They Had One Job: Boards should reconsider whether they are adequately monitoring activities that are mission critical to their companies.

Author:Raymond, Doug

Corporate directors are justifiably concerned about their potential liability when agreeing to serve on a board, particularly that of a public company. It would be naive for a director to dismiss the possibility of litigation against directors for actions taken by the board, and most well-functioning boards have adopted measures (including insurance, indemnification agreements, and charter and bylaw provisions) to try to mitigate this risk. Adding to the challenges faced by directors is that they can be held liable not only for what the board has done, but also for what the board has failed to do. Recent Delaware cases have reemphasized the board's duty of oversight, originally outlined by the 1996 case, In re Caremark International Inc. Derivative Litigation. In light of these cases, boards should make sure their annual agenda includes the identification or reevaluation of the company's critical functions, particularly those with a regulatory or legal component, and that the directors evaluate the reporting structures that are in place to ensure they are adequately monitoring any company-specific and mission critical compliance risks.

The Delaware Court of Chancery's landmark Caremark opinion set a new and heightened standard for board oversight of a company's legal and regulatory compliance programs. In response, boards implemented more robust compliance programs, along with reporting procedures and monitoring systems. These programs and procedures have, by and large, allowed directors to avoid liability under "Caremark claims" --shareholder derivative suits alleging that directors' oversight failures caused serious corporate harm. The recent Delaware Supreme Court ruling in Marchand v. Barnhill, and a subsequent application of this ruling by the chancery court makes plain, however, that merely having a robust compliance program and reporting procedures designed to help the board monitor compliance may not be sufficient to shield directors from Caremark liability.

In Marchand v. Barnhill, a stockholder of Blue Bell Creameries USA, Inc., a major ice cream manufacturer, brought a derivative suit after a listeria outbreak in Blue Bell's ice cream led to a full recall of all ice cream products. The suit included a Caremark claim alleging that the directors breached their duty of loyalty by "utterly" failing to "adopt or implement any reporting and compliance systems" to oversee food safety controls and compliance. The consequences were fatal...

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