A textbook case of board risk: the dangers are unreal ... the liabilities are very real.

• Author: Sutton, Gary
• Position: SUTTON'S LAWS

MY WIFE and I were personally sued in a class action suit for $458 million

This was roughly $459 million more than we were worth back then.

You see, I chaired this college. A student group filed, charging us with false recruitment advertising. If it were not for two things, I'd have been outraged. Those two things were newspaper ads that were, in fact, both false. Oops.

My friend was the chancellor and I had agreed to be his chairman for a single term without pay. We held four board meetings that year. Each lasted four hours.

It was a teeny-tiny little school, with about 100 students when we joined. There were just under a thousand enrolled the day this lawsuit struck. The school taught nursing, court reporting, basic computer, and other vocational skills. Our classes held no glamour and little philosophy but led to jobs. Ivy? Not.

We faced interesting challenges. The inner-city campus hosted many unwed minority mothers. They had a tendency to drop out and sue. Juries had a tendency to award them generous damages. That location, as a result, drained cash. I favored closing it. The chancellor, a kind-hearted and more liberal fellow than I, resisted that thought.

And he could. We could. Because there was also a suburban campus, filled with nonminority housewives, looking to re-enter the workforce as their kids began school. The completion rate for the same courses ran way higher at that location and nobody sued us. So the one operation subsidized the other.

The ads that got us in trouble both said "97% Placement Rate Within Six Weeks of Graduation." That was false: 97% of the graduates were employed within six weeks of graduation but we did not "place" them all. Some found jobs by themselves. While Harvard or Stanford would love to claim 97% employment for their grads in six weeks, that's beside the point. And yes, we ran over a thousand ads each year, and these were only two. That's also beside the point.

Our two ads were false. That's the point.

This occurred several decades ago, by the way, and reflected the beginning of director liabilities, as loftier schools graduated more and more lawyers. And while a chairman reviewing every advertisement would be micro-management, even today, having only four brief meetings a year in a rapidly growing outfit was not even mentioned back then. That could be the centerpiece of a suit today--"obvious negligence." And it's also a lesson, then and now, about how the downsides of being on a board often...