The disengaged director: is there a breach of duty?

Author:Biben, Matthew L.
Position:BOARD DYNAMICS: COVER STORY

It is unlikely that a court would find that a director breached his or her fiduciary duties due to a lack of attention or interest. However, a director's disengagement nevertheless can be harmful to the board and company.

We have all sat in board meetings at which a director is paying more attention to their BlackBerry than management's presentation or the discussion at hand. Being disengaged at a meeting, while unfortunate, is not the focus of this article. Rather, this article addresses how to think about a director's chronic underperformance: when he is so derelict that he no longer engages with other directors or management.

An effectively functioning board requires directors to honor their fiduciary duties to the corporation: the duty of care and the duty of loyalty. While self-dealing and other conflicts of interest clearly violate the duty of loyalty, when does a director's disengagement reach that level? When does such conduct become a breach under the legal standards for the duty of care and the duty of good faith? More importantly, what can companies do to resuscitate such a director and prevent the problem in the future?

It is unlikely that a director's underperformance would be considered a breach of the duty of care. The duty of care requires that directors inform themselves of all material facts and give due deliberation to them before making a business decision. However, courts will rarely find that directors have breached their duty of care; indeed, Delaware courts have required that a plaintiff show a "sustained or systemic failure of a director to exercise reasonable oversight" in order to sustain a claim that director inaction is a breach [In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 at 971 (Del. Ch. 1996)]. Thus, in the vast majority of cases, an underperforming director likely will not violate his or her duty of care absent additional egregious factors.

Similarly, a finding of the breach of the duty of loyalty is reserved for rare egregious cases and not mere director disengagement. The duty of good faith, a subpart of the duty of loyalty, requires that directors act with a conscious regard for their responsibilities as fiduciaries. Thus, Delaware courts have found that "[d]eliberate indifference and inaction in the face of a duty to act can breach the duty of loyalty [In re The Walt Disney Company Derivative Litigation, 907 A.2d 693 at 755 (Del. 2005)]. Recent cases have emphasized that to find...

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