Gov. William Donald Schaefer, enjoying his first major victory of the 1988 General Assembly session, signed into law yesterday legislation allowing Maryland corporations to extend liability protection to their directors and officers.

Schaefer signed the bill just hours after the Senate, which suspended the rules to consider the legislation for the second and third reading in the same day, approved the bill 44 to 1.

The law allows corporations to decide whether to extend liability protection to directors and officers facing money damages in stockholder-initiated lawsuits. The measure would not protect officers or directors for deliberately dishonest actions.

Schaefer hailed the bill's passage as "success through cooperation," referring to the compromise draft that lawmakers hammered out during the summer with business leaders and members of the state bar.

The House Judiciary Committee, which directed the compromise, killed a similar bill last year that would have extended protection only to corporate directors and that would have automatically applied to all corporations in the state.

Administration officials touted the measure as a crucial economic development tool that would help attract and retain businesses for Maryland and reduce insurance rates for companies.

"I think this will help business out," House Speaker R. Clayton Mitchell (D-Kent) said at the State House signing ceremony.

Thirty-five states have similar legislation, but Maryland joins only a few that extend the liability protection to both officers and directors.