Rethinking the Board’s Duty to Monitor: A Critical Assessment of the Delaware Doctrine
Eric J. Pan
U.S. Securities and Exchange Commission; Yeshiva University - Benjamin N. Cardozo School of Law
Florida State University Law Review, Vol. 38, 2011
Cardozo Legal Studies Research Paper No. 299
Does a board breach any of its fiduciary duties when its inattention or inaction leads to harm to the corporation? The duty to monitor addresses this question by imposing liability on directors for failing to respond to signs of wrongdoing, illegality or other harmful activities. Because the duty to monitor imposes liability based on what the board failed to do, however, it is difficult to define the scope of liability. A natural dilemma exists in evaluating a director’s degree of loyalty (or care) based purely on the fact that there was an absence of action by such director. When adjudicating claims alleging inattention or inaction by a board, a court faces the uncomfortable task of exercising its own independent judgment that the board should have done something instead of remaining still and silent. At the same time, the duty to monitor serves as the best means the law has to ensure that directors are attentive and vigilant against the occurrence of harm to the corporation. To the extent we believe board should, and expect boards to, perform a substantial role in managing the corporation it is appropriate to impose on boards a robust duty to monitor. Ideally, little should affect the corporation without the knowledge, consent or consideration of the board. Delaware courts, however, have defined too narrowly the scope of the duty and have made it undesirably difficult for plaintiffs to bring forward duty to monitor claims.
This paper sets forth four objections to how Delaware courts have defined directors’ duty to monitor. First, the Delaware doctrine is inconsistent with the role of the board in the corporation. Second, the Delaware doctrine mistakenly excuses boards from monitoring business risk. Third, the recasting of the duty to monitor as a claim of bad faith conduct has imposed an unreasonable burden on plaintiffs to bring forward meritorious duty to monitor claims. Fourth, Delaware courts have not provided adequate guidance as to when the duty to monitor should apply.
Number of Pages in PDF File: 45
Keywords: duty to monitor, duty of oversight, board of directors, Caremark, duty of good faith, business judgment rule, risk management
Date posted: April 21, 2010
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