performance,” he said.

As a result of the specific conversations aboutperformance-oriented compensation, companies will likely polish uptheir practices to everyone's satisfaction, he said. He added thatin this particular instance, the discussions didn't result inanyone getting paid less.

“Who's going to sue you if you expand the notion to things otherthan compensation and talk to shareholders about a variety ofthings that are on their minds?” he asked.

In addition, if there are suits down the road, companies wouldhave good arguments for dismissal, he said. Defendant companiesthat listen to their shareholders will be in better positions todefend themselves on the business judgment rule–a governing rule instate court securities cases.

Mr. Millstein said he recognizes there are problems to beovercome–”Who do you talk to? How much can you talk about it? Howdo you go about setting it up?” In light of that, he invitedresponses to his proposal on the Yale chat board, where he postedhis idea athttp://millstein.som.yale.edu/forums/showthread.php?t=10.

Mr. Millstein began his talk focusing on the impact oflitigation on U.S. capital markets, rather than on the incidence ofD&O claims, even though he said that D&O insurers were alikely group to get behind his cause. He contended that litigation,not overburdensome financial regulation (as many reports havesuggested), impedes entry to the U.S. markets as well as overallcompetitiveness and performance of many U.S. companies.

While he noted that private litigation reached a 10-year low in2006, and that SEC enforcement activity has been down since 2002,he warned that declines may be cyclical. “The courts are stillthere,” he said.

He also suggested that politics could easily change the dynamicsof litigation. If Democrats get back in power and appoint differentjudges, for example, those judges may not dismiss cases so easily,he said.