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• The payment went to the company rather than the shareholders who sued, allowing them to benefit indirectly along with other shareholders.
• Had it instead been incorporated in one of the 25 or so states with “universal demand” laws, the lawsuit would have been harder to get off the ground.

Universal demand laws make it harder to sue directors

• They point to an alarming unintended consequence of universal demand laws: a reduced willingness of firms to recall potentially hazardous products.
• Firms incorporated in states that have adopted these laws are on average about 30% less likely to announce product recalls than firms incorporated in states without these rules.
• On average, firms incorporated in states that have adopted universal demand laws wait about 50% longer before announcing recalls than firms in states that have not.

In Australia and the UK too

• Australia and the United Kingdom are two countries in which legal precedents make it hard for shareholders to sue directors and officers of companies.
• Our findings suggest that, by shielding Australian and UK executives from personal liability, the law in these countries makes product recalls less likely than it could be.

Firms need to help themselves

• Both seem to have an effect in the US states that make it hard for shareholders to sue directors.
• It’s an argument for firms to try to build up the proportion of their shares owned by long-term institutional investors.

Customer advocates can make a difference

• Such a culture is often denoted by the appointment of a chief marketing officer to the board of directors or the appointment of a consumer advocate.
• We used text analysis of financial disclosures to develop a metric for the extent to which public companies were customer-focused.
• We found the effect on product recalls of being in a state with universal demand laws was 11% less strong in companies that were highly customer-focused.