TheCorporateCounsel.net

UCLA’s Stephen Bainbridge recently blogged about the major challenges and issues he sees facing public company boards over the next year or two. In his assessment, these include cybersecurity, risk management, shareholder activism and political risks. This excerpt addresses risk management:

Cybersecurity is a sufficiently important risk to deserve its own category. But the general problem of risk management remains an important part of what boards must do. Board-level systems designed to monitor and oversee mission-critical functions play a crucial role in showcasing the board’s fulfillment of its Caremark duties.

This was evident last year when the Delaware Court of Chancery allowed a Caremark duty-of-oversight claim to advance against Boeing Company directors. The court’s decision was based on allegations of insufficient board involvement in safety matters and the absence of a dedicated committee with direct oversight responsibilities. Nevertheless, it’s worth noting that two subsequent cases, Hamrock and SolarWinds, have underscored the necessity of establishing bad faith rather than merely proving gross negligence for a Caremark claim to succeed.

By the way, Prof. Bainbridge is no fan of Caremark, and another one of his recent blogs summarizes his objections to it:

First, Caremark was wrong from the outset. Caremark’s unique procedural posture, which precluded any appeal, gave Chancellor Allen an opportunity to write “an opinion filled almost entirely with dicta” that “drastically expanded directors’ oversight liability.” In doing so, Allen misinterpreted binding Delaware Supreme Court precedent and ignored the important policy justifications underlying that precedent.

Second, Caremark was further mangled by subsequent decisions. The underlying fiduciary duty was changed from care to loyalty, with multiple adverse effects. In recent years, moreover, there has been a steady expansion of Caremark liability. Even though the risk of actual liability probably remains low, there is substantial risk that changing perceptions of that risk induces directors to take excessive precautions.

– John Jenkins