Officer Accountability

• Jurisdiction: United States,Federal
• Publication year: 2016
• Citation: Vol. 32 No. 2

Officer Accountability

Megan Wischmeier Shaner

University of Oklahoma College of Law

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OFFICER ACCOUNTABILITY

Megan Wischmeier Shaner^*

Abstract

The officer is at the center of modern corporate governance. Wielding immense power and influence, officers' conduct and decision-making can determine the success or failure of their companies and impact the economy more broadly. Fiduciary duties under state law serve as a vital check on officer power. This article is the third piece in a study of the role of fiduciary duties in regulating officer behavior. It examines an underlying premise in prior scholarship - that officers are rarely being held accountable for their conduct in the traditional fiduciary duty litigation context of state court. This article reviews opinions of the Delaware state courts between 2004 and 2014 to gain insight into officers' fiduciary accountability in this context. The results of this research suggest a modest occurrence of officer accountability in state court, consistent with prior scholars' views. The court opinions also support other beliefs surrounding officer misconduct and the enforcement process for officers' fiduciary duties. This article concludes with a discussion of long-term considerations for future research regarding the role of litigation in shaping officer accountability and fiduciary duty doctrine.

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Table of Contents

Introduction.............................................................................358

I. Corporate Officers and the Need For Accountability............................................367
II. Fiduciary Duty Accountability................................371

A. Case Selection.............................................................372
B. Traditional Fiduciary Duty Cases...........................................................................377
C. Bankruptcy Cases........................................................379
D. Types of Officer Misconduct.......................................380
E. Enforcement.................................................................383

III. Interpretations and Implications..............................388

A. The State of Officer Fiduciary Duty Doctrine............................................................388
B. Restraint and Established Legal Principles...................................................................394
C. Preference for Director Accountability............................................................397

IV. Long-Term Considerations.........................................400

Conclusion................................................................................409

Introduction

"The separation of control from ownership [in the corporate form] demands a system of accountability."¹ This statement is arguably truer now than ever before as today's corporate icons like Warren Buffett, Mark Zuckerberg, and Marissa Mayer wield tremendous power and influence in running corporate America. Indeed, decisions made by these individuals can result in the success or collapse of their companies—and in some cases may even impact the broader

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economy. This power is not unfettered, however. At a minimum, it is subject to oversight by the board of directors and, perhaps more importantly, cabined within the limits of corporate fiduciary duties under state law.² This article is the third piece in a three-part study of the role and effectiveness of fiduciary duties in regulating officer behavior.³ The first article explored the substantive content of an officer's fiduciary duties⁴ while the second article analyzed the legal schemes in place to enforce those duties.⁵ Building upon this prior research, this article engages in an analysis of officers' accountability in the traditional fiduciary duty litigation context of state court.

A hallmark of the corporate form is the separation of ownership and management rights.⁶ Directors and, most often through directorial delegation, officers are given primary responsibility and decision-making powers regarding the business and affairs of the corporate enterprise,⁷ while stockholders, as the owners of and residual claimants to the assets of the entity, have few management

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rights.⁸ Separating ownership from control in this manner has many benefits, most prominently centralized decision-making; the efficient, effective utilization of director and officer expertise; and limited liability for stockholders.⁹ This form is not without drawbacks, however. When a corporation's managers do not share in the ownership of the entity in the same manner as the stockholders, their economic incentives may not align, leaving stockholders exposed to potentially significant agency costs from self-interested or careless actions of the managers.¹⁰ Whether such actions are outright illegal, just unreasonably risky, self-serving, or some combination of them all, they can result in considerable harm to stockholders—not to mention the general public.¹¹

While both directors and officers may engage in opportunistic behavior at the expense of stockholders, a strong argument can be made that actions of officers pose the greatest risks to the corporation and its stakeholders. This is particularly true for public corporations (which is the primary focus of this article) where officers have taken on an outsized role within the enterprise.¹² In the typical public

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corporation, senior executive officers such as the chief executive officer (CEO), not the board of directors, have primary day-to-day management authority.¹³ In connection with this expansive authority, and likely as a result thereof, officers often command immense discretion and deference.¹⁴ Under classic agency theory, however, if left unchecked, officers will exercise their power in their own self-interest as opposed to in the best interests of the corporation and its stockholders.¹⁵ In fact, many of the major corporate scandals over the past twenty years were rooted in self-interested officer conduct, exposing the dangers of an officer-dominated model of corporate governance.¹⁶ Further, recent attempts to regulate officer conduct at the federal level illustrate the recognition of officers' prominent roles in both corporate and broader economic welfare and the importance of reducing the agency costs that flow from their power.¹⁷

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Oversight and accountability can reduce officer agency costs.¹⁸ As a general matter, accountability is vital to encourage legal compliance and deter misbehavior.¹⁹ In the corporate setting, increased management accountability is viewed as an important component in improving corporate governance and protecting stockholder interests.²⁰ Accordingly, a central problem in corporate law is how to deploy accountability measures that allow a centralized management body the freedom to exercise its authority while protecting stockholders from the agency costs associated with that freedom.²¹

One key tool for holding officers accountable is the imposition of fiduciary duties; indeed, it is a principal constraint on officer power under state corporate law.²² While officers may be given wide

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latitude in managing the business and affairs of the corporation, their authority must be exercised within the bounds of their fiduciary duties. This fiduciary constraint can be, and at least in the director context frequently is, enforced by stockholders suing for breaches of those duties.²³ Stockholder litigation has been described as essential to a successful system of corporate governance and management accountability—giving meaning to the abstract concepts of fiduciary duties, supporting the disciplinary effect of those duties, and encouraging desirable conduct.²⁴

While fiduciary constraints are central to the system of checks and balances in corporate law, several scholars have posited that their effect, especially through judicial enforcement in state courts, is limited. Citing to the role reversal in corporate management, procedural hurdles in derivative litigation, and narrowing standards of oversight liability, prior scholarship concludes that better options for holding officers accountable exist outside of state court fiduciary litigation.²⁵ Professors Thompson and Sale, for example, conclude

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that stockholder securities fraud litigation has several practical advantages over state stockholder litigation, which has contributed to the greater use of the former in holding officers accountable.²⁶ Similarly, Professors Johnson and Ricca contend that officer fiduciary accountability is not occurring in the traditional state litigation context but rather in alternative venues like bankruptcy court.²⁷ Finally, scholars have construed studies on CEO turnover rates as suggesting that boards of directors are reasserting themselves through intra-corporate sanctioning, as opposed to judicial sanctioning, of officers.²⁸

This article explores an underlying premise of this prior scholarship: that officers are not frequently or effectively being held accountable for compliance with their fiduciary duties in the context of traditional state court litigation. Specifically, this article takes a first step in studying the status of state court accountability by looking at those instances where the Delaware courts are commenting on the issue of an officer's fiduciary duties.²⁹ To do so, this article reviews Delaware state court and bankruptcy court opinions from 2004 to 2014 that include or discuss breach of fiduciary duty claims against corporate officers.³⁰ This research has

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two goals. The first is to add to our understanding of efforts to hold officers accountable via state law litigation for their breaches of fiduciary duty. The second is to tease out the interpretations and implications of the results of this research on the law applicable to corporate officers' fiduciary duties. The purpose of this article is not to provide an...