February 15, 2022

Caremark: Does Board ESG Oversight Mean Greater Liability Risk?

In light of the increasingly sympathetic approach that Delaware courts have taken to Caremark claims in recent years, some commenters have observed that the risk of potential liability for directors’ breach of their oversight responsibility is much higher than it used to be. In that regard, this Proskauer blog says that one of the lessons of recent Delaware cases is that the growing demand for board oversight on ESG issues may increase the chances of viable Caremark claims:

Recent cases finding complaints to have sufficiently pled Caremark allegations may dovetail with the ever-increasing role of ESG in corporate policy and strategy. Corporate boards may be required to oversee corporate conduct with an eye towards how the company’s financial health intersects with and relies upon its commitment to sustainability, transparency and regulatory compliance. But with these added oversight obligations may come a higher risk of liability if the Caremark standards are not met.

In order to reduce this risk, the blog says that boards need identify “mission critical” aspects of the company’s business by focusing on its essential functions. Mechanisms for actively overseeing these functions should be evaluated and enhanced if necessary. In addition, the full board should regularly address mission critical aspects of the business and ensure that any complaints or significant issues concerning them find their way to the board.

John Jenkins